What is asset protection? Assets protection refers to a set of strategies intended to keep property from being seized by creditors. Here are some of the techniques professionals employ to shield property from legal actions, including creditor judgments. They include forms of ownership, such as the asset protection trust, LLC, family limited partnership. There are also statues such as tenancies by the entirety for married couples in some jurisdictions and homestead protection laws.
Because of the frequency of lawsuits, 15 million annual in the United States, it is prudent to know how to protect your assets 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. It puts oneself in considerable position of strength should a lawsuit rear its ugly head.
Related: Asset Protection Definition and Strategies
What is An Asset?
An asset is property a person or organization owns. There are many types of assets, including current assets, fixed assets, and financial assets. There is another type of asset called intangible assets. These are items 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. These assets can include cash, accounts receivable, inventory, and cash equivalents such as Bitcoin. These may be assets or currency depending on the use. Furthermore, they include 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 that threaten assets, such as those assets used in businesses. The more common ones for potential defendants are slip and fall or other accidents at home or at a business. In addition, there are at fault auto accidents, social host liabilities, debts, and foreclosures. Divorce is another significant threat to assets.
Spill and Fall
These threats to assets can occur, for example, when a homeowner fails to secure a carpet. It can happen when a business owner fails to clean up a spill at work.
This can be a major threat to assets. You may be at fault through failing to comply with local traffic laws. It could be from failure to maintain your vehicle in working shape, driving while intoxicated. Perhaps you got distracted with devices such as mobile telephones.
Social Host Liabilities
This threat may occur when you host a party. Perhaps 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 when guests leave your property intoxicated. It is because the circumstances that lead to the accidents occurred on your property.
Even unexpected debts such as auto accident and 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. If the court orders your support requirements during a season of prosperity, your income may subsequently turn southward. Compounding this issue is the need to pay for an expensive attorney; especially difficult during an era of financial lack.
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, and faulty products. Then there is medical malpractice suits for physicians or other healthcare providers. It could be issues with worker injuries, or worker compensation.
Accidents on Property
Accidents such such as slip and fall incidents can trigger lawsuits. For example some business owners do not keep walks in good repair. An employee may fail to clean up spills. Perhaps they do not make sidewalks clear from ice during winter. All of these present 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.
Medmal can threaten assets if you are in the healthcare industry. Healthcare provider negligence is a common risk to business and personal assets. As most providers know, a corporation will not protect one from such professional liability. Medical malpractice can occur from wrong diagnosis, errantly prescribed medications, or provider error. You or an associate could have left instruments in a patient during surgery or given inadequate patient counseling on how to take medication. We have even seen lawsuit on 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 can even be liable for malpractice and threats to their assets; even those without education and licensing.
Worker injuries are dangers to many businesses. The most common construction accidents include someone getting caught in, between, or under objects. As a result, the victim is pinched, squeezed, or crushed by machinery. Falls from high elevations such as roofs and ladders are common causes of injuries. There are also 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. For example, inadequate safety equipment, unsafe work sites, or the use of unsafe tools have triggered lawsuits.
Asset Protection Strategies
Preventing the loss of your assets is important. But it is best if loss prevention occurs before there is a threat to your assets. Protecting your assets is a matter of being aware of your responsibilities and adequate protection in case a lawsuit strikes. There are retirement accounts, homestead exemptions, bank accounts, business structures such as corporations and LLCs. Moreover, asset protection trusts are substantially beneficial in shielding your finances from legal attack.
Insurance is the first thing many people use 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. The problem is that someone can always sue you for more than your coverage. Plus, insurance companies write hundreds of exceptions into the policies in order to protect themselves from paying claims.
Retirement account may protect savings if you have unpaid debts. If creditors force you into bankruptcy, most states laws protect 401(k) s, IRAs and other retirement accounts. However, this protection is not without exceptions if you owe federal taxes, alimony, or child support. Furthermore, laws do not protect an inherited IRA, unless you inherited it from your spouse.
Homestead exemptions are useful in certain states in order to protect your personal residence from lawsuit threats. 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.” When done, a creditor cannot force you to sell an asset such as a house to satisfy creditor claims without the consent of both spouses. This form of ownership can protect one spouse if the other is in a lawsuit. But it cannot protect spouses if both receive a judgement from the same creditor.
This does not help if you are in a community property state. But they may help in other states 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 you have commingled the account. Some states dictate that you split joint assets in half. 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. For instance, some insurance companies offer policies to protect against disgruntled renters, worker lawsuits, and lawsuits associated with slip and fall accidents.
Holding Liquid Investments
Knowledgeable people often hold liquid investments in one or more limited liability companies (LLCs) to protect them. When someone sues a member of an LLC, there are provisions in the law such that a creditor can neither take the company nor the assets held therein. 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. 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 the tool that experts recommend most often. We discuss this below.
Operating a Business
Operating your 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 someone sues your business. LLCs, because of their tax advantages, tend to be the most recommended tools to hold investment assets. Corporations are the most common tools owners use to operate businesses.
Real Estate Asset Protection
Protecting real estate is critical if you invest in property. Create a business entity such as an LLC to hold title to the property. Should a renter sue it 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.
Asset Protection Trusts
Asset protection trust can be one of the most powerful tools in keeping liquid assets away from creditors. If this is you and you are in or concerned about a precarious legal situation, this may be the solution. If you choose an asset protection trust, they are of the irrevocable type. Therefore, 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. Thus, the trustee could step in and protect you. They can stop payments from going to your enemies if a legal judgment is rendered against you. You can establish these types of trusts locally and overseas. Overseas, or “offshore asset protection trusts” tend to be the strongest in actual practice. This is because the trustee is not subject to your local court orders.
Discuss your situation with a consultant by using the phone numbers or inquiry form on this web page. They can help you determine the right asset protection plan for your needs.
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Anne Cagle. Business Writer