It may have taken you years – maybe even decades – to accumulate all your wealth. That’s a lot of blood, sweat and tears. What’s even harder than accumulating assets? Watching them slip away in an instant. That is why when you maximize your asset protection, you put yourself in a position where it is a lot harder for others to take everything you have.
You may be wondering how this is even possible. A lawsuit can rob you blind, seizing all your assets. Your fancy sports car, big house, yacht, business and other assets can be taken away in a frivolous lawsuit.
Don’t think a lawsuit is likely? Think again! If you have a significant amount of money, you’re a target for people looking for easy money.
Do you ever see poor or homeless people getting sued? Of course not! But if you’re a wealthy business owner, people know you have assets. If a trial lawyer doesn’t sue, he or she doesn’t eat. And they’re waiting for the right opportunity to file a lawsuit that will benefit them tremendously and leave you penniless and bankrupt.
This may be a sobering reality if, all this time, you’ve been focused on accumulating wealth but not protecting it. If you have no asset protection plans in place, now’s the time to consider them. Once you’ve been sued, all your assets are out on the table. There is no way to go back in time and safeguard them.
If you have a lot of assets that you don’t want to lose, you don’t want standard protection. You want the most protection possible so you can have peace of mind. So how can you best protect your wealth?
Whether you have been accumulating wealth for decades or are about to receive an inheritance, sell a company, sell your stocks and bonds, close on a huge real estate deal, sign a sports or entertainment contract or win the lottery, you need a high level of protection from lawsuits, creditors and other legal issues that may come your way. Here are some solid money moves to consider if you want to maximize your asset protection.
Increasing your insurance to protect your new windfall of course is a smart and easy move. You should have a personal umbrella liability policy in place that’s equal to your new net worth. If you just received $5 million from selling real estate, for example, you’ll want to ask your broker for a $5 million umbrella liability policy. Some tax attorneys recommend a minimum of $5 million. If you think you might receive more money in the coming months, don’t be afraid to increase your policy even further. The rates run around $300 per $1 million of coverage, which isn’t too terribly expensive. It will be worth it should you ever get hit with a lawsuit. For best results, plan ahead. Increase your insurance before you receive your funds. All you need to do is make a quick phone call and your millions of dollars in assets will be protected.
If you must share an account with a child, business partner or family member, try to keep the balance as low as possible. That’s because if one of the account holders were to incur any legal trouble – a lawsuit, lien or divorce – all the money in the account could become quickly wiped out. Even though your name may be on the account, there is nothing in place to protect you. So take an inventory of all your joint accounts, and maybe see if you can close them and be rid of them for good.
The above tip applies in some states even if you’re married. Depending on your state, keep the money out of the joint bank account you share with your spouse. That’s because in some states, the money could automatically become half theirs. This could become a problem if you have children from another marriage and you have promised them an inheritance. And if you’re contemplating divorce in the near future, you’ll definitely want to keep that money away from a soon-to-be ex-spouse. Consult with an expert to discuss your options.
Some states have tenancy by the entirety as a form of ownership where if one spouse gets sued, the assets in such an account may be safeguarded from a judgment. So, see if your state offers this form of ownership; especially if you are in a stable relationship.
Rental properties can be a regular source of income, but sometimes you get stuck with less than desirable tenants. As their landlord, you have a high risk of getting sued over a disagreement or injury. One landlord we know was devastated when a tenant’s child fell out of a second story window. Protect your rental property by creating a business entity such as a liability company (LLC). In fact, each rental property should have its own entity. That way, if a renter decides to sue, only the assets in the entity are affected. Your personal assets will be protected.
Corporations and LLCs should be used for business rather than sole proprietorships or partnerships. When the business is sued, there are provisions in the law to prevent the owners and principles from losing personal assets when these entities are properly established and maintained.
