Asset Protection Planning Strategies
Nothing can ruin a day more than having someone drain your assets after years of taking a beating from a knock-down-drag-out lawsuit. Personal and business assets are susceptible to the old cliché, “The bigger it is, the harder it falls.” Asset protection planning strategies should be a primary concern. This is true if you are an entrepreneur living high on the hog. It is also the case if you just have a meager savings and some personal belongings.
These days, there are any number of things that can lead to lawsuits. There Are contract issues, auto accidents, sexual harassment suits, and more. If you can predict the future and prevent any potential liability, you can prevent a lawsuit outright. However, that’s easier said than done without a crystal ball. Before you consult a psychic, however, consider these five strategies to protect your personal and business assets.
Protect Assets After a Lawsuit
Shutting the barn door after the horse is out doesn’t help catch the horse. But there are some ways you can protect your assets after someone has sued you. Pre-planning is your best defense. It holds up best in court.
The problem is that so many people have to touch the hot stove. They have to actually feel the pain before they realize why Momma said to take heed. Many people don’t start looking for an asset protection planning strategy until after the big hairy process server shows up at the door.
So, there are legal tools, such as offshore trusts, equity stripping, and retirement planning. These tools can actually can work after the “bad thing” has happened. But you have to set them up so they actually withstand a courtroom brawl. So, the best thing to do is to consult with an expert. You can use the number or form on this page to do that if needed.
Choosing the Right Asset Protection Tool
Running a business is rewarding but difficult, particularly if a determined plaintiff threatens your personal assets. If you run a home business or freelance (known as a sole proprietorship), your personal assets are at risk in a business lawsuit. Even if you don’t use your personal funds in your business the same holds trust. The law makes no distinction between the business assets and your own as a sole proprietor.
Keeping personal assets protected if you run a business requires the entrepreneurial separation of church and state. Keep business and personal assets away from each other. Using the right business entity will help keep the lawsuits from your doorstep. The process is typically straightforward. Contact an experienced incorporation service provider and pay the fees. They can properly set up a corporation or LLC to act as your legal shield.
Having a business as an LLC or Corporation can protect your personal assets from business lawsuits. That is because the corporate entity is a separate person from the owners. You are one person. The company is another. So, properly structured, there are legal provisions so that lawsuits only target the business assets owned by these entities. You won’t usually be able to use corporate funds to visit Disney World. But you won’t have to worry about risking things like your house, car, or personal finances if your business faces legal troubles.
Liability Insurance Shortfalls
It’s a thing most people don’t want until they need it, most often because insurance is complex and expensive. The idea, however, is simple. You pay a little each month. Then the insurance supposedly covers financially draining expenses later when unexpected issues arise. Depending on the type and coverage, insurance can cover prohibitive legal costs that most people can’t afford outright.
The problem is that there are so many “we don’t cover that” exceptions the companies write into the insurance policies today. Just when you think you need it, the insurance company steps in and refuses the claim. They point out page 17, clause 169 of the policy that says they don’t cover your issue.
Have you or anyone you know ever had a medical insurance company refuse a claim or refuse a certain procedure, physician or prescription? Most people have. Just wait until you try to file a claim against an umbrella liability policy. One former insurance executive interviewed on the news show 60 Minutes said that they were instructed to deny every claim, regardless of the validity. So, consider insurance, but don’t count on it.
Asset Protection: Diversify Asset Ownership
If one LLC owns two houses, a lawsuit pertaining to one house can take both of them. Likewise, if someone sues you personally, bank accounts under your name are up for grabs. This may also include joint accounts that you share with a spouse or other family members, depending on where you live. So, the key is to separate assets into multiple legal tools. That way, a lawsuit in one entity does not take everything you hold dear.
Key Asset Protection Planning Strategies:
- Own each rental property in separate LLC. So, when one tenant sues you, they won’t be able to take everything you own.
- Operate your business as a corporation. That way, when your business is sued, the lawsuit stays inside the company. It doesn’t take your house, car, bank account and everything you’ve worked so hard for.
- Set up a separate LLC that owns the equipment that your business uses. Your corporation that operates your business can lease the equipment from the LLC. Thus, so that when someone sues your operating business, there will be little to nothing to take.
- Operate each business that you run in a separate corporation. That way, when a customer sues one of your businesses, the others are unaffected.
- Set up an asset protection trust to hold your liquid cash and investments. When someone sues you, your trust is a separate legal entity from you, personally. The strongest asset protection is offered by the offshore trust, beyond the reach of your local courts.
Separate Legal Tools
Diversifying your assets is like diversifying your egg-to-basket ratio. You can divide up your assets so even if a lawsuit threatens some of them, the others will remain safe. Keeping assets in the business’s name, separating joint bank accounts, and putting different assets under the names of trustworthy family members will all help you take certain assets off the table.
Placing assets in an Offshore Asset Protection Trust, is one of the most powerful ways to provide protection. Trusts are legal arrangements where a third-party (known as a trustee) can step in to protect you when you are sued. Offshore Asset Protection Trusts usually hold an individual’s assets to protect them from seizure by creditors. The availability, rules, and costs surrounding asset protection trusts will vary from state to state and country to country.
Using The Law
It may seem like the law works against us, but it can offer many ways to protect your personal and business assets, depending on which state you live in. Things like prenuptials, legal exemptions (i.e. Homestead Exemptions), and written agreements determine what assets are threatened in specific cases such as divorce or debt collection.
For business and personal matters, a contract is one of the most effective methods of asset protection. Formalizing business arrangements, employee responsibilities/payment agreements, and other matters can help establish rules and guidelines to determine if legal action is possible when something goes wrong. Most importantly, written contracts also offer physical proof of arrangements if legal action is pursued.
While contracts can be difficult to set up and understand, they are effective when done correctly. Sometimes, they can even prevent lawsuits in the first place. You can seek out someone with experience and expertise, like a corporate or personal lawyer, to set up a good contract that will be legally enforceable. Doing it right is important since a contract that doesn’t meet legal standards or cover foreseeable issues won’t offer much protection in a lawsuit.
Follow The Rules
Finally, one of the most effective ways to protect your assets is to do what you learned in grade school: follow the rules. Whether it’s filing your personal taxes or running a corporate giant, cutting corners and breaking laws will increase the risk of trouble. You might not have a crystal ball, but rules and regulations can guide you through uncertainty and keep open some of the legal protections discussed above. Therefore, you can avoid major headaches in the first place.
Asset Protection Planning Strategies Conclusion
The best defense involves the committed and varied use of many strategies. Some strategies will only protect personal or business assets in certain situations, so you may need to use any number of these strategies to mount a formidable defense. More importantly, asset protection is a lifelong process. Return to and revise the strategies often in order to keep your defenses up-to-date.
Last Updated on October 8, 2019