What Is Asset Protection?
Assets protection refers to a set of strategies intended to keep property from being seized by creditors. Forms of ownership, such as the asset protection trust, LLC, family limited partnership, tenancies by the entirety for married couples in some jurisdictions and homestead protection laws are some of the techniques used to shield property from legal actions, including creditor judgments.
Because of the frequency of lawsuits, 15 million annual in the United States, it is prudent to know how to prevent your assets from being taken and how to take action to preserve as much of your property as you are able. Consulting with an expert so you can tailor a plan to your needs can give one substantial peace of mind and put oneself in considerable position of strength should a lawsuit rear its ugly head.
What is An Asset?
An asset is a property owned by a person or organization that is considered to have value. There are many types of financial assets, current assets, fixed assets, and financial assets. There is another type of asset called intangible assets, such as patents and copyrights, but these rarely concern most owners of assets.
- Current assets are resources that are short-term you can convert into cash within one year. Current assets can include cash, accounts receivable, inventory, and cash equivalents such as Bitcoin that may be assets or currency depending on the use, and prepaid expenses such as insurance, rent, and interest.
- Fixed assets are longer-term resources such as buildings or equipment. These types of assets can depreciate with age. For example, equipment such as computers can become obsolete.
- Financial assets are investments in the assets of other institutions such as stocks, bonds, preferred equity, and other securities.
Why Assets Are Threatened
Everyday situations can threaten your assets unexpectedly. These include the categories of negligence and the inability to meet financial obligations. There are also special situations where there are assets are threatened such as those used in businesses. The more common ones for potential defendants are slip and fall or other accidents at home or at a business, at fault auto accidents, social host liability, debt, and foreclosure. Divorce is another significant threat to assets.
- Spill and fall threats to assets can occur, for example, when a homeowner fails to secure a carpet or when a business owner fails to clean up a spill at work.
- Auto accidents can be a major threat to assets if you are at fault through failing to comply with local traffic laws, failure to maintain your vehicle in working shape, driving while intoxicated or distracted with devices such as mobile telephones.
- Social host liabilities may occur when you host a party where you serve alcohol and a guest causes an accident after leaving the party. If someone uses your house without your knowledge, such as an unsupervised teen, you still can incur liabilities. There are dangers in having guests leave your property intoxicated because the circumstances that lead to the accidents occurred on your property.
- Debt, such as unexpected medical debt, can threaten assets. Inability to pay mortgage payments can lead to foreclosure and loss of your house. Many individuals feel the sting then when lenders foreclose and sell the home, then sue the borrower for the shortfall.
- Divorce can be a threat to your assets including retirement assets. You cannot discharge alimony or child support during a bankruptcy. Financial circumstances change, and if your support requirement demands were ordered during a season of prosperity, your income may subsequently turn southward. Compounding this issue would be the need to pay for an expensive attorney, during an era of financial lack, to have the award amount reconsidered.
Business Threats to Assets
There are many reasons assets are threatened in businesses. These reasons may be as simple as a slip and fall accident or as complex as a harassment lawsuit. Some common business asset threats are accidents on the business property, faulty products, and medical malpractice suits for physicians or other healthcare providers, issues with worker injuries, or worker compensation.
- Accidents on property such as slip and fall incidents can damage assets with resulting lawsuits. Business owners who do not keep walks in good repair, fail to clean up spills, or who do not make sidewalks clear from ice during winter risk asset liabilities.
- Product liabilities are asset exposures when manufacturers create defective products in the design or manufacturing process. These liabilities can also occur if manufacturers do not provide instructions or provide inadequate safety instructions for their products.
- Medical malpractice can threaten assets if you are in the healthcare industry. Healthcare provider negligence is a common risk to business and personal assets, as a corporation will not protect one from such professional liability. Medical malpractice can occur from wrong diagnosis, errantly prescribed medications, provider error, instruments left in patients during surgery, inadequate patient counseling on how to take medication or insufficient counsel on how to manage postoperative care.
Those accountable for medical negligence and the asset risks can be physicians, nurses, other health care providers, and hospitals. Hospitals have liability because these organizations are responsible for whom they hire and whom they allow with admitting privileges. People who work with healthcare providers – even those without education and licensing — can even be liable for malpractice and threats to their assets.
