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Kevin O'Leary Mr. Wonderful Asset Protection

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5 Steps for Asset Protection from Lawsuits

The United States is awash in lawsuits. And the harsh reality is that the more assets you have, the more of a target you are; therefore, the more you need asset protection planning. Whether you have personal or business assets, you can be hit by a whole host of lawsuits. As a result, you can lose some or all of them when litigation strikes. So, what steps should you take right now to protect assets from lawsuits? That is what this article will discuss.

Anyone can get sued—even you. It is best to make sure to take some protective measures; then put them in place before a lawsuit comes your way. The most important part is that you do not wait to implement these protections. Act right away. Once a lawsuit begins, it will look like a last minute transfer on your part.

Now, keep in mind, the attorney suing wants to use your money to put food on his or her own table. And that attorney has just as much sympathy for you as the pack of lions has for the baby gazelle. There are few feelings involved. You’re just the next meal.

Now, there are ways to protect yourself after someone sues you. But it is best to place your assets securely inside of the proper legal tools before the “bad thing” happens. So, if you wait until the last minute, you still have options but you need to act quickly. Plus, you need to make sure to use the proper legal tools.

Here are five or the most important steps to take when protecting your assets from lawsuits.

asset protection trust

Step 1: Asset Protection Trust

An asset protection trust is one of the strongest asset protection tools at your disposal. When someone sues you, putting your assets into the proper type of trust can tie the hands of your legal opponent. Let’s say you’re in a profession where malpractice lawsuits are common (like a medical doctor, real estate professional, accountant or investment advisor). Setting up a trust is incredibly important. It’s worth investing in the proper structure.

For your personal and business assets, “umbrella insurance” may be one option. But a high percentage of lawsuits are for amounts that are far beyond the coverage limits. One unfortunate soul we just spoke with had a $3 million policy but a $28 million malpractice suit on his hands. Another client of ours had coverage. But the insurance company failed to pay the claim due to an exception in the policy. The insurance company loves to collect your premiums. But if they can get out of paying, they will. So, insure yourself, but protect yourself beyond insurance.

Keep in mind that U.S. assets are under the jurisdiction of U.S. courts. There are asset protection trusts in the U.S. But the strongest case law history rests with an international trust. If you do a Google search you will see that the strongest banks in the world are located outside of the United States, not inside. So, set up an offshore trust for your strongest protection. We believe that our organization has established more offshore asset protection trusts than any firm on the planet.  When a lawsuit puts your assets in harm’s way, our offshore law firm / trustee company can step in to protect you.

llc benefits

Step 2: Divide and Conquer

There are a few things you can separate. You can separate your personal assets from your business assets. Second, you can separate your assets from those of another person, such as your spouse. Finally, you can separate safe assets from dangerous assets. For example, you would not hold your car in the same LLC that holds your bank account. That is, you don’t want to expose your bank account to driving liability. 

If your business is unincorporated (such as a private psychotherapist), that is called a sole proprietorship form of business ownership. Or perhaps you operate as a general partnership, which means you and another person are in business together. In both cases, your personal assets and business assets are one in the same. This means that if an employee sues you for sexual harassment or incurs an on-the-job injury, that employee’s attorney can take your personal assets away. There are ways to avoid this. For example, when you operate your business as a limited liability company (LLC) the company can protect your personal assets. When your business is sued, the company can shield you from business liability.

Corporations Vs. LLCs

That is why it’s best, from a legal perspective, for you to operate your business as a corporation or a limited liability company. With a corporation, you can separate your business and personal assets from one another. It is more difficult for your personal assets to be taken away from you in the event that your business is hit with a lawsuit. Limited liability companies (LLCs) are similar to corporations, but with one advantage: charging order protection. In fact, we have a great video on the subject of charging order protection that we highly recommend.

So let’s say you lose a personal lawsuit and are a member (owner) of an LLC. The courts may award the creditor with a charging order that can attach to your portion of the company. Whatever you would distribute out of the company would go to the one holding the charging order. However, the one holding the charging order cannot force you to make a distribution. Since the one who has the right to receive the distribution must pay the taxes (Rev. Rul. 77-137), this means that your judgment creditor gets the tax bill but no money. This often encourages settling or your opponent not pursuing the lawsuit in the first place.

