Are You Making These 15 Asset Protection Mistakes?

Asset protection is a broad area of law that tries to shield assets from creditors and other parties. The American Bar Association says that asset protection is for “high-risk occupations (i.e., doctors and real estate developers) and very wealthy individuals that realize they are targets for creditors.” And while that’s true generally, in states like Texas, many of the strategies and tools available for the wealthy can be used by the average business owner or entrepreneur.

A good asset protection plan “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.” Avoiding those problems when setting up an asset protection strategy is important because if mistakes get made, even the best of plans can end up placing assets at risk.

This article aims to give you a broad overview of some of the general mistakes that happen when building and implementing  asset protection plans, tools, and strategies. In the end, you should have a more educated view of the asset protection process, especially in Texas, which should help you seek out professional help and have a working knowledge as you build a plan for your assets.

Mistake One: Not setting clear, definable goals for your Asset Protection Plan.

While the overall concept of asset protection may seem straightforward, it is actually a broad umbrella that can cover a host of situations and issues. If you do not have a clear idea of things you want from asset protection, you could end up with an off-the-shelf plan in the state you reside, without taking into account all the options available. It is like choosing the base model of a car, sure you get that car, but if you are willing to look at customizations, different models of that car, and aftermarket products, you can miss out on important features.

Anonymous LLCs 

For instance, for some people, in creating an asset protection plan, complete privacy is the top goal. And not just privacy that forming a business entity provides, these privacy hawks do not want state governments peering into their assets, businesses, and estates. If this level of privacy is what you most desire, forming an LLC in the states of Delaware, Wyoming, or — the most private of all — New Mexico, should be high on your list. One asset protection attorney, praising these kinds of business formations, described many situations an anonymous LLC can come in handy:

An anonymous LLC can be quick, simple way to privately own things: a car, a boat, or a piece of land for example. Some people don’t want other people up in their business. Some people don’t want to be on a mass marketing mailing list because of a certain purchase they made. Solution: own it or purchase it in the name of an LLC with no name or home mailing address attached to it.

Landlords use anonymous LLCs to keep angry tenants from showing up at their doorstep. Employees start side businesses without their bosses knowing. Celebrities, judges, law enforcement own homes in anonymous LLCs for privacy.

And if you’re doing that kind of thing, you can form your LLC in one of those states while conducting business operations in a different state. A smart and well-versed attorney can help you form an anonymous LLC while still meeting requirements in a state like Texas, for instance.


Are taxes more your current issue? Then asset protection has to take a different focus and you’ll need a broader team of professionals involves a mixture of attorneys, certified financial planners (CPA), and certified financial planners (CFP). The kinds of trusts, business entities, and tax structures you can set up are numerous. One law firm offers a wide variety of trusts to tackle these issues, everything from “dynasty trusts, private foundations, donor-advised funds, asset protection trusts, and charitable trusts.”

The kinds of assets you’re seeking to protect can impact the kind of plan put together by your team of professionals. If your focus is on real estate, you might need to focus more on estate and real estate planning. If your assets include a large cache of investments, stocks, and bonds, then an attorney and CFP will work to protect those gains.


Sometimes asset protection is very straightforward: creditors are after all your assets, from the business down to your home and personal property. In these situations, getting the protection of law to hold back creditors is essential and other considerations like anonymity and taxes pale in comparison. One law firm commissioned a white paper on this topic and warned creditors, saying “Texas is a debtors’ haven.” Another attorney, who focuses on the topic of asset protection in Texas, tells clients:

For over a hundred years there has been a saying “So-and-so has gone to Texas.” Sometimes this meant the person had physically relocated to Texas; just as often it implied that he had left town to beat his creditors. This grand, if ethically sketchy, tradition continues. The Texas Constitution, the Business Organizations Code, and the Property Code make it possible for individuals and businesses to establish fortress-like operating structures and shield substantial income and assets from execution upon a judgment.

The list of protections offered by Texas law goes back to the pre-modern constitution and continues to this day. And while other states can offer some protection from creditors, a smart Texas-based plan can provide a wide umbrella of protection over your assets.

The overarching point should be clear. When approaching asset protection, you should not walk into it with an idea of your overall goals. Sometimes you can mix and match some of the protection here, other times the tools cannot mesh with one another. Working with an attorney to identify all the key goals of your plan will give you much better asset protection than simply relying on cookie-cutter plans. And in many cases, the money you spend upfront on these bespoke asset protection plans will save both money and your assets down the road.

