Asset Protection in Virginia
Asset Protection is the process of organizing your assets in a manner that safeguards them from exposure to risk. Anyone with equity in a house, significant cash, or a person expecting to inherit a large retirement plan need Asset Protection.
In a perfect world, there would be no need for asset protection. But in today’s victim-oriented society, where people seem to sue one another over just about anything, we are vulnerable every time we drive a car, hire an employee, perform a service, or even have a guest at our home or business.
When you think about asset protection, ask yourself some questions:
- Do you have adequate insurance? Proper insurance on your home, auto, and business is the first line of defense
- If you own multiple properties, are they all titled in your own name? If so, all of your properties are exposed in the event a lawsuit
- If you own a business, do you mix your business assets and your personal assets? Do you maintain the required corporate documents for your business? Properly running your business is critical to protecting both your business and personal assets
Many people think because they have a revocable trust that their assets are protected. They’re not. A revocable trust protects the assets of the next generation but not yours.
Asset Protection Strategies
Depending on your specific situation, we may recommend one or more of the following Asset Protection strategies:
- Review of insurance coverage
- Formation of business entities (see more information below)
- Segregation of business vs. personal assets
- Creation of asset protection trusts or foreign trusts
- Use of equity stripping devices
- Use of asset isolation strategies
- Implementation of a coordinated wills and trust
Using Asset Protection Trusts
Domestic Asset Protection Trust (DAPT) is an irrevocable trust in which the grantor is designated as a permissible beneficiary. That means that once the trust is set up it cannot be changed. The person who sets up the trust (Grantor) is allowed to be a beneficiary. DAPTs are usually combined with Limited Liability Companies in the same jurisdiction. The Grantor and other beneficiaries have access to assets in the trust. However, if you live in a non-DAPT state the assets that come out of the DAPT would be subject to creditors of that state.
16 states Alaska, Delaware, Rhode Island, Nevada, Utah, Oklahoma, Missouri, Wyoming, Tennessee, New Hampshire, Hawaii, Virginia, Ohio, Mississippi, and West Virginia have some sort of DAPT statute. Some states have laws that the state where you reside trumps the jurisdiction of your DAPT. Therefore, it is very important if you are interested in setting up a DAPT you work with an experienced attorney knowledgeable in this area and familiar with the specific state statutes.
Limited Liability Company to Protect Investments
One of the easiest assets for a creditor to attach is an after-tax investment account or a bank account. Our experience is clients get notice on the same day the money is removed from the account.
Putting after-tax investment accounts or bank accounts with large amounts in them into LLCs in states with charging order protection may keep a creditor from getting its hands on your money.
There are several jurisdictions that say a creditor of the LLC only gets a charging order.
A charging order is a lien. If you do not take any money out of the LLC the creditor gets nothing. The creditor has NO right to force you to take money out of the LLC. This is where jurisdiction is very important. In some states, the law gives the creditor the right force you to take money out of the LLC and pay the lien.
Again, it is very important to work with an attorney who is very experienced in this area to properly set up your LLC in the right jurisdiction. Moreover, it is equally as important that the operating agreement is written properly to uphold against the statute and case law of the chosen jurisdiction.
Using LLCs to Protect Your Property
Limited Liability Companies (LLCs) provide a powerful tool for Asset Protection. Families or individuals who may not operate on-going businesses can still benefit from the protection that LLCs provide by creating a proven and reliable structure to manage and distribute family property to children or future generations. Choosing the right jurisdiction to form your LLC in is as important as drafting the documents for the LLC to maximize the liability protection.
If you own multiple properties such as a vacation home, rental property, shopping center, apartment building, etc. it is best to establish one or more limited liability companies (LLCs) as the owner of the properties.
Using Tenancy by the Entirety
It is possible for a married couple to own real property and financial assets in tenancy by the entireties. Tenancy by the entirety provides assets protection because only a creditor of both parties can come after an asset held in tenancy by the entirety. Tenancy by the entirety is only available to married couples.