- Worker injuries are dangers to many businesses. The most common construction accidents are being caught in, between, or under objects where the victim is pinched, squeezed, or crushed by machinery. Falls from high elevations such as roofs and ladders are common causes of injuries. There can also be falls from ground level, such as slipping or tripping on a flat surface.
Other injuries include being hit by moving objects, being struck against stationary objects, and ear damage for excess workplace noise. Everyday injuries are musculoskeletal injuries of the neck, back, and arms from repetitive motions in kneeling and lifting. Burns and concussions are hazards in workplace injuries. Often worker injuries occur from several reasons such as inadequate safety equipment, unsafe work sites, or the use of unsafe tools.
Asset Protection Strategies
Preventing the loss of your assets is important, but loss prevention should occur before there is a threat to your assets. Protecting your assets is a matter of being aware of your responsibilities and adequate insurance in case of lawsuits. Retirement accounts, homestead exemptions, bank accounts, business structures such as corporations and LLCs, and asset protection trust can be substantially beneficial in shielding your finances from legal attach.
- Insurance is the first thing you need to protect your assets. Besides home and auto insurance, an umbrella policy will help defend your assets from miscellaneous liabilities. An umbrella policy is not a stand-alone policy and should not be used in place of a home, auto, and other insurance such as business insurance. It is instead a supplement to other forms of insurance to fill the financial gaps not addressed by other insurance.
- Retirement accounts may be protected if you have unpaid debts. If you are forced into bankruptcy, 401(k) s, IRAs, and other retirement accounts will likely be protected. However, this protection is not without exceptions if you owe federal taxes, alimony, or child support. Furthermore, an inherited IRA is not protected, unless you inherited it from your spouse.
- Homestead exemptions are useful in certain states in order to protect your personal residence from being threatened by a lawsuit. Many states have, such as Florida and Texas, have robust homestead exemptions to protect the loss of your house. Homestead exemptions vary by state, so check the laws of your state. An alternative is some states titling your home using “tenancy by the entirety,” where an asset such as a house cannot be sold to satisfy creditor claims without the consent of both spouses. This form of ownership can protect one spouse if the other is sued, but cannot protect spouses if both receive a judgement from the same creditor.
- Separate accounts are important if you have remarried. In some states, having a joint account means this becomes half of the spouse’s. Commingle an account might mean your children from a previous relationship may get less in inheritance. The toll of divorce can also take away from your assets if there is a commingled account. Joint assets are subject to being divided in half in some states and there are, unfortunately, some spouses who knowingly take advantage of this situation. So in love-on-the-rocks situations, beware.
Asset Protection Tools
Besides ordinary insurance, business owners often need additional insurance such as insurance against disgruntled renters, worker lawsuits, and incidents such as lawsuits related to slip and fall accidents.
- Holding liquid investments are often held in one or more limited liability companies (LLCs) to protect liquid assets. When a member of an LLC is sued, there are provisions in the law such that neither the entity nor the assets held therein can be taken. Step it up a notch and the offshore LLC can offer better protection, yet. There are two main reasons: first, because the company is outside of the jurisdiction of your local courts, and second, the country may have laws that are extremely debtor-friendly, as does Caribbean island of Nevis. For substantial liquid assets, the asset protection trust is often used which is discussed below.
- Operating a business as corporation or LLC is sound practice for just about any business. Corporations and LLCs can provide a legal shield between you and your business when your business is sued. LLCs, because of their tax advantages, tend to be the most recommended tools to hold investment assets. Corporations are the most common tools used to operate businesses.
- Real estate asset protection is critical if you invest in property. Creating a business entity such as an LLC or other corporate entity to hold title to the property should a renter sues you can offer substantial peace of mind. The plaintiff and his or her attorney would typically need to target the assets in the legal entity that holds the real estate instead of your personal assets. A
- Asset protection trusts can be one of the most powerful tools in keeping substantia assets away from creditors if you are in or concerned about a precarious legal situation. If you choose an asset protected trust, they are of the irrevocable type so that your creditor cannot step into your shoes and make changes to it.
Distributions are at the discretion of a trustee, under the guidance of the trust document. Therefore, the trustee could step in and protect you and can stop payments from going to your enemies if a legal judgment is rendered against you. These types of trusts can be established locally and overseas. Overseas, or “offshore asset protection trusts” tend to be the strongest in actual practice because the trustee is not subject to your local court orders.
Discuss your situation with a consultant to determine the right asset protection plan for your needs.
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Anne Cagle. Business Writer