What is Asset Protection?
Asset protection is the concept of and strategies for guarding one's wealth. Asset protection is a
component of financial planning intended to protect one's assets from creditor claims. Individuals and
business entities use asset
protection techniques to limit creditors' access to certain valuable assets while operating within the
bounds of debtor-creditor law.
Key Takeaways
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Asset protection refers to strategies used to guard one's wealth from taxation, seizure, or other
losses.
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Asset protection helps insulate assets in a legal manner without engaging in the illegal practices of
concealment (hiding of the assets), contempt, fraudulent transfer (as defined in the 1984 Uniform
Fraudulent Transfer Act), tax evasion, or bankruptcy fraud.
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Jointly-held property under the coverage of tenants by entirety can work as a form of asset
protection.
Understanding Asset Protection
Asset protection helps insulate assets in a legal manner without engaging in the illegal practices of
concealment (hiding of the assets), contempt, fraudulent transfer (as defined in the 1984 Uniform Fraudulent
Transfer Act),
tax evasion, or bankruptcy fraud. One common methods for asset
protection includes a
family limited partnerships
(FLP).
If a debtor has few assets, bankruptcy may be considered the more favorable route compared to
establishing a plan for asset protection. If significant assets are involved, however, proactive asset
protection is typically advised. Certain assets, such as retirement plans, are exempt from creditors under
United States federal bankruptcy and ERISA (Employee Retirement Income Security Act of 1974) laws.
In addition, many states allow exemptions for a specified amount a home equity in a primary residence
(homestead) and other personal property such as clothing. Each state in the United States has laws to
protect owners of corporations,
limited partnerships
(LPs), and
limited liability companies
(LLCs) from the entity's liabilities.
Asset Protection and Real Estate
Jointly-held property under the coverage of tenants by entirety can work as a form of asset
protection. Married couples who hold mutual interest in property under tenants by entirety share a claim to
a whole piece of
property and not subdivisions of it. The combined ownership of the property means that creditors who have
liens and other claims against one spouse cannot attach the property for their debt reclamation
efforts. If a creditor has claims against both spouses, the tenants by entirety stipulations would not
protect the asset from being pursued by that creditor.
Some attempts at asset protection include putting the property or financial resource in the name of a
familiar member or other trusted associate. For example, an heir might be gifted ownership of real estate
or other property while the actual owner continues to reside on the property or make use of it. This could
complicate efforts to seize property as actual ownership must be determined. Financial accounts may also
be domiciled inoffshore banks in order to legally avoid paying taxes against those funds.
What Is Tenants by Entirety (TBE)?
Tenants by entirety (TBE) is a method in some states by which married couples can hold the title to a
property. In order for one spouse to modify his or her interest in the property in any way, the consent of
both spouses is required by tenants by entirety. It also provides that when one spouse passes away the
surviving spouse gains full ownership of the property.
Understanding Tenants by Entirety (TBE)
For example, a husband could not decide to sell his ownership interest in a vacation home owned with his
wife without the wife's consent.
About half of the U.S. states allow tenancy by entirety for all types of property; a handful of states
allow it only for real estate.
Other possible structures under which spouses may choose to jointly own property include tenancy in common and
joint tenancy. Each method of holding title affects each owner's rights to transfer the property and use it as collateral.
The ownership structure also determines what will happen to the property when one spouse dies and whether the property
can be used to satisfy a debt or judgment.
How Tenants by Entirety Are Viewed From a Legal Perspective
Property that is held by tenants by entirety is comparable to community property. Both spouses mutually own
the entire property as a whole rather than any type of subdivision
where each would have individual ownership. The rights of tenants by entirety can supersede the terms laid
out in a will or trust that might otherwise grant property to heirs upon the death of one of the spouses.
For example, the will left by a deceased party might state they want one of their surviving children to
take possession of a piece of property. If that property is jointly-owned by the decedent’s
spouse and falls under the terms of tenants by entirety, the terms of the will may be ignored. The
surviving spouse would retain sole ownership of the property.
The nature of tenants by entirety means that creditors who may have claims against one spouse’s assets
cannot pursue the jointly-held property for compensation. If both spouses hold joint debt with creditors,
they could
pursue the jointly-held property. Federal tax liens against one spouse could in some circumstances be
attached to property that is covered by tenants by entirety and potentially subject to seizure.
A tenancy by entirety can be eliminated under such circumstances as a divorce, which would see the
property divided between the parties, or a voluntary, mutually-sought petition by both parties to change
the nature of ownership.
What Is Tenancy in Common – TIC?
Tenancy in common is an arrangement where two or more people share ownership rights in a property or parcel
of
land. The property may be commercial or residential. When a tenant in common dies, the property passes to
that
tenant's estate. Each independent owner may control an equal or different percentage of the total property.
Also, the tenancy in common partner has the right to leave their share of the property to any beneficiary as
a
portion of their estate. Contract terms for tenants in common are detailed in the deed, title, or other
legally binding property ownership documents.
What Is Joint Tenancy?
Joint tenancy is a legal arrangement in which two or more people own a property together, each with equal
rights and obligations. When one of the owners in a joint tenancy dies, that owner's interest in the
property
passes to the survivors without the property having to go through the courts.
