Often perceived as having “deep pockets,” senior corporate executives are increasingly the target of litigation. For the general public, perception becomes reality when the incomes of high-profile, high-net-worth executives are revealed during the evening news programs discussing the latest corporate scandal. Unfortunately, this public perception results in senior corporate executives facing an increased risk of personal injury lawsuits from varied causes, such as automobile accidents and accidental injuries to house guests. Even when the allegations are unfounded, the risk of litigation is nearly impossible to avoid and could ultimately result in a severe financial setback. As a result, senior corporate executives (both officers and directors) should implement a comprehensive strategy to protect their personal wealth.

I. REVIEW INSURANCE COVERAGE.

The first step in developing an asset protection plan is a review of existing insurance coverage to consider whether the executive’s current coverage is adequate. Insurance is the most traditional means of asset protection and should be the foundation of any asset protection program. Adequate insurance coverage is vital in both the personal and business arenas.

A. Personal Insurance

Liability coverage should be obtained for homeowner and auto insurance policies, as well as for any boats or aircraft. In addition, executives should consider excess liability, or umbrella, insurance to cover extremely large claims and the resulting legal costs. Umbrella liability coverage may be available at a reasonable price, especially if purchased from the same insurer providing

B. Business Insurance

Umbrella policies do not cover business-related claims. Therefore, senior executives should ensure that their company has adequate director and officer liability insurance in place.

II. MAXIMIZE CONTRIBUTIONS TO CREDITOR PROTECTED ASSETS.

The Employee Retirement Income Security Act of 1974 (“ERISA”), a federal law that covers a wide range of employee retirement plans, protects funds held in employer-sponsored plans from creditors’ claims. As a result, executives should maximize contributions to these plans for asset protection purposes, as well as for tax deferral purposes.

Retirement plans not covered by ERISA – notably IRAs – are covered by state laws, which vary widely. Consequently, corporate executives should proceed with caution before rolling retirement plan funds into an IRA. A 2005 Supreme Court decision liberalized the treatment of IRAs in bankruptcy, potentially making more of them exempt from bankruptcy creditors.P0F1P However, the uncertainty surrounding this issue suggests that it may be better for executives to keep retirement funds in a former employer’s plan rather than rolling them into an IRA, even after retirement.

Assets outside of retirement plans may also enjoy creditor protection. Many states have “homestead” laws that protect a homeowner’s principal residence from creditors, even if the house is extremely valuable. If homestead protection is not available, assets may be sheltered from creditors’ claims simply by properly titling the asset. For example, owning property jointly with a spouse as “Tenants by the Entirety” (a form of joint ownership with rights of survivorship available only to spouses) will generally protect the property from creditors’ claims, unless the creditor is a creditor of both spouses.

Finally, it is important to keep in mind that life insurance policies and annuity contracts may be protected from creditors, especially if the beneficiary is a spouse or a child. Therefore, executives who have maximized their contributions to employer sponsored retirement plans should consider investing through these vehicles.

III. CREATE AND FUND A LIMITED LIABILITY ENTITY

Family Limited Partnerships (“FLPs”) and Limited Liability Companies (“LLCs”) can be utilized to implement a more sophisticated wealth preservation plan and asset protection plan. Although these types of limited liability entities have long been popular vehicles for estate planning, they may also offer creditor protection.

Generally, a creditor who wins a judgment against one partner or member of these entities cannot seize FLP or LLC assets. Instead, the creditor may only obtain a “charging order,” which provides access to distributions, but does not permit the creditor to compel distributions. As a result, creditors may decide to settle claims quickly and on reasonable terms, rather than actively pursuing the FLP or LLC assets.

Please be advised, however, that if the managing member is subject to creditors’ claims and foreclosure, the creditor may be able to acquire control of the entity. In general, maximum creditor protection is available when the debtor is only a limited partner or a non-managing member of an LLC.

IV. CONSIDER THE BENEFITS OF AN ASSET PROTECTION TRUST

Irrevocable trusts are another common asset protection technique. Once assets are out of the grantor’s possession and transferred to the irrevocable trust, they will most likely be beyond the reach of the grantor’s creditors.

Although assets removed from the grantor’s estate for estate tax purposes are beyond the reach of the grantor’s creditors, the grantor’s spouse, children, and other loved ones may continue to benefit from the trust’s assets. Several states have passed laws enabling the creation of “self-settled” asset protection trusts. In these jurisdictions, the grantor may be a discretionary beneficiary of the asset protection trust, and assets may not be subject to estate tax or creditor’s claims (assuming that these trusts were not created with the intent to defraud creditors).

However, the legislation in this area of the law is fairly new and, as a result, many legal issues remain unresolved. In addition, it is important to note that the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 affects the creditor protection available using self-settled trusts. If potential bankruptcy is a concern, the use of a self-settled trust and current bankruptcy laws should be considered.

In light of the diminishing safeguards of domestic asset protection trusts, off-shore trusts are becoming more popular. However, U.S. courts may still view off-shore trusts with skepticism. Unexpectedly severe outcomes may result from attempts to avoid creditors by moving assets to some foreign locales. In some cases, individuals who have misused off-shore asset protection trusts have been held to be in contempt of U.S. courts.

V. DON’T DELAY, PLAN NOW!

A final, vital component of a wealth preservation plan is timing. It is imperative that the plan is put into practice before creditors or potential creditors appear. Implementing an asset protection plan after an event that gives rise to claims against an executive is ineffective. For example, if an executive suspects that there is trouble on the horizon and transfers assets to a trust or invests in life insurance or an annuity, the transfer to the trust or investment in the life insurance or annuity could be characterized as a “fraudulent conveyance.” As a result, the trust assets and cash value of the life insurance or annuity could be reached by creditors.

Senior corporate executives should recognize their increased liability and take steps to protect their wealth. A wealth preservation plan can provide estate tax savings, but should also address asset protection concerns and should be based on a variety of the components described above. Timely implementation is critical to ensuring maximum protection.