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When to protect: Seven considerations on when to implement a wealth preservation plan

October 7, 2015

Wealth preservation planning (also known as asset protection planning), is often defined as follows:

Wealth preservation planning: placing assets beyond the reach of future potential creditors.

But how far in advance should wealth preservation planning be implemented, and when is it too late to protect your assets? The answer is one that is a favorite of lawyers – “it depends”. For asset protection planning attorneys, two factors dictate the feasibility of wealth preservation planning: (1) the laws of the jurisdiction utilized for the asset protection plan, and (2) the nature of the client’s assets and liabilities.

Because timing can be so important to the success of a wealth preservation plan, you should keep these seven considerations in mind before delaying planning implementation.

hourglass money(1) It is never too early to implement an asset protection plan.

Wealth preservation plans are best implemented simultaneously with the acquisition of the asset you are seeking to protect. When you purchase a home, you purchase homeowners insurance to immediately protect the asset. Wealth preservation planning should be viewed as a form of insurance and implemented as soon as possible. Unlike insurance, wealth preservation planning can be implemented BEFORE the asset is acquired, and in fact, can be stronger for it. This is especially true with persons receiving interests in closely held business entities, real estate, inheritances, and other forms of significant increases in wealth. The direct receipt of the asset into an asset protection structure can, in some instances, negate a future creditor’s claims of a fraudulent transfer and provide a greater level of protection.

(2) You cannot insure the house when it’s on fire.

To extend the homeowner’s insurance analogy, you can’t call up the insurance company and take out a policy when the house is burning down. With wealth preservation planning, it is often too late to protect the asset when the proverbial house is burning down. For reasons further explained below, it is sometimes impossible to engage in wealth preservation planning when threats, lawsuits, or judgments from creditors already exist.

(3) The jurisdiction often dictates how far in advance of a claim the planning must be implemented.

One of the primary reasons we use the Cook Islands as the jurisdiction for our asset protection trusts (APTs) is that country’s favorable laws with respect to statutes of limitations (time limits on when a creditor with a claim can reach assets). Certain domestic asset protection solutions leave assets open to creditor claims for as long as ten years, while properly structured Cook Islands APTs can effectively protect assets as soon as the date of transfer.

(4) The nature of the assets can also affect how far in advance of a claim the planning must be completed.

In wealth preservation, cash is king. Cash (as well as publically traded securities) can be effectively protected within a short period of time. Protecting closely held business interests, real estate, or funds with long-term liquidity, can all delay the implementation time (and effective time) of wealth preservation plans.

(5) Service provider availability is reduced and costs can increase when implementation is delayed.

Reasonably priced and reputable trust companies, banking institutions, and other service providers may be unavailable if creditor claims already exist. While the law of a jurisdiction may provide for the possibility of protecting an asset from an existing creditor, trust companies often elect not to take on a new client with an existing aggressive creditor. However, those same trust companies will stand by an established client whose existing planning comes under attack – another reason to implement planning far in advance of any claims.

(6) Existing lawsuits, judgments, and creditors may prevent effective planning.

Many jurisdictions (the Cook Islands included) require that the person creating the APT be solvent at the time of the transfer, and remain solvent after transferring the assets to the APT. Solvency, in its simplest form, is measured by taking the sum of your assets, and subtracting the sum of your liabilities. Any positive number remaining equals solvency. However, an existing threat, lawsuit, or judgment may make you insolvent, and render the proposed APT ineffective or impossible to implement.

(7) Consult with a qualified asset protection attorney early in the process.

This article simplifies the complex process of analysis that we (and other asset protection attorneys) utilize during a consultation. Only in consultation can you learn whether your situation warrants wealth preservation planning. We cannot say it enough – the key to effective planning is to engage in ADVANCE planning. Don’t wait until the “house is on fire” before you call to schedule your consultation!