Mistake Two: Not updating your asset protection plan.

Related to not having clear goals is coming back to update your asset protection plan. Any number of things can change how you need an asset protection plan to work. If you start out needing relief from creditor relief, over some time those concerns may wane and you have other issues. Usually, though, apart from basic goal changes, life and events can impact your asset protection plans.

Sometimes, the government can change your asset protection plans. Laws change across federal, state, and local governments every year and these new laws can tweak your planning needs. The COVID-19 crisis has highlighted changes for many asset management plans due to increased stress on virtual resources and more. PriceWaterhouseCooper, one of the largest consulting firms in the world, warned asset managers of coronavirus impacts:

Asset management firms may need to make disclosure(s) about the effects of COVID-19 on their business within financial statements or other SEC filings, based on relevant GAAP and SEC disclosure standards. These could include risk factors, impairment, debt, liquidity, and management discussion and analysis (MD&A) when discussing operating results and changes in balances. Investors in private asset management firms will likely be focused on these and other business issues, and fund investors may also extend their inquiries to cover areas of potential disruption to the advisor’s operations

With potential delays in the production of financial information — coupled with the US and state and local governments granting extensions to the tax filing deadlines — production and delivery of information reporting to fund-limited partners could be impacted.

In a post-coronavirus environment, better asset protection plans will have contingencies drawn up to cover pandemic situations. The 2008 Great Recession impacted many asset protection plans too, the COVID-19 pandemic has revealed cracks in many strategies, from individuals to international conglomerate corporations. Updating your plan to reflect new realities is necessary.

Mistake Three: Using the wrong tools to protect your assets.

The number of tools, combined with the number of state-specific options out there means the ways you can achieve a bespoke asset protection plan are numerous. Not all these tools and strategies do the same thing, as we alluded to earlier. The list of business entities is long:

  • Sole proprietorship
  • General Partnership (GP)
  • Limited Partnership (LP)
  • Limited Liability Partnership (LLP)
  • Limited Liability Corporation (LLC)
  • C Corporations
  • B Corporations
  • Closed Corporation
  • Open Corporation
  • Non-profit corporations
  • Cooperates (Co-op)

Many people default to an LLC, but that may not be the best case in all situations. Also, as noted above, the kinds of LLC’s can differ, with some states offering anonymity or state-specific tax breaks if you incorporate with that government.

The kinds of trusts you can use is an equally long list, with state-specific quirks. For some flavor:

  • Revocable Trust
  • Irrevocable Trust
  • Asset Protection Trust
  • Charitable Trust
  • Constructive Trust
  • Medicaid Trust
  • Self-settled Asset Protection Trust
  • Special-Needs Trust
  • Spendthrift Trust
  • Tax-bypass Trust
  • Totten Trust

Some of these trust vehicles are offered in every state, others very jurisdiction dependent. Some of these trusts can be set up with various entities listed above, and others shouldn’t get listed with a business entity. Each tool or strategy can help you accomplish very narrow and specific goals or more general ideas. That’s why it’s important to specify goals early on to make narrowing down the list of tools and strategies easier.

Mistake Four: Waiting too long to set up an asset protection plan.

The best time to set up an asset protection plan is before trouble is ever on the horizon. While some states can offer some protection when you get sued or creditors attempt to collect, Texas for example, that is a haphazard way to protect assets. One law firm, warning clients from waiting too long, points to specific instances where courts have held clients in contempt:

The danger in waiting too long – for example, when a lawsuit is filed – is that judges will look at timeline of events. If they see someone clearly moving things around in anticipation of getting a judgment against them, they are likely to hold that party in contempt. Contempt is not something to be viewed lightly, and can range from fines to jail time and asset seizure.

Waiting too long to set up an asset protection plan can not only not help, but it could also exacerbate the situation by making a court believe your actions are fraudulent in nature. Setting up legal structures beforehand will ensure the umbrella protections of asset protection laws are in place if or when a lawsuit hits. It’s not just lawsuits to be concerned about, however, situations like the coronavirus and other “black swan” events can provide challenges for your assets.

Waiting too long to act, in setting up an asset protection plan, is like the moral of the Grasshopper and Ant tale in Aesop’s Fables. When the Grasshopper came knocking on the Ant’s door for food, they exclaimed, “What! … haven’t you stored anything away for the winter? What in the world were you doing all last summer?” And the Grasshopper replied, “I didn’t have time to store up any food … I was so busy making music that before I knew it the summer was gone.” The moral for the grasshopper, and asset protection, is don’t wait for fall or winter to start preparing.

