Understanding Asset Protection
Asset protection is the process of legally organizing your wealth to make it difficult or impossible for creditors to reach your assets. This doesn’t mean hiding assets or committing fraud. It means using legitimate legal tools under Hawaii and federal law to position your assets so they’re protected before a problem arises.
Many successful Hawaii residents face this reality: the more you own, the more attractive you become as a lawsuit target. Business owners, landlords, medical professionals, real estate investors, and anyone with substantial net worth can become targets for frivolous lawsuits or aggressive creditors. A single car accident, a slip-and-fall at your rental property, or a business dispute could put everything you’ve worked for at risk.
The goal of asset protection planning is not to make you judgment-proof or to help you avoid legitimate obligations. The goal is to discourage lawsuits by making it clear that pursuing you would be expensive and time-consuming, and to protect the assets you’ve legitimately accumulated for your family’s future
Why Asset Protection Matters in Hawaii
Hawaii’s legal system provides certain protections, but they’re often not enough for individuals with substantial assets. Hawaii law recognizes tenancy by the entirety ownership for married couples, which can protect jointly owned property from individual creditors, but this protection applies only to married couples and only to jointly owned assets. Your business interests, individual bank accounts, investment portfolios, and sole-owned real estate remain vulnerable without proper planning.
The challenge is that asset protection must be implemented before you need it. Once you’re sued or a creditor comes after you, it’s generally too late to protect your assets. Courts can set aside transfers made with the intent to defraud creditors. That’s why proactive planning is essential.
“We’ve helped hundreds of Hawaii families protect assets ranging from $500,000 to over $10 million.
The key is planning ahead—before there’s a problem.
Once you’re sued, your options become extremely limited.”
Who Needs Asset Protection?
Asset protection planning is essential for anyone who faces above-average lawsuit risk or who has accumulated significant wealth.
Here are the types of individuals and families who benefit most from asset protection strategies:
Business Owners – If you own a business, you face potential liability from customers, employees, vendors, and competitors. A lawsuit against your business could extend to your personal assets if your business structure doesn’t provide adequate protection. Even if you have business insurance, policies have limits and exclusions that may not cover all claims.
Real Estate Investors and Landlords – Property ownership comes with inherent risks. Tenants or visitors could be injured on your property. Maintenance issues could lead to lawsuits. Eviction disputes can turn contentious. Each rental property you own increases your exposure to potential liability claims.
Medical, Legal, and Other Professionals – Professionals in high-risk fields face constant malpractice exposure. Nearly one-third of physicians report having been sued during their careers. Even with malpractice insurance, you want additional layers of protection for assets beyond policy limits.
High Net Worth Individuals – Once your net worth exceeds your insurance coverage, you become an attractive lawsuit target. Plaintiffs’ attorneys know you have assets worth pursuing, and they’ll be more aggressive in their demands. Without proper asset protection, a judgment creditor could force the sale of your home, seize your bank accounts, and take other property to satisfy a judgment.
Families Protecting Inheritance – Parents who want to protect the inheritance they leave their children need to consider asset protection. Without proper planning, the assets you leave to your children could be lost to your children’s creditors, divorcing spouses, or poor financial decisions.
Common Threats to Your Assets
Understanding what you’re protecting against helps you appreciate why asset protection planning matters. Here are the most common threats to your wealth:
Personal Injury Lawsuits
About 62 million Americans seek medical attention for preventable injuries each year, and many of these injuries lead to lawsuits. A car accident, a guest injured at your home, or an incident at your business could result in a lawsuit that exceeds your insurance coverage. Even if you weren’t at fault, defending against a lawsuit can be expensive and time-consuming.
Business Disputes and Liabilities
Business relationships can deteriorate quickly. Contract disputes, partnership disagreements, employee claims, and vendor issues can all lead to lawsuits. If your business faces a judgment, creditors may try to reach your personal assets, especially if your business structure provides inadequate protection.
Divorce Proceedings
Hawaii courts have the authority to divide marital property in divorce proceedings. Without proper asset protection, assets you brought into the marriage or inherited during the marriage could be subject to division. The appreciation in value of separate property can be considered marital property in some circumstances, potentially exposing even inherited assets to a divorce settlement.
Bankruptcy and Creditor Claims
Business failures, medical expenses, and economic downturns can lead to financial difficulties. If you or a family member faces bankruptcy, creditors will seek to collect whatever they can from available assets. Proper asset protection planning can help preserve certain assets even in bankruptcy situations, though there are limits to what planning can accomplish.
Frivolous Lawsuits
Not all lawsuits have merit, but you still have to defend against them. The cost of legal defense alone can be devastating. Plaintiffs’ attorneys know that even weak claims can lead to settlements because defendants want to avoid legal fees and the risk of an unfavorable verdict. Asset protection can make you a less attractive target for these lawsuits.
