Asset Protection

Jacob Stein is the nation's leading and most respected asset protection attorney. He can protect your hard-earned assets better than anyone else. Every year we set up hundreds of structures to protect residences, rental real estate, investments and retirement plans. His clients include officers and directors of Fortune 500 companies; celebrities; Internet entrepreneurs; high-profile real estate developers, builders and investors; physicians; wealthy foreigners; small business owners; attorneys, accountants and financial advisors; and many other individuals facing financial adversity or seeking privacy for their holdings. You will find Mr. Stein to be not only knowledgeable and confident, but also friendly and personable. He takes a no-nonsense approach to his work and makes this subject easy to understand and implement, holding your hand through the whole process. 

Why do you need asset protection?

Do not be fooled – even if you are innocent, that does not mean the courts are on your side. Jurors often side with the plaintiff who appears to need the funds in question rather than the defendant who they assume has money to spare.

Even a judge’s own personal feelings can put you in jeopardy.

Many of our clients believe that once a lawsuit has been filed against them, it is too late to shield assets from plaintiffs. They are happy to learn that usually there is still a lot they can do to protect their assets.

“As long as I am allowed to redistribute wealth from out-of-state companies to injured in-state plaintiffs, I shall continue to do so. Not only is my sleep enhanced when I give someone else’s money away, but so is my job security, because in-state plaintiffs, their families and their friends will re-elect me.”

- West Virginia Supreme Court Justice

Many businesses and professions carry extraordinary financial risks that insurance alone can’t protect against. Medicine is a good example. Malpractice premiums are often barely affordable. Insurance does not cover many claims. Similarly impacted are real estate developers and builders and small business owners.

Over the past decade, our attorneys have represented hundreds of physicians, real estate developers, corporate directors and officers and small business owners. We know and understand the risks your business faces, and how to best shield your assets from these risks.

Even if an auto accident is minor, claims against you can be substantial. You can be sued for emotional damages, physical pain or a spurious claim like whiplash. There are approximately 150,000 practicing attorneys in California. Many of them look to your assets to make a living.

Divorces can be rending, emotionally and financially. Community property laws and the often unpredictable vagaries of judges can make the process even more painful and costly. At Klueger & Stein, we can help plan ahead to reduce both the pain and the costs of a divorce.

No creditor is more powerful and determined to use their power than a government agency. But in terms of debtor-creditor law, they often stand in the same position as most other creditors. With proper advanced planning, your assets can be protected against potential claims and investigations of the government.

In a down real estate market a lot of borrowers find themselves unable to pay back loans or perform on personal guarantees. In difficult economic times banks and lenders pursue borrowers’ assets aggressively and diligently. This means that it is not enough to set up the most basic asset protection structures like revocable trusts or fake equity strips. To defeat the claim of a lender, especially a bank, the asset protection structures used need to be sophisticated and difficult to penetrate. We find that with the right asset protection structure in place, lenders will either give up the chase for your assets or be a lot more willing to negotiate.


What do you want to protect?

Protecting Your Home

For many people, their home is their single most valuable asset. It can also be their most vulnerable. The financial and emotional impact of losing it can be devastating. At Klueger & Stein, LLP we utilize perfectly legal and ethical strategies to avoid such a loss.

A Case History: The Unfortunate Widow

Dolores was 84 and a widow. She had been living in the same house for 30 years, and it was fully paid off. She had virtually no savings, and lived off her Social Security benefits.

She was involved in an automobile accident and was sued. The plaintiff asked for $200,000 in excess of her insurance coverage. She was in danger of losing her home.

Representing the woman on a pro bono basis, we transferred the ownership of her house to a special residence trust. Seeing this, the plaintiff ceased its efforts to pursue our client in excess of her insurance limits.

While Dolores is not a typical asset protection client, her case is an excellent example of an important point- you do not need to be uber-rich, or rich at all, to engage in asset protection planning. We all have assets worth protecting. Whether your home equity is $200,000 or $2,000,000, the emotional attachment and the need to protect it is the same.