Mistake Five: Not setting an estate plan to go along with protecting business assets. 

Assets come in both those that are specific to the business and those that are specific to you. It’s straightforward to set up a plan that protects the business and its assets. What many people forget to do is set up a full estate plan that covers both your personal life and that of the business. The personal aspect of asset protection is what Fidelity Investments calls the “neglected part of financial planning.”

A well-crafted estate plan does more than merely take care of matters upon the event of death. A good estate plan can manage your welfare in the event of hospitalization or incapacity for some reason. This form of estate planning provides that extra layer of protection by ensuring your needs are met at all times, according to your wishes. When all personal and business bases are covered, the result is a multi-layered plan that keeps assets protected and managed at all times.

Mistake Six: Co-mingling personal and private assets.

One of the most dangerous ways to threaten the status of assets is to commingle personal and private assets. A person who intermingles their personal and private life can raise the specter of piercing the corporate veil, when a court can throw aside the protection of an LLC or other business entity and hold the partners, shareholders, or owners of a business personally responsible for the debts and responsibilities of the business.

Generally speaking, “courts have a strong presumption against piercing the corporate veil, and will only do so if there has been serious misconduct.” In Texas, the bar is higher for piercing the corporate veil than other states. Texas requires “actual fraud” to prove a need to pierce the corporate veil. In other states, it’s possible to show that an LLC or other business entity is a “sham” to be disregarded. Not true in Texas. One lawyer provided a stark example:

As an example of what the actual fraud rule allows one to get away with, look at the case of AvenueOne Props. v. KP5 Ltd. P’ship., 540 S.W.3d 643 (Tex.App.-Amarillo 2018, no pet.). The real estate broker defendant created a new company and openly moved substantial assets into it and out of the old company which was the object of the suit, effectively depleting the old company and rendering it judgment proof. The court denied the plaintiff’s attempt to pierce the veil of the new company, finding insufficient evidence of actual fraud.

So while Texas has a high bar to meet when piercing the corporate veil, combining personal and private life does raise the risk of endangering assets. One Texas law firm advises its clients, “The safest practice is to establish and maintain an LLC with thorough and ongoing documentation that is contained in a company book. Certificates for membership interests should also be issued. It is sound business practice to periodically document significant activities and events affecting one’s company using resolutions, special meetings, and the like, thereby pre-empting alter-ego type piercing allegations before they arise.”

Mistake Seven: Not protecting your spouse, OR not protecting yourself FROM your spouse.

One of the most significant changes that can impact all asset planning is marriage. The first mistake here is not including a new spouse in an old asset protection plan. The reason being is that marriage grants the marital partner with significant legal rights in the union. If you’d like to include that marriage partner in those asset protection plans, amending them to lay out what rights do and do not apply is essential.

On the flip side, impending marriage can pose the need to protect separate assets from a spouse. This may seem crude, but it’s what prenuptial agreements are designed to handle. A prenuptial agreement can do more than that though, it can keep personal property separate from the other spouse’s debt obligations. If you own a business and have concerns about the other spouse bringing in baggage that can impact your assets, then creating a prenuptial agreement to keep those things separate can be a very wise asset protection planning strategy.

A version of this is child support. In the case, In Re Knott, 118 S.W.3d 899 (Tex. App. 2003), a Texas court overruled a lower court’s decision to include a new spouse’s income and properties into consideration of her husband’s child support obligations from a prior marriage. Before marriage, the new wife had signed a prenuptial agreement that kept her income and property and income separate from the husband, which meant the old wife couldn’t use the marriage as a basis for extra child support income.

These kinds of obligations can go both ways. You can use them to shield yourself from your partner’s baggage, or use a prenuptial agreement to shield your partner and her assets from your own creditors and business dealings. Either way, forgetting to include this kind of strategy in an asset protection plan is a mistake.

Mistake Eight: Claiming assets or rights you have no legal right on.

When it comes to asset protection, you can only protect those assets you have an actual, actionable legal right to own or govern. For example, in a marriage, there is separate and marital property. You cannot create or assert an asset protection plan that covers the separate property of your spouse unless there’s a very explicit agreement by both parties.

Some asset protection tools cannot be used in all situations. In Texas, the homestead right is unique and personal to the individual or family. And although that individual can operate a business on the homestead, one cannot transfer the homestead right over to an LLC or other business entity. When a homestead gets conveyed to a corporation, the stock of which is owned by the grantors, the property loses its homestead character regardless of whether the grantors continue to occupy the property. The valid title then vests in the corporation and the property becomes subject to the debts of the corporation. Nash v. Conatser, 410 S.W.2d 512, 521-22 (Tex. Civ. App. 1966).

