A lot of people wonder about the legality of asset protection strategies, and rightfully so. There are many, many people who market and sell asset protection plans that either won’t work, are unlawful, or both. All of our plans are 100% legal and 100% effective. Yes, even the offshore trust component of our plans is lawful and has been upheld by numerous courts.
The purpose of this article is to point out how a very common asset protection strategy is sometimes (though rarely) abused illegally.
Understanding Security Interests
A security interest is simply collateral. Think of a mortgage. The property itself serves as security–or a “security interest”–for the loan. But when attorneys talk about security interests, they’re usually referring to assets other than real estate (though asset protection for real estate is critical). Practically anything can serve as a security interest: Cars, boats, household appliances. In the business world, accounts receivable, inventory, and furniture often serve as security for loans.
Borrowing Against Assets
How does this relate to asset protection? Well, as we’ve discussed before, one component of asset protection is risk management. Risks come in all shapes and sizes. One form of risk is the threat of legal attack. This is a primary risk requiring asset protection for doctors, dentists, chiropractors, and other medical professionals.
But there is another risk that you might want to plan for: The risk that your assets might decrease in market value. If that is a risk that you want to protect against, there is a relatively easy way to do so. Simply take out a loan against the asset you want to protect. That way, you have the cash value (at least a portion of it) of the asset and continued use of the asset. Of course, you have to pay interest on the loan, but if you’re able to do that, it means that “times are good.”
When times are bad or when asset values decline, however, you have some built in protection. This is the idea behind strategic default on a mortgage. When the value of the asset dips below the amount borrowed, the bank gets the asset . . . often times in full satisfaction of the loan. And don’t for a second think that this is somehow taking advantage of lenders, because they know and understand the risks more fully than can be imagined.
Don’t Sell Assets Serving as Security
The rub is that assets serving as collateral can’t just be sold. In some states it’s actually a crime to sell such assets without first notifying the lender and then paying off the note out of the proceeds of the sale. If one does sell assets that serve as security without telling the lender, in many cases the loan will “follow” the asset, and both the lender and buyer can have a claim against the seller of the assets.
In short, taking out a loan against certain assets can provide a fantastic form of asset protection against decreases in market price, but it’s not something that should be abused in any way.
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