Asset Protection
The term "asset protection" is commonly misunderstood. Income producing assets are best protected through LLCs and limited partnerships. The objective is to change the creditor's economic analysis, making the pursuit so difficult and expensive, the creditor will either give up or be willing to negotiate on terms more favorable to the debtor. QPRTs are frequently used in estate planning and should be familiar to most asset protection attorneys.
An asset protection alternative to an outright sale is the sale and leaseback of the residence to a friendly third-party on a deferred installment note. Over the years, this new field of law enjoyed a marginal reputation, but started going mainstream in the mid-1990s. The general proposition underlying asset protection is that a creditor can reach any asset owned by a debtor (with some statutory exemptions like the homestead exemption and certain types of retirement plans), but cannot reach assets not owned by the debtor. The more aggressive and knowledgeable the creditor, the more obstacles we need to erect in his path. This makes asset protection your most valuable tool.
While the charging order limitation is generally powerful, its usefulness may not extend to personal residences. The three most important factors are: (i) the identity of the creditor pursuing the client, (ii) the nature of the assets that will be pursued by the creditor, and (iii) the extent to which the debtor is willing to go to protect his assets. The charging order limitation limits a creditor's remedy to a lien against the distributions from the entity, without conferring on the creditor any voting or management rights. The debtor has two asset protection choices: (i) do nothing and stand to lose all assets when the plaintiff becomes a creditor, or (ii) engage in some asset protection planning.