Privacy and Asset Protection

It’s no secret that the U.S. Treasury Department is in a war against money laundering. One method of cracking down has been to impose stricter disclosure requirements for owners and beneficiaries of bank and financial accounts, especially offshore accounts. This creates obvious privacy concerns.

While Federal regulators have backed off the most burdensome proposals, proposal that would have required banks to disclose the identities of anyone operating or benefiting from specific bank accounts. Even the less onerous rules that require only self-disclosure by customers raise serious questions over the ability for anone to have or maintain privacy for business or personal reasons.

Privacy and Asset Protection Behind the Corporate Veil

While he specifics are still being discussed, it is likely that a final policy will be enacted by the end of this year. One thing seems clear: Federal Regulators are likely to insist that banks disclose the names of the beneficial owners of business entity bank accounts. At least one version of the rule would require identification of (i) anyone with at least 10% ownership stake in a company, and (ii) managers who oversee operations of the company.

This has major implications for asset protection purposes. Right now, one can gain at least some level of anonymity by using the corporate veil. Increased disclosure seems pointless in light of the fact that the U.S. Treasury Department already obtains information on individuals through tax filings and when people apply for employer identification numbers. The SEC also gets a lot of information on business owners (10% or more) through Form D filings. How much duplicitous information does the Federal government want us to provide? At this point, disclosure requirements are already burdensome for small business owners.

The Federal government obviously needs information in order to combat money laundering, but the proposed rules open a larger debate about the proper use of information, especially as it pertains to privacy and asset protection. In my opinion, privacy is a legitimate component to many asset protection strategies, business deals, and personal financial planning?

The prevalence of frivolous litigation, lawsuits targeted at people and companies with “deep pockets,” and aggressive marketing practices of financial institutions, what additional levels of disclosure should be required at this point? And what forms of protection will that loss of privacy and asset protection leave for individuals and companies looking for legitimate ways to protect themselves from interventional government overreaching and groundless civil lawsuits?

For additional information, see this article from the Wall Street Journal.

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Lawsuit Protection Part II: Assets That Protect Themselves

ERISA - Exempt Asset Protection
ERISA plans (e.g. 401(k)) have built-in asset protection.

In Lawsuit Protection Part I, I discussed the advantages of being judgment proof. To reiterate, the main purpose is to discourage aggressive attorneys, because there is no financial upside for them.  That article can be summed up as follows: Judgment proof people have nothing to lose, so would-be suing attorneys have nothing to gain.  Being judgment proof is a very effective way to keep a lawsuit from ever being filed against you.

Built-In Asset & Lawsuit Protection

But there is an obvious downside to being judgment proof: We all want to have wealth and assets. How can one have significant wealth AND be judgment proof at the same time? Before we tackle that concept in Lawsuit Protection Part III, it’s important to discuss how different assets are treated in the eyes of law. Assets are not created equal when it comes to wealth protection laws.

What Is An Asset?

Accountants will tell you that assets minus liabilities equals equity, or (A – L = E).  In the realm of asset protection, we think about protecting equity. That’s the real asset. A building valued at $6oo,000 with a $625,000 mortgage in place is not an asset.  It’s a liability.  That building actually represents a debt. It’s underwater and doesn’t need to be protected. Liquid assets like cash, stocks, bonds, and physical precious metals are pure equity and in need of protection most of the time (unless they’ve been purchased on margin or with debt).

Let’s consider the example of a 33 year old physician living in California. Assume this physician has $90,000 of cash in the bank and a home valued at $400,000 (with a $250,000 mortgage). Further assume that she owes $200,000 in student loans. In a strict balance sheet accounting sense, this person is in the red (i.e. she has negative overall equity), but she does have assets.

Is she judgment proof (assuming there is no malpractice insurance)?  To answer this question, we must first understand the difference between exempt assets and non-exempt assets. In general, exempt assets are off limits. They can’t be reached by creditors. Non-exempt assets are everything else.

Exempt and Non-Exempt Assets

Some types of assets are exempt from lawsuit judgments and other creditor claims. Those assets cannot be touched. Some exempt assets include qualified retirement plans under the Employee Retirement Income Security Act (ERISA) and homesteaded property. In some states like Florida and Texas, equity in your home is completely protected by homestead laws.

In almost all scenarios, cash in the bank  is not protected at all. It is a non-exempt asset. That means a court can order that cash in the bank be used to pay off a verdict. An asset protection attorney could help convert cash into an exempt asset category. One simple way to do that would be to simply pay down the mortgage on a homestead property.

