1. Asset Protection in Texas: An Introduction
It should come as no surprise that those who've worked hard to create wealth look to asset
protection planning to ensure that wealth doesn't end up in somebody else's hands. High-risk
professionals, such as doctors, are obvious candidates for asset protection planning. But beyond
those professional risks, people engaged in other risky ventures, such as owning rental real
estate and raising teenage children, also require asset protection to planning protect themselves
from potential judgment creditors. As a result, asset protection is a goal for both business and
personal planning.
While described as a method for defeating creditors, asset protection planning manages the risk
of creditors for the client. By protecting assets before the creditor's claim arises, a client can head
off a lawsuit by promoting a settlement with a creditor, lowering the risks associated with a
trial. So beyond stopping creditors, clients invest in asset protection planning to avoid a
potentially greater loss in a lawsuit.
Asset protection planning can be broken down into three levels of increasing complexity. The
first level of asset protection is insurance and exemption planning. This planning is very
effective because it is respected by the courts, and doesn't require establishing complex legal
structures. This level of planning starts with liability and professional insurance. Because a
doctor's riskiest behavior is (usually) his or her practice, the first step of planning is maintaining
sufficient malpractice coverage. After that, liability insurance, including life insurance, home
insurance, and an umbrella policy, can protect the client from creditors who don't have a
professional claim against the client.
In addition to insurance planning, the first level of planning uses statutory exemptions
provided by Texas law to protect assets from creditors. Texas, as a debtor-friendly state,
provides debtors with generous exemptions to protect assets that are directly owned by the
client. For example, the total value of a debtor's homestead is protected, regardless of its value,
from seizure by creditors. Retirement accounts, such as IRAs and 401(k) plans, are also
protected from creditors. Texas goes further than most states by protecting retirement accounts
even if they are inherited accounts. (Please note that the laws vary from state to state.)
Collateralization is the focus of the second level of asset protection planning. In this stage of
planning, clients start creating legal structures to place certain preferred creditors ahead of
other creditors. If there is a claim, then the preferred creditor's rights to the property stop other
creditors from seizing the protected assets. In effect, someone else has earlier rights to the asset,
so a later creditor can't seize it. One example of this protection is leasing the office furniture so if
there is a judgment, a creditor can't seize it, and thereby disrupt the professional practice in that
office.

2. The third level of asset protection involves what people mostly think of when they think of
asset protection: trusts and legal entities, such as a limited partnership or a limited liability
company (LLC). As with the second level of planning, this level of planning focuses on
separating the client from actual ownership of the assets. By transferring ownership to a trustee
or an LLC, the client doesn't own the asset. At most, the client may have an interest in that
entity or in the trust, but isn't the direct owner of the asset, which prevents the creditor from
seizing the asset. These structures work best only after the previous levels of planning have
been utilized, but they must be implemented correctly, otherwise no protection will be gained.
So, with all of these methods for protecting assets, are there any limits on asset protection
planning? While Texas favors debtors, it doesn't give them free rein to avoid their obligations.
First, not all structures provide protection. For example, Texas does not provide any asset
protection to assets held in self-settled trusts, which are trusts held for the benefit of the client,
because the client still has ownership of the assets. So, transferring assets from yourself, as the
outright owner, to yourself, as trustee of the James Q. Public Creditor-Defeating Trust, provides
no protection. Second, transfers intended to hinder, delay, or defraud any creditor, also known
as "fraudulent transfers," will not provide any protection. A creditor can challenge transfers that
are fraudulent, and possibly seize assets that had been protected. Part of determining if a
transfer is fraudulent is looking at the timing of the transfer. Texas allows creditors to challenge
transfers made up to four years before the claim arose, meaning that there is no benefit to
delaying this planning.
Taken together, asset protection planning allows clients to protect what they have earned from
the claims of creditors. Texas, a debtor-friendly state, provides many options for establishing a
base of protected assets, but once those exemptions have been used, clients with additional
assets to protect will need to create the legal structures to further protect themselves. And
because the clock is ticking on fraudulent transfers, the clients should start this planning now to
stop creditors from seizing assets.
John Strohmeyer is an attorney in the trusts, probate and estate planning section of Porter
Hedges LLP. He is Board Certified in Tax Law by the Texas Board of Legal Specialization. In
addition to his practice in traditional estate and disability planning, he focuses on cross-border
tax transactions for individuals. His recent presentations include Charitable Lead Trusts and
Charitable Remainder Trusts: Tax Benefits and Administration Issues and Pre-Immigration Tax
Planning for U.S. Immigrants. He and his wife Emily are very grateful that their Pomeranian
Wesley begrudgingly shares his home with them and their Boxer Lemmy.