Protecting Your Business

Any business is exposed to lawsuits. Partners, terminated employees, dissatisfied customers, unhappy vendors all can have you in their sights. The fact that you’re not negligent or haven’t acted improperly doesn’t guarantee that you won’t be sued, or if you are sued, that you’ll win the case. Juries often side with individuals in cases against a business, as they see it as a small cost to the company.

Klueger & Stein’s inventory of strategies to protect your business include incorporation, limited liability companies, estate planning and various types of trusts. With our broad experience, we custom-design the strategy that fits your business and circumstance best.

A Case History: Building Protection

The company is a successful California-based homebuilder. Over the past few years, following many construction defect lawsuits, the firm found it more and more difficult to carry liability insurance. Coverage was just too expensive. Eventually, the decision was made to stop carrying insurance coverage altogether.

Without insurance coverage, the company-and possibly its owners-was exposed to future lawsuits. Asset protection for the company and its owners was the best alternative to insurance coverage.

The company’s operations had to be restructured so that the liability arising out of any one building project would reach only a limited amount of the company’s assets, if any. A separate legal entity was established for each construction project. Their protection was enhanced further by having different entities own the real estate and do the development work.

An additional layer of entities further insulated the individual owners from the liabilities of the business. The ownership of the personal assets of the owners was further restructured.

In its first test, this protective structuring worked as planned-seeing the level of protection it faced, the plaintiff dropped a potential class action lawsuit and accepted a surprisingly low settlement offer.

Protecting Your Financial Investments

Your investments are your future. But years of careful financial planning and asset-building can fall to pieces without proper protection. Complex legal systems that create confusion make planning vital. Our knowledge of those complexities can save you years of frustration and pain. Designing protection for your investments now can mean a more peaceful and secure future.

A Case History: In the Wake of Enron

The board member of a publicly traded company found just how dramatically the Sarbanes-Oxley law and the events of Enron have changed the business world. Even though his company was being cleanly run, with the new business environment he was concerned that he was still exposed to significant personal risk.

Because there was no way to insulate him from personal liability under Sarbanes-Oxley, the focus of our planning was on protecting his assets, principally his family home and an investment account.

His family had been residing in their house for the past ninety years and the prospect of losing it was unbearable. The first step in our protection planning was to transfer ownership of the home to his wife as her sole and separate property. She then contributed the home to an irrevocable trust. This structure afforded an insurmountable level of protection for liabilities directed against him, and even provided a significant level of protection against any liabilities that his wife could face.

To protect his investment account, we showed him two primary options: transfer the ownership of the account to either a limited liability company or to a foreign trust. To maximize the protection of the account, he opted to transfer the ownership to an irrevocable trust governed by the laws of New Zealand.

Protecting Your Real Estate Investments

A Case History: Saying No To Greedy Plaintiffs

Mr. Soto is a real estate builder and developer. He completed a 60-house development in Northern California in 2005 and quickly sold off all of the homes at a handsome profit. Having been a developer and a builder for many years, he understood his liability exposure. Under California law, he could be pursued for a period of 10 years for any construction defect, real or alleged. Mr. Soto wished to insulate himself and his family from any potential future lawsuit with respect to this development. His asset protection planning involved a two-step process.

First, pursuant to a transmutation agreement, some of the assets were transferred to Mrs. Soto, as her sole and separate property. The assets transferred to Mrs. Soto included the couple’s personal residence and two apartment buildings. Mr. Soto retained the ownership of the building-development company, and a significant amount of cash. Following this split of the assets, in the event of a lawsuit against Mr. Soto, the residence and the apartment buildings would no longer be reachable by Mr. Soto’s creditors. He longer owned these assets, they were now owned by Mrs. Soto.

Second, all of the assets were placed into special protective structures to create a second level of obstacles for a prospective plaintiff. Mrs. Soto transferred the ownership of the residence to a special residence trust. The apartment buildings were transferred into a limited liability company. Mr. Soto transferred his significant liquid assets into an offshore trust-LLC structure.

As a result, a creditor wishing to pursue the equity in the Sotos’ residence would now need to attempt to break through the transmutation agreement, and then through the residence trust. We have implemented hundreds of these structures and find them to be an effective shield against creditors over 99% of the time.

