We spend a lot of time on learning how to build wealth, but we spend very little time on learning how to protect it, insulate it, and keep it out of the reach of creditors.
Should you have assets you wish to protect—namely real estate, businesses, cash and securities—the time to plan is now. The potential for liability already exists, whether it’s an automobile accident, failed business deal, defaulted loan, injured tenant, or professional malpractice.
Use these three tips to identify and understand situations that put your assets at risk and plan ahead to protect them with a multi-layered and comprehensive asset protection plan:
Tip #1 – Identifying and Avoiding Risks
Whether you are a business owner or physician, real estate investor or board member, parent or retiree – you must work vigilantly to identify situations specific to your own circumstances that may put your assets at risk.
Some risks to watch out for:
- Real Estate
- Owning rental real estate in your own name.
- Owning real estate jointly with someone other than your spouse without a “buy-sell” or joint ownership agreement.
- Property Succession:
- Leaving property, including life insurance and retirement benefits, directly to minor children.
- Failing to consider leaving property to spouse and adult children in trust to protect from mismanagement, creditors, divorce, long-term care expenses, etc.
- Professional Negligence:
- Operating a business as a sole proprietor.
- Failing to respect corporate formalities.
- No or insufficient umbrella liability insurance.
- Vehicle Ownership:
- Owning the car of an adult child or keeping him or her on your policy.
- Owning vehicles jointly with your spouse.
- Letting anyone not covered by your insurance policy operate any of your motor vehicles (including children, family, and friends.)
- Signing a joint income tax return with your spouse if you have any suspicion that he or she is not reporting all income, over-stating deductions, or is otherwise acting fraudulently or negligently.
- Getting married without a comprehensive prenuptial agreement.
- Joint Accounts & Co-Signing Loans:
- Keeping substantial assets in a joint account, even with a spouse.
- Co-signing or guaranteeing loans to family members or friends.
Tip #2 – Using Tools to Protect Your Assets
Liability insurance, exemption planning, and business entities should be used together to create an asset protection plan that is multi-layered and comprehensive. Retirement plans and trusts can also be used to aid in protecting assets.
A closer look at these tools:
- Liability insurance:
Liability insurance is the first line of defense against a claim. It provides a source of funds to pay legal fees, settlements or judgments, as well as legal representation in defense of claim. While it may be costly, and while some exemplary damages are not covered by liability insurance, it is one of the most effective forms of asset protection.
Types of insurance you should have in place include:
- Homeowner’s insurance
- Property and casualty insurance
- Excess liability insurance (also known as “umbrella” insurance.)
- Automobile and other vehicle (motorcycle, boat, airplane) insurance.
- Professional liability insurance.
- Exemption Planning:
Each state has a set of laws and/or constitutional provisions that partially or completely exempt certain types of assets owned by residents from the claims of creditors.
While these laws vary widely from state to state, in general you may be able to protect the following types of assets from a judgment entered against you under applicable state law:
- “Homestead Protection,” or your primary residence.
- “Tenancy by Entirety,” or real estate owned by both spouses together.
- Life Insurance.
- Qualified Retirement Plans and IRAs (including 401(k), 403(b), and 457 plans.)
- Business Entities:
Business entities include limited liability companies (LLCs) and corporations. Business owners and real estate investors alike need to mitigate the risks and liabilities associated with owning businesses and real estate through the use of one or more entities. Business entities can also be an effective tool for protecting your personal assets from lawsuits.
The right structure for your enterprise should take into consideration asset protection, income taxes, estate planning, retirement funding, and business succession goals.
- Corporations have income tax benefits.
- You must operate a corporation tool correctly or creditor darts will pierce the corporate veil.
- LLCs are often easier to use than corporations and are more informal and flexible.
- LLCs offer better creditor protection.
- Creative use of LLCs can protect real estate and investments.
- Can elect to be taxed as a corporation (for the tax benefits).
- Retirement Plans:
Retirement accounts offer the owner diverse options for growing wealth. However, generally, three major concerns regarding asset protection in the context of retirement plans include: creditor protection, taxation, estate claims and probate. For instance, assets within an SEP, SIMPLE, or inherited IRA could be forfeited in part or in all if the account owner is the target of a lawsuit or files for bankruptcy. Additionally, account owners who neglect to complete beneficiary designations or who name the estate as the beneficiary of retirement accounts might not realize