8 Asset Protection Strategies – How to Protect Your Wealth From Lawsuits
The best offense is frequently a good defense. No matter how astute a business person you are, or how skilled you are as an investor, or how lucky you are with your lottery tickets, it does little good if you leave your assets hanging like a slab of meat in the water for trial lawyers to sink their teeth into.
Let’s face it: America is growing increasingly litigious, and the more assets people think you have, the more tempting a target you will become for frivolous lawsuits.
If you are a business professional or if you own a business, you could be hit by any of the following:
Your business isn’t the only source of potential liability. Consider the following possibilities:
Make no mistake – bad things happen to good people all the time. You don’t have to be irresponsible or negligent to get sued. To protect what you have, it’s vital to take some defensive measures, to make it more difficult for creditors to seize your assets in the event you lose a lawsuit, have a judgment entered against you, or are forced into bankruptcy.
If you are an entrepreneur of any kind, it’s important to separate your personal assets from those of your business. If you neglect to take specific legal steps to create a separate business entity, such as a corporation, limited liability company (LLC), or limited partnership, a simple business dispute could well cost you everything you own.
There are a number of business entities to consider:
Some professions generate more exposure to liability than others. If you are a financial advisor, an OBGYN, a real estate agent, or a professional in any other field that generates a lot of lawsuits for malpractice, keep your errors and omissions coverage paid up, and, if you can afford to, invest in extra or expanded coverage. But don’t stop there – you also need to enact these kinds of coverages:
Federal law provides unlimited asset protection to ERISA-qualified retirement plans, and up to $1 million in assets in an IRA in the event of bankruptcy. Some states provide even more protection to IRAs, though some states have opted out of the 2005 Bankruptcy Reform Act’s federal bankruptcy exemptions and exempt a lesser amount.
Check the laws in your state to see how much protection is provided to funds in these accounts. Speak to an attorney familiar with the laws in your state to determine whether creditors can opt between the state and federal exemption amounts.
If your state has a generous exemption, consider moving cash you won’t need until you reach at least age 59 1/2 into one of these protected entities. Bear in mind that you will be restricted by an annual contribution limit, which varies depending on the type of retirement plan. If you go over this limit or withdraw funds prior to age 59 1/2, you may be assessed penalties. Retirement accounts are excellent vehicles to protect long-term savings, and provide substantial tax benefits, but need to be thoroughly understood and used with care.
Some states provide a lot of protection to home equity, which means that if you declare bankruptcy, the law prohibits courts from awarding home equity to creditors. In some states, including Texas and Florida, state law protects an unlimited amount of home equity. Other states provide relatively little protection to home equity in the event of bankruptcy.
Check the laws in your state – if your state provides a generous homestead exemption, consider contributing extra principal to mortgage payments to protect those funds. Principal contributions to the vagaries of the housing market are subject to risk, in that you will lose access to the equity and the cash if property values fall.
Alternatively, if your state provides a minimal homestead exemption, accelerating mortgage payments or paying down principal may not make sense if you are looking to protect assets from creditors.
Examine how your home is titled. If you own your home with your spouse as tenants by the entirety, both you and your spouse own an indivisible interest in the home. If only one of you is named in a suit, creditors cannot force the other spouse to sell his or her interest in the house. Because the interest is indivisible, this can help you protect home equity where state law doesn’t provide a sufficient homestead exemption.
This option is only available in some states, and it only applies to your personal residence, not investment property. Other forms of titling include tenancy in common: joint tenants with rights of survivorship.
The way you have a property titled can have profound ramifications in the event a that creditor makes an attempt to seize it. Speak to a lawyer licensed in your state for specifics concerning your situation.
Some states provide significant protection to annuity balances and to assets in cash value life insurance policies. For instance, Florida provides unlimited protection to these assets, while Oregon provides protection for up to $500 per month in annuity income. Each state has its own laws, so check with an attorney licensed in your state for specific exemptions.
Creditors cannot seize assets that you no longer own. Therefore, consider transferring ownership to irrevocable trusts, from which family members may be able to draw an income or give the assets to family members outright, as part of a strategic gifting program. As of 2012, you can give away up to $13,000 per person without incurring a gift tax liability, subject to a lifetime gift tax exclusion of $5 million.
If you are in a high-risk profession, consider transferring assets to your heirs early – call it an “advance on your will.” If you don’t expect to need the money while you’re alive, you might benefit from watching them enjoy the inheritance.
You can’t wait until the lawsuit is imminent before you make these moves. If you do, the courts could rule that your transfer of funds into a protected class is a fraudulent conveyance and disallow the transfer, leaving those assets exposed.
Above all, don’t become a tempting target, and avoid displays of conspicuous consumption. This could attract trial lawyers and cause them to take a plaintiff’s case where they would otherwise pass on it.
This article is by no means a comprehensive guide to asset protection measures and strategies. Each case is different, and the field of financial and legal planning interfaces with state laws to a significant degree. This is just an overview of some of the major issues and risk factors involved, and there is no substitute for working with a qualified and experienced professional licensed in your state.
Jason Van Steenwyk has been writing professionally about finance, insurance, economics, and investing since 2000. He got his start in journalism with Mutual Funds magazine. Since then, he has published feature articles for financial professionals and consumers alike in Registered Rep., Wealth & Retirement Planner, Senior Market Advisor, The Annuity Selling Guide, The Honolulu Advertiser, and many more. He is also a former insurance agent, where he worked with individuals and small business owners on planning their life insurance, health insurance, long term care and retirement needs. An avid musician, Jason is also a semiprofessional guitarist and fiddler, and proud member of the Army National Guard for 20 years. He lives in Fort Lauderdale, Florida.
8 Asset Protection Strategies – How to Protect Your Wealth From Lawsuits
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