What Is Asset Protection?
Asset protection is the adoption of strategies to guard one's wealth. Asset protection is a component of financial planning intended to protect one's assets from creditor claims. Individuals and business entities use asset protection techniques to limit creditors' access to certain valuable assets while operating within the bounds of debtor-creditor law.
Key Takeaways
- Asset protection refers to strategies used to guard one's wealth from taxation, seizure, or other losses.
- Asset protection helps insulate assets in a legal manner without engaging in the illegal practices of concealment (hiding of the assets), contempt, fraudulent transfer (as defined in the 1984 Uniform Fraudulent Transfer Act), tax evasion, or bankruptcy fraud.
- Jointly-held property underthe coverage oftenants by entirety can work as a form of asset protection.
Understanding Asset Protection
Asset protection helps insulate assets in a legal manner without engaging in the illegal practices of concealment (hiding of the assets), contempt, fraudulent transfer (as defined in the 1984 Uniform Fraudulent Transfer Act), tax evasion, or bankruptcy fraud.
Experts advise that effective asset protection begins before a claim or liability occurs since it is usually too late to initiate any worthwhile protection after the fact. Some common methods for asset protection include asset protection trusts, accounts-receivable financing, and family limited partnerships (FLP).
If a debtor has few assets, bankruptcy may be considered the more favorable route compared to establishing a plan for asset protection. If significant assets are involved, however, proactive asset protection is typically advised.
Certain assets, such as retirement plans, are exempt from creditors under United States federal bankruptcy and ERISA (the Employee Retirement Income Security Act of 1974) laws. In addition, many states allow exemptions for a specified amount of home equity in a primary residence (homestead) and other personal property such as clothing.
Asset Protection and Real Estate
Jointly-held property underthe coverage oftenants by entirety can work as a form of asset protection. Married couples who hold mutual interest in property under tenants by entirety share a claim to a whole piece of property and not subdivisions of it.
The combined ownership of the property means that creditors who have liens and other claims againstone spouse cannot attach the property for their debt reclamation efforts. If a creditor has claims against both spouses, the tenants by entirety stipulations would not protect the asset from being pursued by that creditor.
Some attempts at asset protection include putting the property or financial resource in the name of a family member or other trusted associate. For example, an heir might be gifted ownership of real estate or other property while the actual owner continues to reside in the property or make use of it. This could complicate efforts to seize property as actual ownership must be determined. Financial accounts may also be domiciled in offshore banks in order to legally avoid paying taxes against those funds.
FAQs
For example, a commercial entity that builds a waste storage facility that must be removed at the end of its economic useful life because of regulatory or statutory requirements would have an ARO that must be recognized.
How does a company measure an asset retirement obligation? ›
Under U.S. GAAP, the initial liability is recorded at the estimated fair value to remediate the liability. If the expected cash flow approach is used to estimate the fair value of the ARO, the company must use a credit-adjusted, risk-free rate.
What is the purpose of asset retirement? ›
The purpose of asset retirement obligations is to act as a fair value of a legal obligation that a company undertook when it installed infrastructure assets that must be dismantled in the future (along with remediation efforts to restore their original state).
How do you record an asset retirement obligation? ›
Accounting for Asset Retirement Obligations
- Step 1) Record Initial Liability at Present Value. ...
- Step 2) Record accretion expense and increase ARO liability. ...
- Step 3) Record depreciation expense and accumulated ARC. ...
- Step 4) Record entry when asset is retired or decommissioned.
An asset retirement obligation is the liability for the removal of property, equipment, or leasehold improvements at the end of the lease term. The accounting for these obligations is covered under FASB ASC 410, or Accounting Standards Codification Statement No.
What are considered retirement assets? ›
Retirement account: Retirement accounts include 401(k) plans, 403(b) plans, IRAs and pension plans, to name a few. These are important asset accounts to grow, and they're held in a financial institution.
How is ARO recorded? ›
An ARO is recorded as a credit in the amount of the present value of the estimated cost to return the building to its original condition when the leasehold improvements are retired, offset with a debit to the leasehold improvements asset, which is then depreciated over the shorter of the asset's useful life or the ...
What is the difference between ARO and ARC? ›
What is ARO and ARC? Asset retirement cost is related to, but not the same as, asset retirement obligation. Whereas ARO is the estimated costs of an expense you expect your business to incur after it stops being productive, asset retirement costs are the actual amount it takes to retire an asset.
When should an entity recognize the fair value of an asset retirement obligation? ›
25-4 An entity shall recognize the fair value of a liability for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made.
What is the most valuable asset at retirement? ›
Your Home. If your employee retirement plan isn't your largest retirement asset, then your home very well could be. While you may not have any plans to sell your house anytime soon, it's essential to account for the value of your home and think of it as an asset.
Asset retirement costs refer to the expenses incurred when an asset is taken out of service or disposed of, typically at the end of its useful life. These costs can include dismantling and removal of the asset, site cleanup, waste disposal, and any necessary environmental remediation.
How do you spend assets in retirement? ›
One frequently used rule of thumb for retirement spending is known as the 4% rule. It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement.
How to determine ARO? ›
To accurately come up with an ARO figure, you'll need to have a figure for the predicted number of occurrences of an incident and the number of years in question. Divide the first figure by the second figure, and you'll be left with your ARO. Essentially, Annual Rate of Occurrence is a ratio of incidents to years.
What are the asset retirement costs? ›
Asset retirement costs refer to the expenses incurred when an asset is taken out of service or disposed of, typically at the end of its useful life. These costs can include dismantling and removal of the asset, site cleanup, waste disposal, and any necessary environmental remediation.
