Asset protection is a broadly used term that refers to a wide range of legal devices or techniques that may be used to shield one’s assets from either direct or third party liabilities. The street use of the term typically refers to protection of an individual’s assets, although it may apply to protection of an entity’s assets as well. Asset protection structures may be as simple as transferring business assets to an entity, implementing an estate planning technique, or negotiating exculpatory language into a contract such as a purchase and sale agreement or other business arrangement.

In a commercial loan or lease, asset protection concerns frequently arise in the context of a personal guaranty required by a lender or landlord. In this scenario, the negotiation of a limited form of guaranty can help to curb the individual’s or entity’s liability. In business transactions involving indemnities from other contract parties, those indemnities may be secured with meaningful collateral or set-off rights against current obligations owed. Depending on the situation, structures may be more complex. In the commercial context, this may include separating business assets of an operating entity to affiliate entities in order to isolate liabilities, or creating parent or subsidiary companies. In each case involving the transfer or separation of business operating assets, there must be a legitimate business reason for the particular structure selected, and creditors’ rights must be considered.

Often, an interdisciplinary approach is needed in order to structure the asset protection vehicle properly. For example, if less than fair market value is given for a transfer of assets, then there must be an evaluation of whether any gift tax may be due, or if the transfer violates the rights of any creditors, or if the transfer otherwise runs afoul of the fraudulent conveyance laws. With respect to an individual, asset protection planning also requires a knowledge of the state and federal statutory exemptions that may be relevant in either a federal bankruptcy filing or an out-of-court insolvency proceeding. With respect to both individuals and entities, asset protection requires an understanding of creditors’ rights and liabilities under the bankruptcy code, including what payments may be deemed to be preferential transfers and thus recovered by a bankruptcy trustee. For more information, please contact Seth L. Cooper (slcooper@brodywilk.com).