The same is true in business entities themselves. In LLCs and other business entities, there are rules and limits to how far a single partner can claim rights or interests in the business.

Mistake Nine: Failing to correctly establish a Texas homestead by following the procedures.

The Texas homestead is a very broad, constitutionally protected right that provides an umbrella of protection of a person’s home against nearly all creditors. To establish the Texas homestead, you have to show a combination of both overt acts of homestead usage and the intention to claim the land as a homestead. Gregory v. Sunbelt Sav., F.S.B. 835 S.W.2d 155 (Tex. App. 1992). If you’re not occupying the homestead and living there, some overt act of preparation to reside there is required to establish a homestead right to corroborate claims. Clark v. Salinas, 626 S.W.2d 118 (Tex. App. 1981).

As an example, one person purchased his new home and began renovating it, but had not moved into it yet. He was in the process of moving from one property to another was performing extensive renovations. The court held that because the debtor had spent $12,000 – $15,000 in renovating the house, and vacated the property, he was previously renting, that these factors together established a new homestead at the renovated home. In re Huizar, 71 B.R. 826 (Bankr. W.D. Tex. 1987).

Buying a house is not enough to achieve a claim to the Texas homestead. The clearest way to show homestead intent is actual possession and use of land by one who owns it and who resides upon it makes it the homestead in law and in fact. NCNB Texas Nat. Bank v. Carpenter, 849 S.W.2d 875, 880 (Tex. App. 1993).

Mistake Ten: Not registering your out-of-state or foreign LLC with the state of Texas.

It’s very common for the average business owner to register their LLC in the state of Delaware, or in another state. If you then take that business and move operations to Texas, it’s time to look into registering the LLC or business entity with the Texas Secretary of State. Texas provides a full registration process through its various websites and covers all requirements by statute.

Failure to register an out-of-state LLC in Texas can lead to lost legal rights, back taxes, and fines, all of which the state can pursue through litigation. Ensuring stable legal rights at all times is preferred to ensure the LLC structure is maintained. If in part of the move, Texas determines that you owe various taxes or fines, they can seize various forms of property to fulfill that debt and discard the protections of an LLC. If protecting asset protection is important, registering the foreign LLC with Texas is an important step to ensure whatever protections are set up to continue in Texas.

Mistake Eleven: Relying on Do-It-Yourself (DIY) forms to handle all asset protection.

Good decisions early on can save you later on. Or as the old idiom goes, you don’t want to be penny wise, pound foolish. DIY forms and the websites that churn them out can be a safe way to start research into asset protection, but they cannot be the end of creating a strategy.

Because state and federal laws change from year-to-year, DIY forms may give you the most recent forms, but they can’t help you combine tools and strategies to create that perfect bespoke plan for your situation. As laid out above, there is a litany of business entities, trusts, and other kinds of legal structures that can provide ample protection for assets. Figuring out how to combine, mix and match, requires more than forms.

Asset planning is more than filling out forms and filing them. It’s about planning for the future and mapping out a strategy that provides for most contingencies. As you encounter major life changes, or even massive ones in the case of the novel coronavirus of 2020, a bespoke plan will help you remain agile in those situations where a DIY form plan cannot.

Mistake Twelve: Failing to protect various kinds of retirement benefits.

Asset protection extends into retirement too. You want to ensure every stage of life has some level of protection, from beginning to end. Understanding the various legal protections around different kinds of retirement accounts, as well as retirement age benefits can help protect everything.

The best kinds of retirement accounts on this front are those that qualify under ERISA. “Retirement accounts that qualify under the Employee Retirement Income Security Act (ERISA) are generally protected from creditors, bankruptcy proceedings and civil lawsuits.” The kinds of retirement plans that qualify here are “401(k) plans, deferred compensation plans, pensions and profit-sharing plans.” In addition, “ERISA may cover employee health and welfare benefit plans. Common ERISA-covered plans include medical, surgical, hospital, or health maintenance organization (HMO) plans, health reimbursement accounts (HRAs), health flexible spending accounts (FSAs), dental and vision plans, prescription drug plans, disability insurance, life insurance, and 419(f)(6) and 419(e) welfare benefit plans.”

