Arizona asset protection is the process of structuring ownership of a person's assets to preserve maximum value for the owner and family, etc. in the event of creditor problems.
Asset protection strategies can operate to accomplish many different goals, including but not limited to: deterrence, privacy, & legal protection.
Potential plaintiffs may have significantly less incentive to litigate a matter if a potential defendant does not legally have the resources with which to pay a judgement or settlement. Well-designed asset protection plans can effectively do just that, remove assets from the legal ownership of potential defendants so they cannot be legally compelled to pay a judgment or settlement using specific assets.
In addition to making it less attractive to sue a potential defendant by decreasing the pool of assets from which a judgment can be satisfied, a well-designed asset protection plan can make it very difficult, if not impossible, for potential litigants to even determine the resources of a potential defendant by protecting the identity of an asset's beneficial owner.
Perhaps most important, asset protection goal is legal protection from judgment that an asset protection plan can create. A well-designed asset protection plan can permit a person to receive benefits from assets, all the while changing the owner of the assets or limiting liability associated with assets. In other words, if a person doesn't legally own an asset or is not liable for damages caused by the asset, that asset cannot be used to satisfy a judgment against that person.
Many different risks can make a person's assets susceptible to creditors, these risks include: contract-, tort-, & government-based risks.
Risks that a person voluntarily agrees to, e.g. singing a lease agreement, and are not statutorily-based, are created by contract and include the following:
Breach of Contract/Default
If a person signs a valid contract and doesn't fulfill the terms of the contract, the person may be liable for damage because of his/her failure to perform the contract. For example, if a person contractual agrees to perform a specific task and fails to perform that task, he/she may be liable for any damages caused by his/her failure to perform, e.g. higher costs for paying someone else to perform the contract.
If a person agrees to guarantee a legal obligation and the contract is not performed, that person may become personally liable to perform the obligation. Perhaps the most common example of this is a person who co-signs on a mortgage where mortgagor does not fulfill his/her payment obligations on a mortgage.
Risks that a person does not voluntarily agree to, are not statutorily-based, and are called caused by their actions, e.g. negligently operating a motor vehicle, are tort risks and include the following:
Owners of real property owe various duties to those people who are on their property. As such, if a court finds that an owner has breached one such duty, it can impose liability for damages caused by the breach. For example, if a landlord doesn't properly maintain his/her property, he/she may be liable for damages caused by his/her negligence in maintaining the property.
Merchants that produce or sell defective products may be liable for damages caused by those products. As such, it goes without saying that merchants should conduct business as limited liability entities, e.g. corporations or limited liability companies.
Unlike both contract- and tort-based liability, the U.S. Federal & State governments can impose liability upon, nearly, all people without their consent or action.
Perhaps the creditor with the strongest claim against a person is the U.S. government against a person who has not paid his/her taxes. The government's claims for unpaid taxes can use many different types of property, even property that is protected from contract- and tort-based actions cannot, to fulfill those claims.
Piercing the Corporate Veil
The government can impose liability upon the owner of some limited liability entities if it determines that a person has abused the privilege of incorporating. For example, if the owner of a corporation fails to observe the required formational and operational formalities, the federal or state governments can impose personal liability upon the owner.
Asset protection is not a single device that can be simply employed or elected. Instead, it involves the coordinated use of multiple legal methods, strategies, and tools including: limited liability companies (LLC), limited partnerships (LP), trusts, & corporations.
A limited liability company is a separate legal entity from its owners, called members. As such, the members are note personally responsible for the creditors' claims against a validly formed LLC and for which the members have not offered personal guarantees. In most states, including Arizona, LLCs require the observance and compliance with very few formalities and, as such, are common elements of asset protection plans.
In Arizona, and many other states, a creditor of an LLC is only permitted to obtain a charging order against the LLC. A charging order is a court-ordered right to receive distributions made to a judgment debtor. It does not entitle the creditor to any say in the management of the LLC or to compel distributions from the LLC.
Unlike a general partnership, in which all partners are liable for all debts of the partnership, a limited partner in a limited partnership is only responsible for his/her contributions to the partnership. However, all limited partnerships require at least one general partner who will be liable for all the debts of the partnership. In addition, a limited partner may not be actively involved in the management of the limited partnership.