Converting Property from Non-Exempt to Exempt

Why pay down the mortgage as opposed to the student loans? Well, as discussed above, homesteaded property is an exempt asset. There are laws in place that automatically place homesteads beyond the reach of creditors. By paying down a mortgage, your can protect the asset AND keep it available for future use (i.e. a home equity line can be tapped in the future). Just as important, if tragedy strikes and for some reason other creditors come calling, the $60,000 would be safely exempt from the claims of those creditors, including student loan lenders! That’s more relief than one could get even in bankruptcy court. Exempt assets are protected assets!

Again, the key to fortifying your assets is being judgment proof, even if you have significant wealth. Take practical steps today to understand the types of assets you have, and then begin figuring out how to protect them one at a time as part of an overall asset protection strategy.

Asset Protection Articles, Mortgages & Strategic Defaults

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Strong Creditor Collection Tools

Visit https://mwpatton.com to learn more about asset protection strategies.

One of my asset protection clients has a judgment entered against her by a federal regulatory agency. This client has almost no income, except for a modest monthly social security check. The creditor federal agency hired a commercial collection firm to collect its judgment. As part of the collection effort, my client’s social security income was garnished. There is a federal statute which states that creditors cannot garnish social security. The client wants to know how he can dissolve the garnishment and protect her assets.

IRS – Asset Protection Exempt

The IRS has enhanced collection tools including the legal right to garnish social security checks and other benefits sponsored by the federal government. Specifically, Section 6334 (c) of the Internal Revenue Code (26 U.S.C. 6334 (c)) allows Social Security benefits  to be taken to collect unpaid federal taxes, if monthly social security benefits exceed $750. If benefits do exceed the $750 threshold, the IRS gan garnish up to 15% of the income. Of course, a debtor has the right to appeal for a “hardship” exception.

Other federal regulatory agencies have similar remedies available to them, and no amount of asset protection planning can protect federal benefit income from such garnishment remedies. Any judgment owed to the federal government can be enforced by garnishing income received as part of social security or any similar government benefit.

But this is one collection rule that I don’t think we should be complaining about. After all, if one owes the federal government money, isn’t it just common sense that federal social benefits should go toward paying the debt. If you disagree, tell me why below.

Asset Protection Articles

529 Asset Protection College Planning

529 Asset Protection PlanningInternal Revenue Code 529 savings plans help families save for the cost of college tuition. Some 529 plans are operated by the States while others are directly operated by educational institutions. All 50 states offer at least one type of 529 plan to help parents (or other relatives) fund the cost of college tuition. Investment and interest returns on 529 plans grow tax free. Qualified distributions for college expenses are likewise tax free. 529 plans generally come in one of two flavors:

  • Savings plans – these operate much like 401(k) or IRA retirement plans.
  • Prepaid tuition plans – these allows parents to “lock in” tuition rates for in-state public colleges or universities.

In some states, 529 plans have built in asset protection features. Money in a 529 plan is generally exempt from bankruptcy estates, which means that if you file bankruptcy, creditors will generally not be able to get their hands on the cash value of a 529 savings plan.

529 Asset Protection Outside Bankruptcy

What about outside of a bankruptcy filing, in the context of a lawsuit or other creditor claims? Are 529 plans protected in a civil, non-bankruptcy context? The answer depends on where you live. Individual states offer varying degrees of legal asset protection for 529 plans. In some states 529 plans are protected from the claims of creditors of the beneficiary of the 529 plan (i.e. the college student), the account owner (e.g. parent), and/or the donor of the funds (e.g. parent or other relative). Some states offer protection for all three. Other states offer considerably less protection for 529 funds. Since the asset protection component varies so considerably from state to state, your best best is to consult an asset protection attorney to find out how well your 529 assets are protected. For a complete (though not frequently updated) list of state by state creditor exemptions for 529 plans, check out Morningstar.

Florida Asset Protection for 529 Plans

Money contributed to a Florida 529 plan is broadly protected. Assets in a Florida 529 savings plan are effectively protected against creditors of the beneficiary, the account owner, and the donor of the funds to the plan.

New Jersey Asset Protection

New Jersey, on the other hand, only offers protection against the creditors of the beneficiary and the donor of funds. In other words, claims against the account owner (e.g. a parent) are not exempt and could result in a 529 plan being liquidated to satisfy a legal claim or judgment.

New York Asset Protection

The New York statute only addresses creditor claims against account owners. The statute provides legal asset protection for funds in a 529 account only while the beneficiary is a minor.

