June 2006: by Jim Nellis

Asset protection strategies, part one

Protecting assets from potential claim is an important issue for all business owners. There are a number of different strategies one could choose depending on the situation.

It is essential that you and your team of professionals have a thorough understanding of creditor rights with respect to one's obligations prior to considering any asset protection planning.

Prior to beginning any discussion on appropriate techniques for asset protection we must look at the concept of 'control.'

Clients are often reluctant to give up control of their assets. They want their assets to be owned by a third party but also want to have control over how those assets are dealt with. It is this conflict over control that often results in asset protection strategies being unwound by potential creditors.

Consequently, the issue of control over one's assets is paramount to any type of asset protection planning. A person must give up control of those assets and the day-to-day management of those assets to some third party for the plan to be effective.

Perhaps the simplest form of third party protection is to transfer the title of one's assets to a spouse, trusted family member, or a trusted friend. In this strategy no formal relationship exists. The client is at risk that the assets transferred to the third party will be subject to the third party's creditors.

There is no guarantee that any of the previously mentioned parties will not be subject to their own creditor attacks in the future. In this case all that has happened is that the creditor risk has been transferred to the third party.

It is important to consider the tax consequences of this kind of transfer. The transfer is considered a deem disposition that could result in a capital gain as the disposition will occur at fair market value. There are too many risks involved for this to be an effective protection-planning tool, your assets are still at risk of being lost.

Protecting your assets through insurance planning is another means of asset protection. Universal life insurance and segregated funds have become popular tools over the years to provide asset protection in certain circumstances.

With respect to universal life insurance the insured designates beneficiaries of the policy. Beneficiaries would receive cash on surrender of the policy or the death benefit upon death. Creditors cannot step in and force the policy owner to surrender the policy to meet the debt owed by the insured.

With respect to the beneficiary: where a beneficiary is in place, the forced surrender by a creditor would destroy the beneficiary's contingent interest and this is not allowed for certain types of beneficiaries.

Essentially there are four types of beneficiaries; the irrevocable beneficiary; beneficiaries for value; non-family beneficiaries; and family beneficiaries. No creditor protection is available to a revocable nonfamily beneficiary under an insurance policy which has not matured. Protection is only available in this situation where the policy has matured but the insurance company has failed to pay the beneficiary.

With respect to insurance-based investments, protection is available from creditors because the issuance of these products contains a prohibition against surrender.

These are just a couple of simple insurance-based asset protection strategies that may or may not be right for you. There are also strategies that involve the use of domestic trusts and foreign trusts that fit well in more complex planning scenarios.

Every situation is different. It is important you seek out professional advice when considering what strategy is the right one for you.

Knowing your assets are protected will provide you with peace of mind and let you focus on running your business.

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About the author
Jim Nellis, B.Comm, is a Financial Planning Advisor with Assante Financial Management Ltd. He can be reached at 1-877-837-3377 or 306-665-3377, or Click to email Jim Nellis.

Disclaimer
Please contact a professional advisor to discuss your particular circumstances prior to acting on the information above. The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd.

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