A Case History: The Aspiring Donald Trump

Jonathan was in his early 40s and a successful physician. One of his investments included a 10-unit apartment building. He was concerned about a creditor attack against the apartment building in the event of a lawsuit. We transferred the ownership of the apartment building into a limited partnership with a limited liability company acting as the general partner. For tax purposes both the limited liability company and the limited partnership were treated as disregarded entities, with no federal tax return filing requirements. Because Jonathan no longer owned the apartment building, a creditor could no longer reach it. Jonathan now owned interests in the limited partnership and the limited liability company, but both were protected by the charging order limitation. All our research and practical experience allow us to conclude that the charging order protection is an extremely powerful tool and very rarely tested by creditors.

A Case History: A California Mogul

Mr. Johnson is a well-known California real estate developer, builder and investor. He owns over one hundred separate real properties, primarily in California. While the overall structure we devised was fairly complex, we used a Delaware series limited liability company as the umbrella entity. A series LLC allows one to compartmentalize liabilities within one LLC. This significantly cuts down on franchise taxes, legal fees and accounting fees. Mr. Johnson was able to reduce his annual California franchise taxes from approximately $80,000, to $800.


Commonly Used Structures

Personal Residence Trusts

No asset is more important to shield from creditor claims than the house we live in. For most of us, the house represents the bulk of our fortune. It may also have great sentimental value.

The personal residence trust is the most commonly used structure to protect a home. This is a structure that is inexpensive to set up, simple, and exceptionally effective. Over the course of our careers we have established hundreds of these trusts for our clients. They have never failed to achieve their desired objective. Let us take a look at how these trusts work.

A personal residence trust is an irrevocable trust. The word “irrevocable” scares many people. None of us want to do anything that is irrevocable, especially when we are talking about our most significant asset.

Fortunately, irrevocable simply means that no one (like a plaintiff or a creditor) would be able to force you to revoke the trust. You will always be able to do so, and quite easily, without going to court. For example, under California law there is an easy procedure to revoke an irrevocable trust that just requires the trustee of the trust and the beneficiary to sign a simple document.

Because the trust is irrevocable, the assets owned by the trust are not owned by you. At least not in the legal, technical sense. The trust now owns your home. Because you no longer hold legal title to the house you live in, it is not an asset that your creditor can reach. Your legal relationship with the house you live in becomes the same as your legal relationship to the Transamerica building in San Francisco. It is not your asset, and when you get sued, your creditor cannot attach either one.

The residence trust allows you to continue living in the house, rent free, usually for the rest of your life (technically, this period of time is measured in a specified number of years tied to your life expectancy). Your children or other family members would then become the beneficiaries of the trust. This structure is very similar to your living trust.

There are no income tax consequences on the transfer of the house into the residence trust. There are no property tax consequences and no property tax reassessment. Your bank cannot accelerate the mortgage (there is a federal statute that prevents the bank from doing anything with your mortgage when the ownership of the house is transferred to a trust).

Because the trustee of the trust will be a person you appoint (usually a friend or family member, but never you), you will retain the ability to sell the house or to refinance the house. Additional flexibility can be built into the trust to accommodate your specific needs.

The trust is not subject to any annual fees or filing requirements. Once it is done it is done.

To summarize, the residence trust is an inexpensive, easy to establish structure that allows you to continue living in your house, allows you to retain control over your house, but at the same time makes it unreachable to creditors (which has been tested in practice time and time again). It is no wonder that these trusts are our favorite asset protection technique for a personal residence.

Limited Liability Companies & Limited Partnerships

Limited liability companies and limited partnerships are frequently used in asset protection. Consider the following.

Any asset that you own (the asset is titled in your name or owned by you directly) can be seized by a creditor. For example, if you have an apartment building or a bank account, a creditor can seize those assets. Any asset that you do not own cannot be taken from you by a creditor. While that sounds like a simplistic statement, it lies at the heart and soul of asset protection planning.

Any asset that is owned by a legal entity is not owned by you, even if you own and control the legal entity. For example, if you own a share of General Motors, you have no ownership in GM’s assembly plant in Detroit. This concept applies to any legal entity, regardless of the percentage of the entity you own.

