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 and 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. So, what steps do you take to protect assets from lawsuits? That is what this article will discuss.
Anyone can get sued—even you. It is best to make sure you have some protections in place in case of a lawsuit. The most important part is that you do not wait to implement these protections. Once a lawsuit begins, it will look like a last minute transfer on your part. So, it is best to hold your assets inside of the proper legal tools before the “bad thing” happens. If you wait until the last minute, you still have options but 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.
Step 1: Asset Protection Trust
It is one of the strongest asset protection tools available. When you get sued, 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 or financial 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 the way to go. But a high percentage of lawsuits are for 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. So, get insured, 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. The strongest banks in the world, if you do a Google search, are located outside of the United States, not inside. So, set up an offshore trust for your strongest protection.
Step 2: Separate Assets – Corporations & LLCs
There are a couple of things you can separate. You can separate your personal assets from your business assets. Plus, you can separate your assets from those of another person, such as your spouse.
If your business is unincorporated (like if you are a private psychotherapist), that is referred to as a sole proprietorship form of business. Or perhaps you are in a general partnership, which means you and another person are in business together. In both cases, your personal assets are not separated from your business assets. This means that if you get sued for malpractice or if your business is taken to court for an employe sexual harassment claim, then your personal assets could be taken away. There are ways to avoid this. For example, operate your business as a limited liability company (LLC) and your personal assets can be protected. When your business is sued, your personal assets can be shielded from business liability.
Corporations Vs. LLCs
That is why it’s best from a legal perspective, for your business to be inside of either a corporation or a limited liability company. With a corporation, your business and personal assets can be separated 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.
So let’s say you lose a personal lawsuit and are a member (owner) of an LLC. The creditor may be awarded 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 the lawsuit not even happening 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 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.
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) are protected 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. If your IRA has good protection where you live, moving cash into the account might be a good idea, within the annual contribution limits. But do this wisely. You must understand the complexities surrounding IRAs first—seek help from an attorney or accountant.
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), 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 another person (such as your spouse), and you are both considered tenants by the entirety, both you and the other person has an equal and undivided interest in the property. This means that if one of you is sued, the other one cannot be made to sell his or her interest in the home. Keep in mind that this is only allowed in some states and 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.
For both homestead exemptions and titling, research your state’s laws.
Step 5: Eliminate Your Assets
If you don’t have assets, no one can take them away. You can transfer ownership of an asset 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, you can give an “advance on your will,” which means you can give assets to your heirs early, especially if it is within an asset protection trust that you can still access during your lifetime.
The more assets you have, the more protection you should seek, whether they are personal or business. Personal assets can be taken via lawsuits with business partners or via personal events like divorce and foreclosure. And one would be well-advised to protect business assets from threats like 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, getting fully insured, separating your assets, utilizing your retirement accounts, considering legal tools to protect your home and property, and even eliminating your direct ownership of assets entirely through the use of 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.