Family Limited Partnership
Although it will not absolve the general partner(s) from liability associated with the assets owned by the partnership, a family limited partnership can protect the assets of the limited partners from the creditors of the partnership in addition to protecting the limited partnership from claims of the limited partners' creditors.
For example, a husband and wife create a limited partnership in which the husband and wife are general partners and each own 1% of the partnership interest. Thereafter they convey ownership of their investments to the limited partnership. The remaining 98% of the interest is owned by their children. This arrangement gives them control over the limited partnership while the investments owned by the partnership cannot be used to satisfy the debts of, or judgments against, the parents.
Trusts can be very flexible and effective means of asset protection. They are flexible, in that they can be used to accomplish many different objectives, and they are effective, in that they can remove assets from a person's legal ownership while still providing benefit to that person.
Domestic Asset Protection Trust
A domestic asset protection trust is a trust created under the laws of the United States in which legal title to the trust, and effectively its assets, is in the name of the trustee and, in which, distributions are made to beneficiaries on a discretionary basis.
A trust that includes "spendthrift" provisions can prohibit creditors of trust beneficiaries from reaching trust assets, thereby limiting such creditors to distributions made by the trust. The trust can also be structured so as to limit distributions to the discretion of the trustee in such cases.
Family Savings Trust
A family savings trust is simply an umbrella term for an irrevocable trust that serves to benefit a family by, inter alia, protecting a family's assets. For example, a mother and father transfer their business to a trust that includes spendthrift provisions, in which they are the trustees and their children are the beneficiaries. Claims against the children cannot be satisfied using the assets of the trust.
Life Insurance Trust
A life insurance trust that is the beneficiary of one or more life insurance plans and which includes spendthrift provisions can be a very effective way for a person to provide for their beneficiaries in a manner that is according to their desires in the event of a tragic event, all the while protecting the trust's assets from the creditors of trust beneficiaries.
Qualified Personal Residence Trust
A trust that meets specific requirements and is created to own a person's or family's home is called a qualified personal residence trust. This type of trust is used to both minimize estate taxes and to provide asset protection.
Offshore Asset Protection Trust
Once the province of very high net worth individuals or families, offshore trusts have become more accepted ways of providing asset protection by providing greater flexibility and privacy than domestic trusts. However, these trusts are not without their limitations and risks, e.g. the stability of the international government in which the trust exists.
Revocable Living Trust
Although revocable living trusts are very popular because they can avoid probate, they provide very little, if any, asset protection.
Corporations can provide some asset protection, however, they do have problems that range from minor to substantial. The following risks can completely remove the asset protection effects of the corporation and are thus very substantial.
Lack of Charging Order Protection
Unlike an LLC, LP, or trust, creditors of a corporation are not limited to charging orders as remedies; rather, they can simply seize the shares of the corporation along with all rights and duties associated with such shares.
Substantial Corporate Formalities
Compared to a limited liability company, limited partnership, or trust, a corporation requires compliance with additional formational and operational formalities including annual reporting.
Asset protection strategies are not without their limitations. The following two limitations are just two of many scenarios in which a person's assets will not be protected from creditors in the absence of additional asset protection measures.
Although professional corporations may provide asset protection by limiting the owner to his/her contributions to the corporation in some instances, they do not provide asset protection against malpractice claims.
Timing is everything with asset protection. If a person incurs debts prior to the creation and execution of an asset protection plan, any transfer made in accordance with the plan may be deemed fraudulent and courts can impose both criminal and civil penalties for such transfers in addition to disregarding the transfer altogether.
This brief overview of some important considerations associated with asset protection is by no means comprehensive. Always seek the advice of a competent professional when making important financial and legal decisions.
Douglas K Cook is an Arizona asset protection lawyer with over 40 years of experience as a practicing attorney. Although Douglas K Cook's office is located in Mesa, Arizona, he represents clients throughout the Phoenix, Arizona Metropolitan area including the following east valley cities: Scottsdale, Paradise Valley, Tempe, Chandler, & Gilbert.
Last Updated on August 2, 2012