Fraudulent Transfers

If money put into a 529 plan is deemed a fraudulent transfer, then it can be attacked and “clawed back” by legitimate creditors of the person making the transfer into the 529 plan. Again, fraudulent transfers are the primary reason that asset protection planning needs to be pursued before trouble is on the horizon.

Asset Protection Articles

AP Twitter Account Hacked – False Report of Explosions in White House

False tweet of white house explosions and Obama injury
False tweet from hacked Associated Press Twitter Account

Do you feel safe online? Sharing personal information over the internet has become something that many of us do without thinking about who’s on the other end of our online connection (or at least who’s intercepting the information we send). I do it every day in the form of online banking, insurance, trading stocks, etc. If my information gets intercepted, it would be bad . . . for me.

But what about the media itself? What if the news agencies we rely upon are hacked? How would we know who was controlling the flow of information?

Today provides a PRIME EXAMPLE of what could potentially go wrong. The Associated Press’ Twitter Account (yes, their Twitter account) was hacked. The hackers falsely reported two explosions in the White House and that President Obama had been injured.

And yes, there were adverse consequences. As reported by Zero Hedge, in response to this “news,” over $20 billion worth of S&P 500 futures contracts traded in a mini-crash. In other words, the hackers managed to tank the stock market with a hack job that gave them access to less than 160 characters.

I’m not sure whether to blame the algorithms that read headlines and trade the markets, the programmers behind the software, the Associated Press hackers, or the fact that we all seem to be putting a lot of faith in things we don’t really know much about (e.g. who is behind the “news”). But a couple things are certain, we need to be skeptical about what we read and careful about the information we send over the internet.

There’s a couple reasons for that. The most compelling, in my opinion, is that information could be being gathered today for future use against us in ways that are completely beyond anything we might anticipate today. Don’t think that’s possible? Pick up an Isaac Asimov book or just read this CNN article on the impending Surveillance State.

 

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Really Scary Risks and Asset Protection Planning

The scariest risks are risks that you don’t even know exist. The ones that are like a snake in the grass, silently coiled right by your feet ready to strike. It’s virtually impossible to manage risk unless you clearly understand the risks.  As an asset protection law firm, we’ve become pretty good at dealing with legal risk, and we’ve developed methods to eliminate or, at least, diminish it’s capacity to impact your wealth.  While legal risk is probably the greatest threat to your wealth, it is not the only risk to your wealth.

Defining Other Types of Risk

Besides legal risk, you should consider three broad categories of risk:

  • Institutional Risk — Remember Bear Stearns and Lehman Brothers?  How about MFGlobal, which took almost $800 million of client money down with it?  Major institutions have failed, and more possibly can fail. Have you done the research necessary to decide for yourself whether or not your bank or financial institution is safe? If not, you’re in the realm of really scary risk, and no amount of asset protection planning can save you.
  • Market Risk — This is the risk of investments losing value. Anyone who has ever bought stocks or bonds has consciously taken market risk. Asset protection planning isn’t designed to address this type of risk.
  • Control Risk–When you invest in stocks or bonds, you don’t control the underlying vehicle (company) in which your investing. That leaves you open to the risk posed by other people. Enron, WorldCom, and Bernie Madoff are good examples of what can happen when you give up control of your investments. My asset protection strategies leave you in charge of the planning, so control risk is at your option.
  • Currency Risk — Yes, currency can be risky, even if you hold it in 100 dollar bills in your mattress at home.  The reason is that the amount of goods of services that currency can buy in the global marketplace changes daily. You might be thinking “Isn’t this really market risk?” Yes and no. I think of it separately because it pertains to paper money and not investment instruments like stocks and bonds. For what it’s worth, I like the U.S. Dollar when it comes to currency. Call me crazy . . . . Any good asset protection strategy should give you the option to hold different currencies as you see fit.

More on Market Risk and Asset Protection

Many professionals follow advice that traditionally has worked very well–they buy municipal bonds and hold them until maturity.  That strategy has worked well for many years, and it might continue to work.  I’m not challenging your financial advisor’s advice. My goal is simply to make you think: Does it seem to you that we are experiencing traditionally reasonable market conditions?  Does the extreme volatility in the markets concern you at all, not to mention the daily headlines coming out of the closely correlated markets in Europe? Are you concerned about the filing of the largest municipal bankruptcy in history, and rampant fraud in the financial services industry?

This is the one question you should be asking:  Given all the known and unknown risks in the market, am I being appropriately compensated for my participation in the game?  If the answer is “no,” then consider sidelining some of your assets.  That’s asset protection 101.  If you don’t know the rules (risks), don’t play.

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