Investopedia, an online source of financial content, defines asset protection as “guarding one’s wealth.” The protection can be against creditor claims, as this limits their reach to certain assets that business entities may want to protect.
Asset protection is a legal way to protect other assets without violating the laws for contempt, concealment, tax evasion, fraudulent transfer, or bankruptcy fraud.
Here is a look at how this financial legal tool came to be:
A Concept Traced to Romans
According to Forbes, asset protection dates back to Roman Law, which is when trust law started. It was said that Romans realized setting up trust law, dubbed as fidei commisum.
Britannica defines fidei commisum as a system where a person is gifted with property and would be obliged to transfer it to another specific recipient, who “cannot take the property directly.”
The English, who were the last people conquered by Romans, turned this concept into a tool in legal planning and widened its application.
Law Development in Cook Islands
In 1989, Colorado lawyer Barry Engel successfully encouraged the amendment of the International Trust Law in Cook Islands such as allowing trusts that are self-settled and spendthrift. Cook Islands is said to be the first in its Trusts Act a clause on Asset Protection.
This legislation was later adopted by Belize, the Channel Islands, Cayman Islands, the Isle of Man and Nevis.
Blog Escape Artist said that Cook Islands Asset Protection clause includes provisions on a statute limitation period of two years which the creditor may bring to court a charge for conveyance against a trust or of fraudulent transfer.
A Development in Connecticut State
An article in the Wealth Advisor highlighted a legislative movement in Connecticut state for Asset Protection. This was signed on July 12, 2019 and took effect at the start of the year.
The August 2019 report stated that the state enacted “Connecticut Qualified Dispositions in Trust Act,” which included a clause on the creation of “self-settled domestic asset protection trusts (DAPTs).” This allows a person to create a fund with his assets and still be allowed to be a beneficiary of said trust. A DAPT set up can protect trust assets from future creditors’ claims.
Asset Protection Planning Now
Forbes advises people who are looking into asset protection to plan before there is a claim or demand letter arrives. If you do it after there is a claim, the law will cover this on fraudulent transfer.
The same report also stressed that asset protection differs from professional insurance, but it can supplement the latter. Asset protection will not drive away lawsuits, but if these arrive, your insurance company can settle and defend it.
Forbes also said that asset protection planning does not mean secrecy from the creditor. This can later turn into a problem for disclosure on tax returns. When filing for bankruptcy, meanwhile, know that full disclosure, including transfers and assets. Failure to do so may result in denial of discharge or worse, lawsuits for bankruptcy fraud or perjury.