If you are interested in holding financial assets in tenancy by the entirety, make sure that the company allows it. For example, there are situations where the title to the account was changed to tenancy by the entirety, however, when one person had a creditor problem, they learned that the financial institution did not allow the title to be such and really just considered the account to be in joint tenancy. Therefore, there was no asset protection and the creditor could reach the account.
Some pitfalls with tenancy by the entirety are that it terminates with death, also divorced, and lately, we see more judge’s ruling in favor of creditors.
If most of your assets are joint, then you are very likely to have a joint creditor. Here is another example. The husband is in a bad car accident. The damages exceed his insurance. There is a judgment for the injured party. The injured party cannot collect against the house but then the wife dies. The injured party can collect against the house.
Tenancy by the entirety has also been set aside in bankruptcy. While it is a good first step, an asset protection trust offers stronger protection.
Joint Asset Planning
If you want to own property with another person and you are not married, what are your options?
Joint tenancy has a right of survivorship. That means the asset will automatically pass to the surviving owner. That is a pretty good option for a lot of people. Joint tenancy also means that a creditor or either owner can take the entire asset. That is generally not a good thing. Many parents put their children on the title of their house not realizing that a creditor of their children can take their house.
Tenancy in Common
There is no right of survivorship. In this type of ownership, you own a set percentage. If the two parties each own 50% then you each own an undivided 50% interest. You are able to leave that interest to whomever you choose. You can even put your share in a trust. Generally, creditors are not interested in assets owned by more than one person unless debtor does not have assets in his or her own name. The creditor can only place a lien on the asset. They cannot force you to sell. However, a creditor will put a lien on a piece of property owned by more than one person. Owning an asset in tenancy in common is NOT asset protection.
Problems With Joint Ownership
- If an asset is owned jointly then both parties must agree as to the distribution of the asset. If the parties do not agree then the only option is to seek judicial intervention.
- If a portion of the property is given to a child in the child’s lifetime, then the child inherits that share at the parent’s original basis. That means whatever amount of capital gains is already in the asset at the time of the gift remains in the asset. There will be no erasing of the capital gains in the gifted amount at the death of the parent.
- If the child dies before the parent, then the parent will re-inherit the property. In order to get the same set-up, the parent will have to re-gift the property.
- If you have questions regarding joint assets, it is important to seek help with an experienced Fairfax asset protection attorney. Your lawyer can fully explain your options and the best course of action to take regarding your individual situation.
There is a certain amount of statutory protection for some of your assets. The statutory protection is provided by state and federal law. The following is a non-exclusive list:
Retirement Account Assets: Assets such as IRAs, Roth IRAs, and 401ks and other qualified retirement plans are protected under Virginia and Federal law from creditor claims. Note, the Supreme Court ruled that these accounts are not IRAs and therefore not entitled to the statutory protection. If you are concerned about making sure an inherited IRA is protected, Fairfax attorney Rhonda Miller recommends that you set up an IRA Trust. If you do that the money can still be stretched out and it is protected.
Annuities: Annuities are protected from creditors.
Life Insurance: The proceeds from life insurance is also protected.
Spendthrift Provision: If you have a spendthrift provision in your trust, money left to a person (children, grandchildren) as long as it stays in trust is protected from creditors. If the money is taken out of trust it is not protected from creditors.
Tenancy by the Entirety: Tenancy by the entirety also provides statutory protection of the asset held in tenancy by the entirety from a creditor of just the husband or the wife. However, it does not protect against a creditor of the husband and the wife. There are cases where bankruptcy courts have allowed the creditor of one spouse to get at a tenancy by the entirety asset. Therefore, simply putting assets in tenancy by the entirety may not be enough asset protection under all circumstances.
The exemptions provided by law are fairly limited. Notice what is not protected:
- Joint or individual bank accounts
- Joint or individual brokerage accounts
- Personal property
- Real property owned in just one person’s name or owned by non-married persons
Contact our experienced Asset Protection Attorneys Today
The attorneys at DBL are experienced with Asset Protection planning and can help you map out a strategy that will safeguard your assets. Visit the Asset Protection FAQ page for additional information. To learn to find an asset protection attorney in your area click on your area and the practice area, or call 866-755-8745 today.