Asset protection planning in New Hampshire

Like New Englanders who complain about the weather, owners and executives of small businesses worry about being sued, but don’t do anything about it.

A recent nationwide survey of small-business owners and executives revealed that two-thirds of the respondents were worried about lawsuits, but less than a fifth had a plan to protect their personal assets.

Although there isn’t much you can do about the weather, you can design a plan to place assets beyond the reach of your creditors. The complexity of such a plan – known as an asset protection plan – can range from very simple to extremely complicated, depending on the nature and extent of your assets, your budget and your pain threshold for dealing with lawyers and paperwork.

The first step in asset protection planning is avoiding a “fraudulent” transfer. Assets that you transfer fraudulently are still available to your creditors. You can’t transfer assets to put them beyond the reach of a known creditor, or to make yourself insolvent. If you’re already being sued, or are about to be sued, it’s too late to do any legitimate planning.

New Hampshire law affords some automatic asset protection to its residents. The state’s “homestead exemption” protects up to $100,000 of the equity in your home from your creditors. If you’re married, your spouse also has homestead rights in your residence, so up to $200,000 of equity is protected.

New Hampshire law also protects your IRA, 401K and other qualified retirement plan assets from your creditors. This means that creditors cannot reach any of your retirement savings, as long as the assets remain within the retirement plan. Life insurance cash values and commercial annuities generally enjoy unlimited protection too.

Purchasing an umbrella liability insurance policy is a simple way to obtain additional creditor protection. The umbrella coverage applies when you exceed the limits of your primary auto or homeowner’s policy.

It’s important to remember, however, that liability insurance won’t cover everything for which you might be sued, including sexual harassment and other “intentional torts.” Even if coverage is available, your personal assets will be exposed to the extent a claim exceeds the limits of your policy.

If your spouse doesn’t have the same liability concerns that you do, you might consider transferring some of your assets to him or her. If you’re sued, your creditors can’t reach assets owned solely by your spouse. The downside to this strategy is that you no longer manage or control the property. If you divorce, the assets will belong to your spouse (subject to a property settlement).

If divorce isn’t a concern, and you expect your spouse to share the use and control of the transferred property, this is a good, low-cost asset protection option.

Establishing a trust, and transferring assets to it, also can put assets beyond the reach of creditors. For the past decade, “offshore” asset protection trusts have been in vogue. Clients establish trusts in “debtor-friendly” foreign jurisdiction, such as the Cook Islands, and transfer their assets to them. These trusts allow clients to continue to use and enjoy the transferred assets, but (at least in theory) protect the assets from the clients’ creditors.

However, administrative complexity (where exactly are the Cook Islands?), expense and recent U.S. judicial attacks on the efficacy of these trusts make them useful only for the adventurous.

In recent years, a handful of U.S. states – but not New Hampshire – have adopted laws allowing individuals to set up “domestic” asset protection trusts. New Hampshire residents can create such trusts in the states that permit them. Domestic asset protection trusts generally are easier and less expensive to establish and maintain than foreign trusts. However, a domestic asset protection trust may not provide the same level of asset protection as an offshore trust.

Finally, two less exotic strategies available to New Hampshire residents include irrevocable trusts and limited liability companies.

If you transfer assets to an irrevocable trust, and you neither control the trust as trustee nor retain an interest in the trust as a beneficiary, your creditors can’t reach the trust assets. But neither can you. Your spouse, however, can be a beneficiary, and in some cases, the trustee.

A limited liability company is similar to a partnership, except none of an LLC’s members is personally liable for the LLC’s liabilities. If an LLC member is sued individually, his creditors can’t attach any of the LLC’s assets. LLCs are now the entity of choice to hold commercial and rental real estate in New Hampshire.

The estate plan of any New Hampshire business owner or executive should include some element of asset protection planning. Using a variety of asset protection strategies will provide the most protection and, it’s hoped, some peace of mind.

Amy K. Kanyuk, of the Concord law firm of McDonald & Kanyuk, concentrates her practice in the areas of estate, gift and generation-skipping planning for high net worth individuals.