The Seven Levels of Asset Protection Planning


Volume 6 • Issue 9 • September 2016

The Counselor is a monthly newsletter of Hallock & Hallock dedicated to providing useful information on estate planning, business succession planning and charitable planning issues. This month's issue will discuss a variety of asset protection strategies - from rather simple to quite complex. If you are interested in learning more about the ideas and processes discussed in this newsletter, please contact us for an initial consultation.

Asset protection planning is not about hiding or concealing assets. It is about using the existing laws appropriately to obtain the best possible level of protection in the event a lawsuit happens. Asset protection planning is the process of analyzing ownership of assets and re-arranging ownership of those assets as needed to ensure maximum protection, maximum use of exemptions and to minimize risk of loss in future litigation. Asset protection is not evasion of taxes or defrauding current creditors. To be effective, asset protection plans must be properly designed, drafted and implemented. An asset protection plan is never stronger than its weakest link.

While most of us like to have a high degree of certainty in the outcome of a particular planning strategy, asset protection tends to be more art than science. Asset protection planning tends to be a balancing act between your desire for access to/control over assets and your desire to protect the assets from the claims of others.

When to Plan

In the United States, more than 41,000 lawsuits are filed each day (more than 15 million lawsuits each year). The best and really only time to plan is before the claim arises. When looking at transfers, most states have rules that apply to known creditors and different rules for unknown future creditors. But even with an existing claim, and sometimes even when a judgment has been entered, some options may still be available.

The Seven Levels of Asset Protection

A combination of strategies often works best in asset protection. Also, it is important to crawl before you walk. Therefore, asset protection planning is often done by levels, usually starting at the lowest. Not every level will be appropriate for every person. The following are what we refer to as the seven levels of asset protection.

Level 1: Keep Quiet

The most basic asset protection planning technique we can share is to be discrete. The norm in society is to shout about your wealth. Be discrete! Beware of what you put on Facebook or other social media. Keep quiet! It is harder to take what you don’t know about.

Level 2: Exemptions

Certain assets are automatically protected by state or federal exemptions. State exemptions include personal property, life insurance, annuities, IRAs, homestead, joint tenancy or tenancy by the entirety. Different states protect assets differently and amounts of the exemptions will vary greatly from state to state. For example, some states have an unlimited homestead exemption while others, like Utah, are very limited. Federal exemptions include ERISA which covers 401(k) and 403(b) plan accounts, pensions, and profit-sharing plans. Creating and funding qualified retirement plans for clients can provide excellent shelters against creditors’ claims.

Level 3: Liability Insurance

Obtain or increase liability insurance and umbrella coverage. It is amazing how few people are carrying relatively inexpensive umbrella policies. Get with your insurance advisor and review your insurance coverage to determine if adequate coverage exists.

Level 4: Titling of Property and Property Agreements

Title is king. If you own an asset that is not covered by an exemption it could be lost to a creditor. If you are in a high risk profession, consider titling property in the name of a spouse who may not be subject to as much risk. If you are in a community property state, consider a property agreement that converts community property into separate property. In making this decision, it is important to take into account the loss of the double step-up in income tax basis that occurs with community property. Also prenuptial agreements can be an important tool in providing asset protection in the event of a divorce, as well as protecting your estate plan at death.

Level 5: Entity Formation

Any entity will be better than a sole proprietorship or general partnership, but choosing the right entity can really make a difference. LLCs can be created to own specialized or valuable equipment and/or real estate and to remove these assets from an operating entity. This allows you to segregate real estate, equipment and even securities accounts from exposure to the liabilities of the operating entity. It is also important to know that the laws of each state vary and there may be a benefit to forming your business in a state other than the state where you reside.

Level 6: Irrevocable Trusts

People are often mistaken in their belief that traditional revocable living trusts (RLTs) provide asset protection. So long as a trust is revocable, it does not provide asset protection. However, an RLT can be drafted to provide asset protection for the surviving spouse or children after the death of the first spouse. Additionally, an irrevocable trust established by a person during their lifetime for the benefit of another (often their children) can also provide asset protection. One common example of this is the Medicaid Asset Protection Trust.

Level 7: Self-Settled Asset Protection Trusts

Self-settled asset protection trusts are irrevocable trusts where the person creating the trust continues to have some access to the assets held by the trust. These come in two forms: domestic asset protection trusts (DAPTs) and foreign or off-shore asset protection trusts (FAPTs). Use of this highest level of asset protection planning should be engaged in with extreme caution and only with the help of excellent advisors. DAPTs are trusts established under the laws of a particular state, whereas FAPTs are organized under the laws of a foreign country. Only 16 states currently authorize the use of DAPTs. So it is unclear if one state will honor the laws of another state. Further, there are almost no court cases that have addressed the viability of this strategy. While protecting the assets from creditors can be achieved, it remains difficult for the individual to get assets back out of the trust while under attack by creditors.


Asset protection planning is a valuable and important part of estate and business planning. There isn’t anyone who cannot benefit from implementing one or more of the seven levels of asset protection planning. If you would like to talk about any of these ideas in more depth we would love to speak to you further.

This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.