Asset Protection Strategies and Tools
At Okura & Associates, we use various legal tools to create comprehensive asset protection plans tailored to your specific situation. The right strategy depends on your assets, your risk exposure, your family situation, and your long-term goals. Here are some of the most effective approaches:
Limited Liability Companies (LLCs)
A limited liability company offers liability protection to its owners and provides maximum flexibility under federal income tax law. By holding rental properties, investment accounts, or business interests in properly structured LLCs, you create a barrier between those assets and your personal liability. If someone sues you personally, they generally cannot reach assets held in an LLC. If the LLC is sued, your personal assets remain protected.
We help clients structure their LLCs to maximize protection while maintaining operational flexibility. This often involves creating separate LLCs for different properties or business ventures, rather than putting everything into a single entity.
Irrevocable Trusts
While revocable living trusts are excellent for avoiding probate, they provide no asset protection because you maintain complete control over the assets.
Irrevocable trusts, on the other hand, can provide significant asset protection because you give up certain rights over the assets. This makes it much more difficult for creditors to reach those assets.
Legacy Trusts (Generation Skipping Trusts) are a powerful form of irrevocable trust that we frequently use for clients with substantial estates. These trusts protect assets from estate taxes, creditors, divorcing spouses, and other threats, while still allowing your children to benefit from the assets and maintain substantial control as trustees.
Tenancy by the Entirety
Hawaii law allows married couples to own property as tenants by the entirety, which protects the property from the creditors of either individual spouse.
This is one of the strongest forms of asset protection available, but it only applies to married couples and only works for assets owned jointly by both spouses.
Recent changes in Hawaii law now allow couples to maintain this protection even after transferring property into trust, though specific requirements must be met.
Equity Stripping
For real estate, equity stripping involves reducing the equity in a property by taking out legitimate loans secured by the property.
When a property has little or no equity because it’s encumbered by mortgages or liens, it becomes less attractive to judgment creditors.
This strategy must be implemented carefully to avoid fraudulent transfer issues.
Domestic Asset Protection Trusts
Hawaii enacted domestic asset protection trust legislation in 2010, allowing individuals to create self-settled trusts that provide some creditor protection. These trusts can be useful in certain situations, though they have limitations and requirements, including the need for a
Hawaii trustee and restrictions on the types of assets that can be transferred to the trust.
Retirement Account Protection
Retirement accounts like 401(k)s and IRAs receive significant protection under federal and Hawaii law.
In many cases, these accounts are completely protected from creditors. We help clients maximize their retirement account funding and structure their estate plans to preserve this protection even after assets pass to beneficiaries.
Insurance
While insurance is not technically asset protection, it’s an essential first line of defense.
Adequate liability insurance, umbrella policies, and professional liability coverage can handle most claims without touching your personal assets.
We work with clients to ensure they have appropriate insurance coverage as part of a comprehensive protection strategy.
The Best Possible Experience
With over 30 years in business, our goal is to provide you with the most effective legal solutions.
“Our overall experience with your office has been most positive. The service was just outstanding.
We were so impressed with your expertise, the professional way your staff conducted themselves, their friendliness, and the high quality of your work.”
Critical Timing Considerations
Asset protection is not something that may be accomplished during a crisis. The time to protect your assets is before you have a problem, not after. Here’s what you need to know about timing:
The Fraudulent Transfer Problem
Courts will set aside transfers made with the intent to defraud creditors. If you transfer assets after you’ve been sued or after you’ve become aware of a potential claim, courts will likely view the transfer as fraudulent and undo it.
You could face additional penalties for attempting to hide assets.
Even if you haven’t been sued yet, there are limitations on what you can do if a wrongful act has already occurred.
For example, if a car accident happens today, you can’t transfer assets tomorrow to protect them from that accident claim, even if the lawsuit hasn’t been filed yet.
The Seasoning Period
Many asset protection strategies require a “seasoning period” before they become fully effective.
For example, bankruptcy exemptions often require that assets be held in a protected form for a certain period before the bankruptcy filing.
Some domestic asset protection trust statutes include specific time periods before transferred assets are fully protected.
The best time to implement asset protection is when nothing has happened and there’s no hint of impropriety. This is when you have the most options and the greatest flexibility.
Regular Reviews and Updates
Asset protection planning isn’t a one-time event. As your wealth grows, as your business evolves, as family circumstances change, and as laws are updated, your asset protection strategy needs to be reviewed and adjusted.
We recommend reviewing your asset protection plan every few years or whenever significant changes occur in your life.
Our Approach to Asset Protection Planning
At Okura & Associates, we don’t use a one-size-fits-all approach to asset protection. We take the time to understand your unique situation, including:
- The nature and value of your assets
- Your specific risk factors and concerns
- Your family situation and goals
- Your business structure and operations
- Your insurance coverage
- Your long-term estate planning objectives
Based on this comprehensive analysis, we design a customized asset protection strategy that provides maximum protection while allowing you to maintain control over your assets and continue your normal lifestyle.
We use multiple layers of protection, recognizing that no single technique is foolproof.
We also work closely with your other advisors—your CPA, financial planner, and insurance agent—to ensure that your asset protection plan integrates smoothly with your overall financial plan.