Asset ProtectionEverything You Need to Know

Denise Elizabeth P
Senior Financial Editor & Contributor

Date Published: August 3, 2022

What is Asset Protection?

One of the techniques used in protecting a company’s assets against creditors’ claims is known as Asset Protection.

Asset protection is a legal financial practice to restrain creditors from exhausting a company’s wealth for them to get paid.

Essentially, creditors are not totally limited from any claims of a person or a business’s assets but simply, asset protection aims to limit it so that some of the valuable assets will not be accessed. 

Understanding Asset Protection

Asset Protection operates within the bounds of law and is a completely legal practice.

Assets can be protected without having to hide the assets, commit fraud by bankruptcy or transfer, evade taxes, or contempt. 

Financial experts urge business enterprises put a strategy in place before any claim arises.

Some of the most used techniques are accounts-receivable financing, asset protection trusts, and family limited partnerships.

For small enterprises that own small-scale assets, it is preferable to file for bankruptcy instead of using the asset protection strategy.

However, if the material assets of the enterprise are exposed to any claim, it is advisable to proactively use an asset protection strategy.

Under the United States Federal Bankruptcy and ERISA (the Employee Retirement Income Security Act of 1974) laws, certain assets are exempt from any creditors’ claims such as retirement plans.

Additional exemptions also include a certain portion of the home equity of a person’s primary residence and clothing, among other personal properties. 

Asset Protection and Real Estate

asset protection

Jointly-held property can also be subject to asset protection through the coverage of tenants by entirety.

Married couples who share the same property have a claim on the property as a whole and not just portions of it. 

If it is only one of the spouses who are indebted to the debtor, the creditor may not have the right to any claim for the specific asset that is subject to tenants by entirety.

However, if both spouses happen to be both debtors, the property will not be covered by the asset protection and will be subject to claims by the creditor.

Another method of protecting real estate assets is through the donation of assets.

The company or individual may donate or transfer the asset to one of its family members or to any trusted third party.

For example, if a company donated an asset to an individual, on paper the rightful owner is the donee.

But in practice, it is still the donor who uses and benefits from the said asset.

When a creditor makes a claim, assets already named on behalf of another person or entity will not be easily seized by the creditor because the ownership of the asset needs to be determined.

When a person also deposits their money or other financial accounts in offshore accounts, payment of taxes may be legally avoided against the deposits. 

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  1. Cornell Law School "asset protection trust" Page 1. August 3, 2022