The above entities can protect you personally, if your business is sued. But what if you are sued personally? You are driving home from a restaurant on a Friday night, rear-ended somebody, and get sued for triple the coverage of your insurance policy. Everything you own could be wiped out. So, it is prudent learn how to protect your assets. Then to take action. Set up the legal tools you need to protect your assets when a lawsuit stares you down, personally. An LLC owned by you and your spouse can be used to hold your cash and investments.
Don’t mix safe and dangerous assets. It’s unlikely someone is going to trip and fall over the cash in your bank account. You are much more likely to be sued for breach of contract, a vehicular collision, or a slip and fall on a house or rental property. Put significant liquid resources into an asset protection trust. The strongest of those being an offshore asset protection trust since the local courts do not have jurisdiction over them. So, shield your personal assets from creditors and legal vampires looking to you as their next meal by using the right legal tools.
A business partnership is no better than a sole proprietorship. In fact, it can be even worse, because not only are you responsible for your own debts, but you’re held liable for anything your partner does as well. It’s similar to having a joint account, but it can cause you to end up in an even more tragic situation. With a partnership, you can lose all your business and personal assets if your partner is involved in a business lawsuit. For example, if you and your partner own a consulting firm, and your partner signs a contract with a client and doesn’t hold up his end of the deal, then you – and your assets – will be on the hook for the damages. The lesson here is to avoid any type of business partnership. This doesn’t mean you should avoid going into business with your best friend or sibling. Just be smart about it and avoid the informal route. Think about your company from a legal standpoint. Form a corporation or LLC, instead, so that you can have a legal shield in place for your assets.
Even if you decide to take the advice given above and form an LLC, you can go even further to protect your personal assets. As alluded to above, when you get sued personally, an asset protection trust can protect your money, home, collectibles and other cherished property. This is because your trust will legally hold the property instead of you. So, if established properly, you have nothing that be seized by creditors.
The trust owns the assets and you will be tasked with appointing a trustee who will distribute the assets to the beneficiaries of your choice upon your death. Relinquishing control of assets can be a scary thing to think about, so, you might want to consider a Domestic Asset Protection Trust (DAPT). DAPTs are also called self-settled trusts because you can name yourself as the beneficiary while protecting assets from creditors. If you’re interested in setting up a DAPT, it’s important to do so as soon as possible, since there are waiting periods involved. If you wait to until you get sued, the court could rule your asset transfer as fraudulent. Your assets will be left unprotected and vulnerable to seizure. DAPTs are available only in 16 states, and each state has different rules regarding protections.
Offshore trusts, on the other hand, have a much stronger case law history. Judges don’t always follow the law. Moreover, with expanding theories of legal liability, you do not a judge to have your assets in his hands. Especially one who is being craftily manipulated by a cunning lawyer. Domestic courts do not have jurisdiction over foreign trustees. So they don’t have to listen to court orders issued by your friendly neighborhood judge who has been lead to believe that you are the next Bernie Madoff. So, don’t take a chance. Offshore trustees in the proper locales are licensed, bonded by insurance companies and have longstanding reputations for looking out for their client’s best interest.
If you have a business that is generating revenue, and you don’t necessarily need to place the profits back into the business, put the money into a retirement savings plan. Retirement plans, cash value life insurance and 529 college plans generally provide some degree of protection against creditors. However, each state has different rules, so if you are considering any of these accounts as a form of asset protection, be sure to check into the laws governing your state.
We all strive to make more money. Money gives us the ability to buy assets and give our friends and family better lives. More money equals more experiences and a better quality of life.
Money can enrich your life, but if you let it, it can also ruin your life. As the saying goes, “More money, more problems.” Money often breeds jealousy from those who are less prosperous. This is especially true if you live in the fancy house and drive the fancy car. If people know you have money, you have a target on your back.
The good news is that with some advanced planning, you can enjoy your money and keep it from causing you unnecessary stress. You can take steps to protect your money and allow you to sleep peacefully at night. By using one or more of the strategies above, you can maximize the protection of your business and personal assets to make sure they are out of reach of creditors and frivolous lawsuits.
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Linsay Thomas, Technical Editor, contributing author