How does that benefit you? Once you transfer the ownership of an asset to a limited liability company or a limited partnership, you no longer own that asset. The asset is now owned by the LLC or the LP. All you own is an interest in this legal entity. So, why is it better to own an interest in a legal entity than to own the underlying asset directly?

Under the laws of all states, interests in limited liability companies and limited partnerships are protected by the so-called charging order protection. Pursuant to the charging order protection, a creditor cannot seize your interest in one of these entities. And if they cannot take your interest in the entity, they cannot get to the underlying assets. For a more in-depth study of charging orders, click here.

Note, corporations do not offer you any charging order protection. If you own a corporation, which in turn owns valuable assets, a creditor will be able to seize your corporate stock, and then get to the valuable assets. Corporations will only protect you from lawsuits directed against the corporation itself. If the lawsuit is directed against the shareholder, there is no protection. If you are seeking to protect assets from claims of creditors, forget about corporations. Look into forming a limited liability company or a limited partnership.

Assets that our clients commonly protect by using limited liability companies and limited partnerships include investment and income producing real estate, intellectual property, valuable businesses, corporations, art and collectibles, airplanes, and other valuables.

By appointing you as the manager of the LLC we allow you full control over your assets, without compromising asset protection. All entities are structured to be tax neutral – this means that there will be no tax consequences to you in setting up a limited liability company or a limited partnership. Most of the time, these entities can be structured so that they will not even have to file federal income tax returns. For state income tax purposes, there are usually no returns to file, but this requirement does vary from state to state and you should consult with your attorney or CPA.

Limited liability companies and limited partnerships are easy to set up, have nominal annual costs, and provide you with a tremendous level of asset protection.

Example: Dr. Brown owns Apartment Building 1 and Apartment Building 2. Building 1 is owned through a corporation and Building 2 is owned through a limited partnership. Assume that a tenant in each building slips and falls and files a lawsuit. Each tenant would have to sue the owner of the respective building, which means the corporation and the LLC. Each legal entity will protect Dr. Brown and prevent the lawsuits from reaching his personal assets. Great result.

Now assume that Dr. Brown runs over a pedestrian and is being sued personally. The plaintiff obtains a judgment against Dr. Brown and looks for Dr. Brown’s assets to pursue. What happens to the apartment buildings?

While the creditor would not be able to seize Building 1 directly, the creditor would be able to seize Dr. Brown’s corporate stock, then liquidate the corporation and get to Apartment Building 1. Not a good result.

With respect to Apartment Building 2, the creditor will not be able to get Dr. Brown’s interest in the LLC, and will not be able to get Apartment Building 2. Great result.

Equity Strips

Whether you are looking to protect a personal residence or investment real estate, you have to realize that creditors do not pursue the real estate itself, but the equity in the real estate. Creditors have to foreclose on the real estate, which means the real estate will be sold by a sheriff. On the foreclosure sale, after the payment of secured liens (like a bank mortgage), after paying the sheriff’s expenses, and after paying to the debtor the homestead exemption amount, the remaining equity goes to the creditor. Consequently, it is the equity that gets converted into money and given to the creditor. Not the real estate itself.

If the real estate has no equity, then on a foreclosure sale the creditor will not get any money. For example: Your home is worth $1,000,000 and is encumbered by a mortgage of $800,000. You live in California and your homestead exemption is $75,000. The home is forced into a foreclosure sale, where it is sold to some buyer for $900,000. Of the $900,000, the first $800,000 goes to the bank to pay off the mortgage. Then some money goes to the sheriff, and then $75,000 goes to you. There is nothing left for the creditor.

An intelligent creditor can do this math ahead of time and will not try to push a home like this into foreclosure. As a matter of fact, many creditors will drop their lawsuit if they realize that there is no equity left to pursue. Consequently, many debtors look to eliminate (strip out) their equity.

There are two equity stripping techniques:

Actual Bank Loan

One way to strip out the equity is by obtaining a bank loan. The bank will secure the loan by recording a deed of trust against your property. This eliminates the amount of equity equal to the loan.

