We must often do more than shelter non-exempt assets by titling them to one or more protective entities. We then have additional firewalls. One method is to “strip the equity” from real estate and personal property. Unencumbered, vulnerable wealth converted to debt-ridden wealth becomes worthless to a plaintiff.

We use many different mortgages and lien arrangements to equity-strip real estate or personal property. As the property owner, you or your protective entity retain title or legal ownership to the property, but you effectively transfer the asset’s economic value to the mortgage holder; in this instance, to reduce the equity for seizure by creditors or litigants. Nothing discourages prospective litigants more than the reality that you are mortgaged to your eyebrows. You can own millions in assets, but if the mortgages against your assets equal their value, you are indeed a poor lawsuit candidate. Prospective litigants want equity to seize. When you pledge your assets to other creditors, your poverty becomes negotiating power.

Equity stripping for asset protection is its own specialized niche. We have developed many creative ways to structure “friendly” liens against assets. But you want bonafide liens. Sham mortgages can be set aside by the courts when you have a more aggressive creditor. You must also protect the loan proceeds. The devil is in the details. Again, that’s why you need a good asset protection lawyer.

You’ll notice that all of the above strategies fall into the category of either transfer-based asset protection (transferring an asset out of a creditor’s reach) or transformational asset protection (transforming the asset into something a creditor couldn’t get or wouldn’t want). For example, part of your salary can be placed into an ERISA-governed plan (401(k), etc.) that is exempt from creditors. Although this involves exemption planning, it also involves transferring cash into an ERISA-governed plan, and is, therefore, transfer-based asset protection as well. Another method involves using exposed cash to prepay certain expenses or repay favored creditors (as long as those creditors aren’t “insiders” under applicable fraudulent transfer or fraudulent conveyance law). For example, one could take exposed cash and use it to pay in advance for a five-year commercial lease. Such a technique results in the right to use an asset (the leased property), a right most creditors wouldn’t want. This is transformational asset protection.

Nearly every asset protection strategy relies upon one or more of these three core strategies, while simultaneously utilizing either transformational or transfer-based methods. These are the “firewalls” from which you build your strongest financial fortress.