Asset protection plans can help safeguard wealth from lawsuits

Business executives living in New Jersey may be part of a larger group that is being increasingly targeted in litigation. According to PricewaterhouseCoopers, members of company boards were included as defendants in about one-third of federal securities lawsuits brought in 2008. But by last year, that figure had nearly doubled, reaching 64 percent.

Directors and executives stand to lose a good deal of their accumulated wealth if those plaintiffs' suits are successful. In response, a number of businesspeople are engaging in asset protection planning, which is a broad term to describe various strategies that place a person's assets outside the reach of creditors. Strategies can include the use of umbrella insurance, the formation of limited liability companies and the creation of asset protection trusts.

Although they can be used together in various combinations according to a person's individual circumstances, the asset protection trust is most frequently used. Only about a quarter of states authorize the use of such trusts, and New Jersey is not among their number. But people can still implement an asset protection trust if the named trustee is in one of the states that allow them.

When establishing a trust, a person may want to consider how much of one's assets to put into it. Experts recommend no more than one-half of a person's wealth should be placed in the trust. When executives or directors leave their positions and are out of serious danger of lawsuits, they may be able to eliminate the trust with the trustee's permission.

But as with everything related to estate planning, it is vitally important to create the trust before any trouble arises. If the asset protection trust is formed after an event that could give rise to liability, a court might hold the trust invalid, thwarting its purpose.

Source: Bloomberg, "Wealthy Americans Turn to Trusts to Shield Assets," Elizabeth Ody, May 22, 2012.