That’s a broad level of protection for those accounts. Outside of those kinds of accounts, working out a plan to protect other kinds of retirement and investment accounts can go a long way towards shielding future nest eggs. Roth and traditional IRAs fall outside the ERISA purview and can deserve particular attention for the asset protection minded individual.

Outside retirement, the next level of retirement age protection plan is a Medicaid protection trusts can be another vital strategy. These trusts “protect a Medicaid applicant’s assets from being counted for eligibility purposes. This type of trust enables someone who would otherwise be ineligible for Medicaid to become Medicaid eligible and receive the care they require be at home or in a nursing home. Assets in this type of trust are no longer considered owned by the Medicaid applicant. MAPTs also protect assets for one’s children and other relatives, which is a win-win for Medicaid applicants and their families.”

Mistake Thirteen: Playing games with switching titles and ownership between multiple people. 

One method people occasionally use to protect assets is to change the title and ownership from themselves to another person, usually a spouse, business partner, or perhaps even a company. If the asset in question is legitimately moved to that person or business, then there’s no problem. But if the goal is to continue using the asset as before, but only preventing a creditor from getting control of it.

There are many problems with this (including issues of fraud and illegality depending on the jurisdiction), but purely from an asset protection mindset, this is a bad plan. If you remove your name from ownership of that property, it is no longer yours. In terms of asset protection, it’s no longer your asset to protect, and you lose legal rights over it. This kind of asset protection plan tends to smack of desperation and is too clever by half.

Mistake Fourteen: Not following best practices in setting up an asset protection plan.

Following the best practices means following all the accepted standards, and even legal standards, of a given form or asset protection strategy. Having a good strategy without following all the procedures the right way can foul up even the best of plans.

For pre-nuptial agreements, as an example, having the entire agreement in writing, well in advance of the wedding, with each party represented by an attorney covers most of the bases. Following all these steps ensures both parties walk into the agreement with eyes wide open, and avoids issues of coercion and fraud. Failing to follow best practices in filing an LLC can lead to fines, tax penalties, and restricted legal rights.

The worst part of not following best practices in each specific area of asset protection is that creditors or others can reach through and seize assets. The protections can fall in an instant if all the T’s don’t get cross, of the I’s dotted. This point is true of following a bespoke strategy or going it alone with DIY forms only.

Mistake Fifteen: Doing nothing for an asset protection plan. 

Sometimes doing nothing is better than having a bad asset protection plan. But doing nothing also leaves you open to numerous kinds of liability. If you don’t care what happens, or having nothing of value worth protecting, then this might be a valid plan. If you’ve built a business and looking for ways to protect your hard work and investment, then going without an asset protection plan is like driving a car without a seatbelt or not wearing a helmet on a bike. You’re banking on not crashing yourself, and hoping no one else is dumb enough to crash into you.

A hope and a prayer is not a viable asset protection plan. If you’re reading an article like this one, chances are you already realize this and are looking for ways to foolproof your strategy. That’s a smart tactic, and it’s a good reminder to not take everything here as gospel either. You should work with an expert team of lawyers and other related experts to protect all your hard-earned assets.


Hopefully, you have a better idea of some of the pitfalls surrounding asset protection. Most plans designed by a team of attorneys and other professionals should avoid these pitfalls and you should have no worries. But entering the process with a more educated idea of what the lawyers, accountants, and others can help in understanding the overall process and why certain things go into a plan.

You should also be able to ask questions and help map out the overall plan for your assets. If you understand the reasons why certain tools and strategies exist, you will have a better chance of ensuring you do not mess them up. Hopefully, that ensures your assets stay protected from creditors and others who would seek to seize them.

LEGAL DISCLAIMER: Information in this article is provided free of charge and purely for informational and educational purposes only and is not offered as legal advice. No attorney-client relationship is created by the offering of this article. [WEBSITE NAME] is not a law firm, does not represent clients, and is not representing you or anyone else. Although every effort is made to keep information up-to-date, laws may change. Retaining legal counsel for your individual case and circumstance is advisable before taking any action that has legal consequences. Consult a tax advisor or financial consultant as well, as this is not offered for any tax or financial service or advice


Daniel C. Vaughan is an experienced attorney who has worked on or consulted in numerous lawsuits for Fortune 500 companies and the top law firms in the country. He’s worked on multi-state class action lawsuits, government investigations, and more. He leads teams of attorneys to bring new technology to bear on legal problems to reduce legal spend and find innovative solutions. He received a law degree from Regent University School of Law and a Bachelor of Science from Middle Tennessee State University where he graduated from the University Honors College.