Asset protection is defined as a means to protect assets from becoming liabilities at another place. Asset protection is applied during a bankruptcy. The purpose of asset protection is to insulate certain assets when a person has several of them.
Under the purview of federal bankruptcy laws in the U.S. and the Employee Retirement Income Security Act, ERISA, particular assets are protected from creditors in the event of bankruptcy. The law varies from one state to another but in general, certain categories of personal property, clothing, individual retirement accounts, equity and personal residences fall under the umbrella of asset protection.
In all of the states, there are also laws which protect owners of limited liability companies, limited partnerships and corporations from liabilities. Similarly, the assets of trusts are also protected to some extent from the creditors of beneficiaries.
Asset protection law began to evolve as a niche area of bankruptcy law in the late ‘70s.
This came of age a decade later, in the late ‘80s. Barry Engel, an attorney from Colorado is credited with the creation of this category of law.
Asset protection law developed over the years and according to an article in the Wall Street Journal about 60% of the millionaires in the U.S. considered asset protection law as a major entity in their estate planning.
Asset Protection Law has arguments for and against it. In a way, each attorney who has created a trust, limited liability partnership, corporation or limited partnership also has a hand in asset protection planning in some form or the other. One may justify this by the logic that everyone has a right to safeguard their own assets. However, it has been pointed out that asset protection law provides a means for some unscrupulous individuals to evade taxes and engage in fraudulent activities.
Asset protection law is therefore subject to interpretation, and it is the duty of the courts to decide where it is used prudently for the genuine protection of an individual’s assets and where it is misused for unlawful gains.