While this technique results in the elimination of equity, there are two problems. First, it is difficult to obtain a bank loan large enough to eliminate 100% of equity. Second, the cost of this asset protection technique is staggering. Assuming a $1 million loan bearing a 7% interest rate, the cost of this equity strip is $70,000 per year. (Debtors usually ameliorate the carrying costs by investing the loan proceeds at a comparable rate of return.)

Paper Strip

Another way to strip out the equity (frequently advocated by debtors), is to encumber the residence by recording a deed of trust in favor of a friend.

This avoids the carrying costs of an actual bank loan and can be done in any amount. With this technique it is important to know the intelligence and the aggressiveness of the creditor. Some creditors may stop trying to collect when they realize that there is no equity in the residence. Others may dig deeper, and if the debtor cannot substantiate the transaction as an actual loan, the deed of trust will be set aside by a court as a sham. The creditor will again have equity to pursue.

Sale to Friendly Third Party

Many debtors consider selling their residence to protect the equity. However, they may not want to actually move out. To accommodate these conflicting desires, the sale and leaseback of the residence to a friendly third-party on a deferred installment note may be the solution.

Under this structure, the debtor sells the residence to a friendly party and takes back a promissory note. The promissory note is usually structured as a long-term balloon note. The debtor then leases the property back from the buyer and continues to live in his old house. Instead of owning a house, the debtor now owns a promissory note, an asset that is a lot less desirable to a creditor.

This structure works only so long as the debtor can establish the legitimacy and the arm’s-length nature of the sale. Income tax consequences of the sale, and possible property tax consequences on the transfer of ownership should be considered.

Outright Sale

An arm’s-length cash sale is the best way to protect the residence (and the equity in the residence) because it is much easier to protect liquid assets (sale proceeds) than real estate. While this technique affords the best possible protection, it is also the most radical and may result in additional income taxes.

Limited liability companies are a fantastic asset protection tool. You can read more about LLCs and their asset protection benefits here. Why do foreign entities (sometimes referred to as offshore entities) warrant special attention?

Foreign entities may, at times, a viable alternative to foreign trusts as a mechanism to protect liquid assets. Foreign trusts allow you the most protection imaginable, usually, unbreakable protection, but they are not the cheapest alternative around.

Some clients do not want to go through the expense or the trouble of a foreign trust, or may simply not need that much protection. A foreign trust may be overkill in some cases.

Holding assets in your name directly also does not work. As a general rule, any asset that is owned by you directly (titled in your name) can be taken from you by a creditor. It does not matter whether this asset is stock of a corporation or a foreign bank account. All assets, domestic and foreign, owned by you directly can be reached.

One of the few exceptions to this rule is an interest in an LLC. All LLCs are shielded by the charging order protection. What is then the difference between a domestic (U.S.) LLC and a foreign LLC?

Simple. A foreign LLC is governed and protected by the laws of a foreign jurisdiction. This means that it may be possible to move any litigation surrounding a foreign LLC to a foreign country. This makes it very expensive for the plaintiff to pursue a foreign LLC. Not impossible, but expensive.

Sometimes all we need to do is change the plaintiff’s or the creditor’s economic analysis. Destroy their profit potential and they will leave you alone.

All entities, especially foreign entities, may have tax consequences. You should consult with your advisors and implement these strategies very carefully.

The term “foreign trust” means an irrevocable trust governed by the laws of a foreign jurisdiction. Foreign trusts are similar or even identical in most respects to the standard trusts that we all see every day. The main difference is the governing law. If the trust provides that it will be governed by the laws of California, then California trust law will apply. If the trust provides that it will be governed by the law of the Cayman Islands, then those laws will govern the trust. When we draft the trust we get to pick the governing law by simply drafting it into the trust.

Several foreign countries have enacted trust laws designed to assist debtors with asset protection. The laws of these countries go through every step possible to make it impossible for a plaintiff to pursue the assets of a foreign trust.

