Let’s face it: the assets you have worked long and hard to accumulate can be lost easily if they are not protected. In the end, 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, it does little good if you leave your assets hanging around unprotected.
So how can you protect your assets from litigation?
Who exactly is at risk? Let’s go into a little bit more detail about the measures you can take to protect your assets.
Who’s At Risk?
Honestly, anyone with assets is at risk. You may think that only doctors, corporate executives and others in litigation-prone professions are the only ones who need to worry about protecting their assets. But in reality, that’s not so. There are many circumstances under which your assets can be attached or garnished.
These include if your file for bankruptcy, you get a divorce or you are on the defensive end of a civil lawsuit. Many of these circumstances are ones that most people don’t even consider until they occur. For instance, if your teenage child is on the wrongful end of a motor vehicle accident, that could result in the damaged party going after your assets. So now that you know who is at risk, what can you do to protect your assets?
How To Protect Your Assets
Although asset protection may have had a tarnished past, there are legitimate strategies out there
. Look at it as a way to put up as many obstacles as possible that potential creditors must jump over before they can get to your property. This might encourage these creditors to make favorable settlements instead of getting
involved in long and expensive litigation processes.
#1: Strip Out Your Equity
One option for protecting your assets is to pull the equity out of them and put that cash into assets your state protects. For example, suppose you own an apartment building and are concerned about potential lawsuits. If you took out a loan against the building’s equity, you could place the funds in a protected asset, such as an annuity.
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.
#2: Own Insurance
This is a big one. Some professions generate more exposure to liability than others. Here are some coverage’s you can enact to protect yourself:
- Homeowners Insurance. Homeowners insurance helps cover you if someone is hurt on your property. Choose a deductible you can cover with your savings, and make sure liability coverage is adequate in case someone gets hurt on your property and decides to sue you.
- Commercial Liability Insurance. This type of insurance protects your business if someone gets hurt on the premises, or is injured as the result of an action by an employee.
- Worker’s Compensation Insurance. This is mandatory in most jurisdictions. Worker’s compensation protects you and your workers alike by ensuring that there’s enough liquidity in place to take care of any employee who gets hurt on the job, and that the expenses don’t come out of your pocket.
- Auto Insurance. Don’t settle for the minimum legal liability coverage – additional coverage is usually affordable. Buy enough additional coverage for your auto insurance so that you will have meaningful protection in the event your vehicle is involved in an accident and generates a lawsuit. As a general rule of thumb, make sure your total liability coverage is at least equal to your total assets.
- Umbrella Coverage. Umbrella coverage is backup insurance that can be used in the instance that your other coverages are inadequate. In the event that your auto, homeowners, or other liability coverages are exhausted, umbrella coverage pays benefits up to the limit of the policy. Otherwise, the plaintiffs could start coming after you to seize assets for damages. Typically, these policies get underwritten for $1 to $5 million in face value. It’s usually very affordable.
- Long-Term Care Insurance. Long-term care insurance protects you against the financially devastating costs of in-home or nursing home care for chronic ailments, such as dementia, Alzheimer’s, strokes, paralysis, multiple sclerosis, spinal cord injuries, and the like. Medicare doesn’t provide much coverage for these afflictions, and most major medical insurance policies don’t provide any. Without long-term care insurance, you could be on the hook for more than $200 per day in nursing home costs – until the expenses drive you into poverty so you can qualify for Medicaid. The longer you wait, the higher the premiums get. Additionally, you could develop an ailment that would preclude you from getting coverage, or at least make it prohibitively expensive. Alternatively, consider purchasing long-term care insurance for your parents if you’ll otherwise be on the hook for this expense.
#3: Asset Protection Trusts
For years, wealthy individuals have used offshore trusts in such locations as the Cook Islands and Nevis to protect assets from creditors. But these trusts can be expensive to establish and maintain. Now several states, including Alaska, Delaware, Rhode Island, Nevada and South Dakota, allow asset-protection trusts. You don’t even have to be a resident of the state to buy into one.
Asset protection trusts offer a way to transfer a portion of your assets into a trust run by an independent trustee. The trust’s assets will be out of the reach of most creditors, and you can receive occasional distributions. These trusts may even allow you to shield the assets for your children.
The requirements for an asset protection trust include the following:
- It must be irrevocable.
- It must have an independent trustee that is an individual located in the state or is a bank and trust company licensed in that state.
- It must only allow distributions at the trustee’s discretion.
- It must have a spendthrift clause.
- Some or all of the trust’s assets must be located in the trust’s state.
- The trust’s documents and administration must be in the state.
If you are considering looking into an asset protection trust, be sure to work with an attorney who is experienced and proficient in this field. Many individuals have run afoul of tax laws because their trusts did not satisfy regulatory requirements.
In short, it’s extremely important that you take certain measures to protect your assets. Of course these aren’t the only viable options, but it’s a good starting point.
Everyone needs Why? Life planning effectively serves many goals and avoids many difficulties. For most people, life is predictable. That is why we speak of “probable” events and consequences. There are, however, a significant percentage of people who encounter “unexpected” events. Life planning is important for both. If you are interested in learning more about Life Planning, I encourage you to visit our