When people begin to think about making an estate plan, they may wonder whether estate planning can protect their assets from creditors. Asset protection is certainly a valid goal sought by many planning their estates. But do not start moving money around now without understanding how estate planning can protect you – and its limitations.

How Creditors Can Access Your Assets

When you hold assets in your own name, such as money in your bank account or property with your name on the deed, creditors can find them and access them to satisfy debts you owe. All they have to do is locate the assets and follow court procedures to obtain a judgment and enforce the judgment against the assets. Unless you pay your debts off, the creditors can take your assets away from you.

When Creditors Cannot Access Your Assets

Estate planning focused on asset protection primarily works by removing assets from your direct ownership. Often  this may involve either setting up a trust or incorporating a holding company. Trusts work by removing direct ownership of assets from the original owner, who gives the assets over to a trustee. The trustee has legal ownership of the assets, while beneficiaries retain beneficial ownership. The original owner signs a legal document that obligates the trustee to act in the best interests of the beneficiaries.

Generally, as long as the original owner of the assets (also called the trust settlor) gives up all control over the assets when they are placed in trust, creditors usually cannot access the assets. They no longer belong to the settlor. Some types of trusts allow the settlor to maintain some control over the assets; these are not effective for asset protection.

Assets can also be transferred to or held in the name of a company which becomes the legal and beneficial owner of the assets.  The concept of separate legal personality of a company from its shareholders means that the debts of the individual shareholder cannot be enforced against the assets of the company.  This is so unless the court is able to pierce the corporate veil and treat the corporate structure as the alter ego of the shareholder.Speak to an estate planning attorney to learn what is best for you.

Avoid Fraudulent Transfers

Unfortunately, if you already have a judgment against you or are expecting that creditors will soon try to collect your debts, you have fewer options. The law prohibits fraudulent transfers of assets, meaning those performed with intent to deceive or prevent creditors from collecting their debts. If someone learns of a pending collections action and transfers all his assets to a trust the next day, the court may set aside his transfer because it shows an intent to defraud the creditors. Intricate laws like the fraudulent transfer prohibition are why consulting an estate planning attorney is especially important if your goal in forming a trust is to protect your assets.

To find out more about making an estate plan in The Bahamas, visit Gonsalves-Sabola Chambers online or call the office at +1 242 326 6400.