Asset protection vehicles such as Trusts cannot be created, and assets cannot be transferred into them, after a legal claim such as a malpractice suit has been launched.
Moving assets into a Trust after a claim arises can be viewed as a fraudulent act known as a Fraudulent Conveyance. The upshot is that once a claim has been filed, it may be too late to protect assets.
As in all proper risk management processes, the key is to be proactive and set up the asset protection Trust or other tools in advance.
If you set up an asset protection entity and there’s a legal judgment against you, the assets inside the entity (for example, a Trust) may be out of reach of creditors. But if there are flows out of the protected vehicle, for example payments made out of the Trust, those flows may be subject to seizure.
It’s important not to go overboard on asset protection. According to attorney Barry Rosen, people sometimes spend so much time and effort on insulating assets from creditors that they hurt their spouse and heirs by constraining the mobility of assets and miss out on tax or other estate planning benefits they could have realized. While devastatingly large creditor claims do occur, they tend to be rare. It’s important therefore to keep one’s asset protection plans in proportion to the anticipated risks.
A final caution: Your personal assets may be placed in danger whenever you enter into contracts with language subjecting you to personal liability. Such language may be found in some business or private practice loans. Be on the lookout for these and avoid them.