There are many methods that individuals can use to shield assets from debt collection. Rudimentary asset protection involves using statutory exemptions from debt collection to the greatest extent possible. In California, however, the only secure exemption of any significant amount is for certain retirement plans; other exemptions are greatly limited.
Asset protection can be combined with estate tax planning. For instance, limited partnerships or LLCs are often used to consolidate assets and transfer substantial interests to heirs, while providing a discount in the value of the underlying assets. At the same time, debt collection against partnership assets is cumbersome.
Long-term asset protection also involves asset-protection trusts. In California, a settlor cannot establish an asset-protection trust for the settlor’s benefit. To be effective, the trust must be created by another party, such as a parent or grandparent. Accordingly, it is appropriate to ask clients with children whether they want to provide asset protection for their children. Similarly, clients whose parents have significant assets may be informed that parents can leave assets to them in a manner designed to foster asset protection. There are several different types of asset-protection trusts. Substantial assets also can be disposed of through a dynasty trust, which is designed to be free of the claims of most creditors and wealth-transfer taxes indefinitely. Foreign trusts can be used to protect substantial assets and are highly effective if funded and maintained properly.
Many asset-protection plans involve more than one of these devices. Regardless of the type of asset-protection plan adopted, the fraudulent transfer laws must always be taken into account as the plan is devised and implemented.