These foreign countries erect the following obstacles in the creditor’s path: (1) They will not recognize a legal judgment from any other country, including the U.S. This means that the judgment obtained against you by your creditor here in the U.S. is meaningless. (2) Because the creditor’s attorney is not licensed to practice law in that foreign country he would have to hire local attorneys to litigate for him, which is an expensive proposition. (3) The trustee of the foreign trust is a trust company that has no connections to the U.S., which means that a U.S. judge will not be able to force the trustee to distribute trust assets to the plaintiff.

The assets transferred to a foreign trust are usually liquid, such as bank accounts or brokerage accounts, but can also include intellectual property, interests in legal entities and other. The assets owned by the trust can be located anywhere in the world, including the U.S. or Europe. The assets are almost never held in the same country where the trust is set up. After all, who would want to keep their life-savings in a country like Vanuatu, which most Americans have never heard about.

Most of our client transfer the ownership of their assets to the foreign trust but keep the assets in the United States, with their existing banks or brokerage firms.

Often, foreign trusts are established in such a manner as to allow the client to be the only one who can know what assets are owned by the trust and to be the only one who can reach those assets. Even the trustee of the trust can be effectively prevented from having access to your assets. This way you don’t need to worry that anyone will run off with them.

Over the years foreign trusts have become a favorite planning technique for many debtors. These structures are perfectly legal, tax neutral (while they usually have to be disclosed to the IRS, they are treated in the same manner as living trusts – ignored for income tax purposes) and extremely effective in protecting assets from lawsuits.

It should be noted that many debtors believe that simply moving money to an offshore bank account will serve as sufficient protection from creditors. While the plaintiff may have a difficult time enforcing his judgment in a foreign country and levying on a foreign bank account, the debtor will never have a problem withdrawing the money if the account is directly in the doctor’s name. Consequently, the plaintiff may petition the court to direct you to withdraw the money from your foreign account and to pay it over to the plaintiff. With a foreign trust that can never be a problem, because you will not be the legal owner of the assets of the trust.


Offshore Banking

Offshore bank accounts are safe and are a smart choice for many investors. Whether you are seeking an advanced level of asset protection or simply wish to diversify your investments, there is a whole world of opportunity awaiting you. Let’s explore it.

Offshore accounts are legal, but in many cases you are required to report them to the tax authorities. If you are a U.S. citizen or resident it may be difficult for you to open an account under your name. Most European banks shy away from dealing directly with U.S. investors as that may expose them to the U.S. regulatory regime. A commonly used structure is to set up a foreign entity (a limited liability company or an IBC) and open an account in the name of that entity. For example, John, who resides in Los Angeles, creates a Nevis LLC and opens an account in Lichtenstein in the name of the LLC. John is the manager of the LLC and therefore the sole signatory on the account. Thus, you do not need to be a Swiss resident or have a Swiss company to have a Swiss account.

There are many foreign banks that most U.S. investors have never heard but that are large and safe and have been around for hundreds of years. According to Bloomberg, as of February 2008, there were only 4 U.S. banks in the list of the world’s top ten banks. Many Swiss private banks have assets in the billions and have been around since before the invention of electricity. They largely embrace a conservative investment philosophy and are safe.

Swiss banks offer as many investment choices as are available in the U.S. You can have a simple money market account, earning the same rate of return as your U.S. money market account. You can have an investment account, investing in stocks, bonds, derivatives, currencies and mutual funds. You are only changing the bank, not the underlying investment choices. If you have an investment account in the U.S. you can transfer your equities to the Swiss investment account without selling the equities. Therefore, no need to worry about capital gain taxes.

Monies in a Swiss bank account are easily accessible. It is simply a matter of instructing the Swiss bank to wire the money to your account in the U.S. Usually, the next day the money is back home.

In addition to Swiss bank accounts, you can invest in Swiss annuities, life insurance products, investment funds, hedge funds, FOREX funds and a multitude of other investments. Both for bank accounts and all the other investments you can pick the currency the investment will be denominated in.

We have assisted hundreds of clients in setting up offshore bank accounts and investment accounts in various jurisdictions. Often times, the process is simpler than setting up a bank account in the U.S. We would be happy to discuss your offshore banking needs with you and guide you in the right direction.