Are you protecting your hard-earned assets from lawsuits? Most people are not, and by the time someone slaps you with a lawsuit, it’s likely too late. We live in a litigious society, and this could end up being a costly oversight. Luckily, there are a number of ways to protect your assets from lawsuits. We cover strategies to help make sure you don’t lose your most important possessions. Below are five ways to protect your assets from lawsuits; legal tools that can help you keep what is yours.
5 Ways to Protect Your Assets
1. Land Trusts
A land trust provides privacy of ownership for real estate. While not purely an asset protection tool, it does hide your ownership. So, it can reduce the likelihood that a lawyer will take a case against you on a contingent fee basis. A land trust is an agreement among three parties. 1. A “trustee,” who agrees to hold title to a property. 2. One or more “beneficiaries,” who receive the benefits of the trust. 3. A “trustor,” who’s the creator of the trust and who is usually the original titleholder to the property. When a professional drafts a land trust, same people generally hold the beneficiary and trustor positions.
The beneficiaries can remain in control of the property, and can receive all income from the trust. The land trust agreement establishes how much influence the beneficiary gives the trustee. The trustee often has no other function than to act as the beneficiary directs them. You can replace an uncooperative trustee as land trusts are generally revocable. The trustor may typically change, modify, and even terminate these trusts while he or she is still alive.
Privacy of Ownership
Land trusts provides privacy of ownership. The trustee holds title as a fiduciary. The trustee incurs little to no personal liability for simply being on the title. The beneficiaries, on the other hand, cannot lose the property to their personal creditors. It may even defer litigators from suing, since they do not realize that you own the property. Public records won’t reveal this information. And plaintiff’s attorneys generally don’t pursue people without assets.
Let’s summarize the benefits of a land trust. Your identity as the legal owner of the property is private. Only a subpoena or court order will uncover it. Regular searches will not reveal you as the owner of the property. You can change the beneficiary of the trust without recording a change in the public records. Plus, you can usually transfer a property into a land trust tax-free. You remain eligible for home owner and senior citizen real estate tax exemptions. Property owners can use them to hold real estate together with others. That is, a land trust can be structured to provide for multiple owners.
Keep in mind that a land trust is a privacy device. It is not a corporate entity, and does not enjoy the liability protection of corporations or limited liability companies. If someone slips and falls on the property, the beneficiary can still be held liable. This is the reason that experienced professionals usually establish LLCs to stand in as beneficiary. We will discuss this next.
LLC stands for limited liability company. It can protect you from personal liability lawsuits in case someone sues your business. This means that if the business can’t pay a creditor, there are legal provisions to help prevent the creditor from coming after personal possessions of an LLC member. So, his or her house, cars, and other valuables can be safe and secure. As an LLC owner, you risk losing no more than the money you have invested in the LLC. This is why we call it a “limited liability” company.
For the protection of the LLC to stand strong, you must use it properly. A judge can hold LLC owners personally liable if they directly injure someone. Likewise if they personally guarantee a bank loan or business debt on which the LLC defaults. LLC owners are also personally responsible for failing to deposit taxes withheld from employees’ wages. It is the same if they intentionally do something illegal or reckless that causes harm to a company or person.
Separate Business from Personal
Also, the owners need to treat the LLC as a separate business. Otherwise the courts could decide it is an extension of their personal affairs. So, don’t pay your personal light bill with your LLC bank account. Pay money from your LLC account into your personal account. Then pay your power bill from your personal account. In other words, treat your company as a separate person.
There are tax advantages to an LLC. By default, it enjoys sole proprietorship or disregarded entity taxation if it has one owner; or partnership if it has two or more. Properly filing the 8832 form, gives it C-corporation taxation; the 8832 and the 2553, as an S-corporation. So, it is the sole proprietorship or partnership taxation method by default unless you do extra tax filings. How it is taxed does not typically affect how it protects you from lawsuits.
Owners typically use corporations more often to operate active businesses than LLCs. While the primary benefits of operating as a corporation usually revolve around tax and marketing benefits for larger businesses, it can also protect your personal assets. For example, if one of your employees does something that triggers lawsuit against the company, you can usually contain the lawsuit inside of the corporation cubby-hole. This can prevent your opponent from taking your personal assets in a business lawsuit. It is also easier to transfer ownership in a corporation compared to a sole proprietorship or a partnership. Plus, there tends to be more tax deductions available to corporations than other business types.
Even if you are technically an employee and/or a shareholder of your own corporation, litigators may still sue you personally for actions you perform through your corporation. As an example, if you create an ad campaign for your corporation which is criticizing a competitor, the competitor may view the campaign malicious and decide to sue. If your competitor wins, you will likely not be liable for the settlement which the corporation has to pay as a result of the suit. However, the competitor won in its case against you as an individual can attach your personal assets to pay off any judgment. This underlines the need to shield yourself multiple asset protection strategies. You may also have to come up with your own money to fight the personal lawsuit.
4. Equity Stripping
Equity stripping is a process of reducing the overall equity in a property in order to keep it away from creditors. Experts consider it one of the simplest asset protection methods. It is also one of the most successful ways to protect your assets from lawsuits. Remember how litigators are generally not interested in people without assets? By giving another party a claim against a property, owners are able to retain control over the cash flows and use of the asset. At the same time they are making the property unattractive to creditors attempting to enforce some type of legal judgment. A common form of equity stripping is home equity lines of credit (HELOC).
A HELOC gives the lender a lien against the equity of the property. The property serves as collateral for the loan. HELOCs make it difficult as well as costly for creditors to get at the actual equity in a property, so they often deter from starting any legal proceedings. Placing a HELOC on a property also provides a source of funds you can use for emergencies or any other financial obligations. It’s easy and inexpensive to set up, and will not add financial risk such as required interest and principal repayments. A HELOC offers an effective strategy to discourage a party from going after your property. With a line of credit in place, creditors cannot tell how much you actually owe to the bank. If you want to, you can max out your HELOC and send the funds to an offshore trust, which we discuss next.
5. Offshore Asset Protection Trust
Experts consider the offshore asset protection one of the strongest ways to protect your assets from lawsuits. It offers the ultimate financial security as no judge in your country can compel a foreign trustee to release funds and assets to a creditor. Even if a creditor is determined to pursue assets held in an offshore trust, the legal battle has to first be won locally and then within the offshore trust jurisdiction. This is very expensive, and will make it highly unlikely for a creditor to pursue offshore assets. We have found the offshore trust in the Cook Islands or Nevis virtually bulletproof.
As with all the alternatives listed above, the best time to set up your offshore trust is before any legal action is taken against you. If you’re looking to protect your assets from a possible lawsuit, the time to set up your land trust, LLC, corporation, HELOC or offshore trust is not tomorrow or next week, but now.
By Annika Andersson