Protect First, Plan Second: Why Estate Planning Must Include Asset Protection
By: Randall A. Denha, J.D., LL.M.
Consider the case of Benjamin Smith, a successful real estate developer and father of four. Years before any financial turmoil or litigation threats emerged, Benjamin made a pivotal decision—to treat asset protection not as a reactive defense, but as a core pillar of his estate plan. With the guidance of his legal and financial advisors, Benjamin implemented a coordinated strategy that shielded key assets, streamlined wealth transfer, and fortified his legacy against unforeseeable legal risks.
He began by transferring ownership of his primary residence into a single-member limited liability company (LLC) and then layered that LLC within a Wyoming-based irrevocable trust. The structure ensured that, in the eyes of potential litigants, Benjamin was a tenant in his own home rather than a titled owner. He funded a Nevada Asset Protection Trust with brokerage accounts that had accumulated significant gains, providing himself discretionary access while maintaining legal separation. His life insurance policy was placed into an irrevocable life insurance trust (ILIT) to prevent inclusion in his taxable estate and insulate the death benefit from creditors.
Benjamin also held several rental properties in a Michigan LLC taxed as a partnership, which he later transferred to a dynasty trust for the benefit of his children and grandchildren. This removed future appreciation from his taxable estate and established a multi-generational framework insulated from divorcing spouses, lawsuits, and irresponsible beneficiaries. In parallel, his nonqualified retirement investments were migrated into an Offshore Asset Protection Trust with a trustee in the Cook Islands, ensuring another layer of international protection beyond U.S. court jurisdiction.
These moves, made during a time of full solvency and absent creditor pressure, exemplify proactive, preemptive planning. They weren’t merely asset transfers—they were strategic transformations of ownership, control, and risk posture.
Asset protection, when executed legally and ethically, does not mean evading creditors or hiding assets. Rather, it involves structuring ownership in ways that make assets legally unavailable—or far less attractive—for seizure by judgment creditors. It hinges on two timing rules:
- Planning must be implemented while the individual is solvent and free of known or foreseeable creditor claims.
- Transfers must not be made with actual intent to hinder, delay, or defraud any specific creditor.
When done right, asset protection strengthens the estate planning process by ensuring the client’s wealth is not merely preserved but guarded through layers of ownership, control mechanisms, and jurisdictional advantages.
Asset protection is not one-size-fits-all. The best strategies are customized, coordinated, and layered. Here are some of the most effective and commonly used planning vehicles:
1. Domestic Asset Protection Trusts (DAPTs)
States like Michigan, Nevada, Delaware, and South Dakota offer self-settled trusts that allow the settlor to be a discretionary beneficiary while protecting trust assets from most creditor claims. A well-drafted DAPT requires an independent trustee and adherence to strict formalities.
Example: Maya, a tech entrepreneur in California, used a Nevada DAPT to hold a portion of her post-exit liquidity. The trust gave her flexibility for future access while protecting assets from potential lawsuits stemming from prior business dealings.
2. Offshore Trusts
Jurisdictions like the Cook Islands or Nevis provide asset protection trusts with strong “firewall” provisions that limit foreign court recognition and creditor access. These are often combined with U.S. LLCs or FLPs to bridge asset control.
Example: Alex, a physician with high malpractice exposure, established a Cook Islands trust to hold international investment accounts. The structure was layered through a Belize LLC, and his U.S. brokerage account was pledged as collateral for a foreign-held life insurance wrapper—keeping the assets within arm’s reach but beyond reach of plaintiffs.
3. Family Limited Partnerships (FLPs) and LLCs
FLPs and LLCs are foundational tools for both asset protection and estate tax minimization. These entities provide control and management continuity, while charging order protection statutes limit what creditors can seize from limited partners or members.
Example: The Hall family used a Florida LLC to consolidate real estate assets across multiple states. The LLC was owned by a trust for each child, and a family management company handled operations. A creditor of any one child could not compel distributions or seize the underlying real estate.
4. Irrevocable Life Insurance Trusts (ILITs)
ILITs remove life insurance death benefits from the taxable estate while protecting the proceeds from creditor claims and marital division.
Example: Benjamin structured his $8 million life policy through an ILIT with a discretionary distribution standard. Upon death, the trust provides liquidity to pay estate taxes without exposing the proceeds to creditors or divorcing spouses of his heirs.
5. Qualified Retirement Accounts
Retirement accounts like IRAs and 401(k)s enjoy creditor protection under federal and state law. While not typically used as asset protection vehicles, they are often central to litigation-aware planning.
Example: Veronica, a corporate executive, maintained substantial wealth inside her self-directed IRA, investing in promissory notes and real estate. In combination with a spendthrift trust for her children, she created a parallel layer of income protection and intergenerational control.
Well-executed asset protection planning often works not by winning in court, but by deterring lawsuits altogether. Plaintiffs and their attorneys are typically driven by cost-benefit analysis: Will the reward justify the risk and expense? When assets are difficult to find, control, or attach, litigation becomes a less profitable and more uncertain venture.
Even if a lawsuit is filed, a well-structured plan changes the dynamic of settlement. With little hope of recovery, plaintiffs are more inclined to settle on favorable terms—or walk away entirely. This, in turn, preserves the client’s wealth, privacy, and mental well-being.
As trust and estate advisors, it is our responsibility to move beyond simple wills and revocable trusts. In today’s environment—marked by entrepreneurial risk, rising litigation, and expanding creditor theories—our clients need integrated, forward-looking planning. Asset protection is not about secrecy; it is about security. It is about giving clients peace of mind that their wealth will endure—not just for probate avoidance or tax efficiency, but against the deeper threat of predatory claims.
Through the use of irrevocable trusts, protective entities, favorable jurisdictions, and preemptive strategy, individuals can take control of their legacy—just as Benjamin did. In doing so, they not only protect their wealth but empower future generations to build upon it, without the shadow of financial vulnerability.
