Most people have heard the adage stating that the more you have, the more you could lose. When you’re a kid, protecting what you have is a tactile practice with clear rules. There are doors to lock, piggy banks to hide, and family members to act as your first line of defense. As an adult, having an asset protection strategy and knowing how it works becomes essential. You now have to go beyond physical locks to navigate the world of financial and legal planning.
Lawsuits are common. Very common. Attorney J. Mitton says that the average person suffers five lawsuits in his or her lifetime. Where do these lawsuits come from? Here is an article on the most common lawsuit causes of action.
Your asset protection plan, though, can be very easy to grasp once described by an experienced professional. In fact, the simplest, easiest to understand plans are often the best ones. Here are a few guidelines to keep in mind when creating a plan.
It’s Never Too Early
But It Could Get Too Late
Many people only realize that their assets are in danger when a lawsuit arises or the medical bills stack up, but at that point, it’s too late. Transferring your funds to protected accounts after your assets are in danger can work. But it is not as bulletproof as securing your assets before a lawsuit rears its ugly head. The downside is that courts could rule your transfer a fraudulent conveyance, which can lead to court sanctions, extra fees, in addition to leaving your assets exposed.
When to Protect
There are ways to protect assets after you have been sued, but the most effective asset protection plan is one that starts not only before there is a problem, but before the problem has a chance to occur. If you or your business have a potential lawsuit coming today, best you get started now.
Whether you only need to protect yourself or you have an entire company to protect, it’s never too early to create a plan. Securing your assets while times are good could ensure you won’t lose it all when the worst happens.
Corporations and LLCs
Do you own a business or income property? Any good business asset protection plan should be paired with the proper legal tools. Like the lock that once protected your allowance, a properly structured company is your first line of defense.
Some things to consider include:
- Corporation to operate your business
- A separate LLC to own each piece of income property
- An LLC to hold your “safe” assets such as a stock market portfolio
- A separate corporation to own each business. In case one business is sued, the others can be shielded.
- Set up one or more separate LLCs to own the equipment your business uses. Your business can have a written equipment lease agreement with your LLC. That way, when your main business is sued, it there are few assets to take.
Insurance – Good Idea but Not Enough
It is a good idea to have insurance coverage. If you’re in a profession that has a higher chance of generating a malpractice claim – think physicians, dentists, lawyers, and financial advisors – you might want to invest in extra liability coverage. Also, a good backup to any insurance plan is umbrella coverage, which is additional coverage that can help after your other insurance plans have been exhausted. There are tremendous exceptions written into today’s insurance policies letting the insurance company opt of paying. So, it is useful to have insurance. But do not think of it as the only protection because in a large percentage of the time, the insurance companies find loopholes to squirm out of paying claims.
Divide and Conquer
You’ve probably heard that separating work and play can make you a happier, healthier person, and that’s just as true when it comes to your assets. You might think combining your business or personal accounts might make things easier now, but will almost certainly leave all your assets vulnerable when you lose a lawsuit. A lawsuit or legal dispute in your business could attack your personal assets, and vice versa.
So, set up one or more corporations or LLCs as stated above. Have a separate bank account for each company. Pay yourself a salary or distribution from the companies according to your accountant’s advice. Place this income in your personal account. You will pay for personal items from your personal funds. But don’t pay your personal electrical statement or grocery bill with company money. If you made that mistake, the courts would call you and the company one in the same. Then a lawsuit against your company could expose your personal assets. Don’t let a corporate lawsuit jump over into your personal life. Separate the two by treating your companies as separate people.
Depending on the laws in your state, there are pros and cons to having joint accounts and titling within your personal assets. For example, having you and your spouse on the title of your primary residence means that you each have an indivisible interest on your home in some states, and could expose the asset to lawsuits in another. In some states, a suit against one of you, can protect the other spouse from being forced by a creditor to sell his or her interest in the home. In others, creditors could seize the property from both spouses. So, they type of protection offered depends on where you live.
With a joint bank account, your spouse may be automatically entitled to half of the asset. In the case of a divorce or having children from a previous marriage, you and your family could end up with less. If you have a stable marriage, a tenancy by the entireties account may protect you and your spouse. In other states, such accounts are not offered.
Your business partner can be a source of liability as well. Lawsuits against your partner could put your own assets at risk. Avoid any general partnership if you can, and formalize any informal partnership agreements you have. Strongly consider forming an LLC or corporation for yourself to get legal protection and avoid partnerships.
Let the Law Help You
There are already several state and federal laws in place to protect your assets from creditors. Speaking with an asset protection specialist is a good step. They can discuss the various options that they have seen work for other people under the same circumstances. The following investments may have some protections in place:
- Traditional and Roth IRAs
- Retirement accounts
Entities and Trusts – What Do I Use?
In your business, as stated above, a legal entity can help shield your assets from creditors and lawsuits. Business entities include corporations, limited partnerships, and LLCs. These can help ensure that your personal assets are safe in the event of a business lawsuit.
Within your personal assets, asset protection trusts in the proper jurisdictions that are properly drafted and funded provide great protection. Asset protection trusts allow you to transfer a portion of your assets into an irrevocable trust managed by an independent trustee. These trusts used to be predominantly offshore, but several states now offer them, and you don’t have to be a resident of that state to establish one one. However, many results-oriented judges have ignored the statutes and have penetrated these trusts. The international trusts, on the other hand, have shown to offer nearly impenetrable protection because the assets are placed beyond the reach of your local courts. So, discuss the options with an asset protection specialist. There are phone numbers and a form on this page in order to do this.
You Can’t Take It With You
Sometimes, the best way to protect your asset is just to get rid of it. Part of your asset protection plan should include stipulations for what happens to your assets after you’re gone, but that doesn’t mean you can’t start passing on your assets now.
Your family can benefit from an irrevocable asset protection trust. The trust can stipulate that upon your passing all of the assets go to your spouse, for example. Then when both of you pass, they are divided equally among your children.
Alternatively, or simultaneously, you can set up a family LLC that gives you 100% control during your lifetime. Then you and/or your spouse, can gift non-controlling percentages of the membership interest that fall below the annual gift tax amount. You still control the entire company. You can still spend all of the money on yourself if you want, but you have potentially given a significant reduction in the estate tax by simply giving them a non-controlling interest in the company outright as a gift.
Beyond the Piggy Bank – You’re Not Alone
Protecting what’s important to you might not be as easy it was when you were a kid, but it doesn’t have to be a crippling fear either. Many people are facing the same problems you are. This article has covered some strategies to get you started on the road to an asset protection plan, but each case is different. Remember, the simplest plans are the best, so choose what makes sense to you.
You don’t have to create your plan alone. Speaking to an asset protection specialist might help you understand the best options for you and your company.
By Rebecca Reilly