When it comes to your and another person’s assets, it might be a good idea to keep them separate. The best example is if you’re married. If you have a joint account with a spouse, half of that money belongs to your spouse. In the event that the marriage ends in a divorce, this could become a problem for you and your assets. If you think this might be a possibility some day, it could be in your best interest to keep your assets separate. The best choice might be holding assets in a Nevada or Wyoming limited liability company or, better yet, an international LLC in the Caribbean island of Nevis. A Nevis LLC offers the strongest LLC asset protection on the planet. See our web page on the topic for more details. 

retirement account safe

Step 3: Utilize Your Retirement Accounts

If you have a 401(k), you might want to consider moving some cash into it. Individual retirement accounts (IRAs) enjoy protection under federal law as long as they are ERISA-qualified (such as a 401(k)). Your IRA might have even more protection depending on your state’s laws. Florida has very strong protection for IRAs but the protection in California is very weak. If your IRA has good protection where you live, moving cash into the account might be a good idea, within the annual contribution limits. 

On that same note, the problem with retirement accounts is that there are some strict limits as to how much you can contribute. Plus, in many states, last minute transfers can be seized by the courts. So, proceed with caution. You must understand the complexities surrounding IRAs first—seek help from an attorney or accountant. We do have licensed attorneys on our staff who you can speak with during business hours.

homestead exemption

Step 4: Homestead Exemption

Home equity (value of your home less loans/liens secured by your home) can have a lot of protection via homestead exemptions, depending on the state. Some offer more than others. Some states offer unlimited protection (except for in bankruptcy in some cases), such as Florida, Texas and Kansas. But others do not. If your state provides a big homestead exemption, then you may want to consider contributing more principal to your mortgage payments.

You should also consider how your property is titled. If you own a home with your spouse, in one of the tenancy by the entireties (T by E) states, both of you have an equal and undivided interest in the property. This means that if one of you is sued, the other one cannot be forced to sell his or her interest in the home. Keep in mind that most states do not allow this type of protection, In those that do, in some of those states, it only applies to personal residences. But it’s important to know that the manner in which your property is titled may have an significant impact on a creditor’s attempt to seize it.

Don’t rely on tenants by the entries, alone, to protect you. You and your spouse divorce. One of you dies. Both of you are sued by the same party, which is very common. In any of those scenarios, tenancy by the entireties flies out the window. Then, your creditor could seize your assets in an instant.

For homestead exemptions, titling, and T by E, research your state’s laws. If you want to protect your home, call one of our attorneys or consultants.

asset privacy

Step 5: Eliminate Your Assets

If you don’t have assets, no one can take them away. You can transfer ownership of your asset to LLCs. Then the LLCs to a legal tool such as an offshore asset protection trust, as discussed above, which you or family members can access. 

If you’re in a profession that tends to attract malpractice lawsuits, it is best to set this up before you need it. Asset protection has a window of opportunity. If a court places a freeze on your assets mid-lawsuit, it’s too late. So, take advantage of these asset protection tools while you still can. 

The true beauty is that an asset protection trust can also have estate planning provisions for transferring your assets along to your heirs upon your passing. So, one asset protection tool can provide you with multiple benefits.

shielding wealth

Asset Protection from Lawsuits Summary

The more assets you have, the more protection you should seek, whether the assets are for personal or business use. Lawsuits with business partners can take personal assets as can personal tragedies such as divorce and foreclosure. And one is well-advised to protect business assets from threats such as malpractice lawsuits.

No one should assume he or she will never be sued—but it happens all the time. It is important to understand what sorts of issues you could come across. There is employment discrimination to personal guest liability. Then understand what actions you can take before a lawsuit occurs. These include setting up an asset protection trust, fully insuring yourself, separating your assets, utilizing your retirement accounts, considering legal tools that protect your home and property, and even eliminating your direct ownership of assets entirely through the use of LLCs and asset protection trusts. But the most important thing to remember is that you should not wait to protect your assets. Once a lawsuit strikes, you will look a lot better in the court’s eyes if you set up your legal fortress before the battle arises. 

Call us or fill out a free consultation form for help.

Last Updated on September 7, 2021