Asset Protection from a Lawsuit: 7 Ways to Secure Your Money
You've probably heard of lawsuits before. They're often talked about on the news and in the papers, as we never think it could happen to us. Often the first questions that come up are: what does it mean and how can I avoid them?
Many people are under the impression that they have nothing to worry about when it comes to protecting their assets. However, this is not always the case. If you get hit with a lawsuit and your assets are exposed you could be held liable and lose your entire life savings.
The best way to protect yourself from lawsuits is by creating an asset protection plan. This will allow you or your loved ones to maintain control over your property even if a lawsuit occurs.
Most people think they don't need an asset protection plan because they believe that nobody would sue or that they aren't high net worth individuals; however, many lawsuits start off with small claims of around $10,000 in damages and then increase as time goes on. We live in an age where lawsuits happen more than we think. In this article, we will provide you with seven ways you can protect your assets from a lawsuit.
Table of Contents:
- Why Do You Need Asset Protection from Lawsuits?
- The 7 Best Ways to Protect Your Assets from a Lawsuit
- The Importance of Acting Now
Why Do You Need Asset Protection from Lawsuits?
Many believe that they only need to worry about protecting their assets from lawsuits if they work in a profession that is prone to legal action such as doctors, business owners, and lawyers. However, this is not exactly the case. There are a variety of scenarios in which just about anyone can be unexpectedly hit with a lawsuit, leaving their personal wealth exposed and threatened.
If you find yourself in a situation where you need to file for bankruptcy or get a divorce, your assets which are found through a public asset records search, are also again in danger of being exposed and seized. The higher your net worth, the greater the risk you are exposed to. This is why it is so important to implement sound strategies to protect assets. There are many ways you can do this, and often a multi-pronged approach works best. Here, we will look at seven of the most tried and tested ways to protect your assets from a lawsuit.
The 7 Best Ways to Protect Your Assets from a Lawsuit
It is important to legally separate your personal assets and business assets with the use of a limited liability business entity to ensure that your wealth is adequately protected. If you are an entrepreneur or work in a self-employed role, you are at risk of being personally liable for any lawsuits which arise in the course of business if you have not created a separate business structure.
Two of the most effective types of business entities which offer limited liability protection to their owners are a Limited Liability Company (LLC) and Corporation. Using one of these entities effectively shields your personal assets from lawsuit claims against the business, and vice versa. In this way you can also transfer assets to the business if you are worried about a personal liability claim, which would then protect the assets which now belong to the business in this situation.
Asset Protection Trusts
Asset protection trusts (APTs) are probably the single most powerful asset protection tools you can find. As the name suggests, these are trusts which have been specially designed to provide maximum asset protection to the assets in the trust, and hence to the beneficiaries of those assets.
A major advantage of asset protection trusts is that they allow the grantor of the trust to simultaneously be the sole beneficiary. Therefore, you are effectively able to transfer assets out of your own name and into the trust, whilst remaining as the beneficiary who ultimately gets to benefit from the proceeds of those assets when the time comes. In the meantime, the assets are safeguarded by the trustee whose sole responsibility is the wellbeing of the assets in the trust, and is under no obligation to turn the assets over if the grantor is personally sued.
It is possible to make use of domestic APTs in the US; however, by far the most effective are Offshore APTs. Asset protection trusts which are established in the Cook Islands or Nevis provide far superior levels of asset protection, privacy, as well as other attractive advantages. These trusts benefit from being in a separate legal jurisdiction, making it incredibly difficult for local court orders to have any real weight. In addition, these jurisdictions have specific legislature and mechanisms which make it nearly impossible for creditors/claimants to lay their hands on the protected assets.
ERISA-qualified retirement accounts enjoy unlimited asset protection in the event of bankruptcy according to federal law, and IRA accounts are protected up to about $1 million (the exact amount and level of protection varies depending on the State). This means that simply transferring some of your assets into your retirement account can be a simple yet highly effective way to protect them from unexpected lawsuits and bankruptcy.
The exact rules around this are somewhat complex and differ across States, so it is important to seek out the guidance of a retirement plan expert or asset protection lawyer to determine whether this is a sound option for you.
Having adequate insurance coverage is another effective way to reduce the risk to your assets. There are various types of liability insurance you can utilise to protect your assets from any number of lawsuits. These include:
- Commercial and/or professional liability insurance: This protects the assets belonging to your business in the event of any liability claims arising during business operations. These could include someone being injured on your business’ premises, or even malpractice lawsuits if you are involved in a higher risk profession like that of a doctor, lawyer, or architect.
- Homeowners Insurance: This provides liability protection in the event of someone being hurt on your property.
- Auto Insurance: A premier auto insurance policy should provide significant coverage if you are involved in a vehicle accident which results in a liability lawsuit.
- Umbrella Coverage: Finally, you can consider purchasing an additional umbrella coverage. This is used as a “plan B” insurance in the event that any of your other existing policies are insufficient to cover a liability claim which arises. These policies usually provide benefits up to the maximum of any of your other policies (e.g., if you have $500,000 homeowner’s insurance but suffer a $1 million claim, the umbrella insurance should cover the rest). They are generally quite affordable.
Being adequately insured is important to provide safety and wellbeing to your personal wealth, but it is also important to make sure you are not “over-insured”. Speak to a professional to determine exactly what is adequate to suit your needs, and avoid overpaying for a multitude of insurance policies that you don’t need.
See here for more info on captive insurance.
Homestead Exemptions and Titling
In some states home equity is protected from being awarded to creditors in lawsuits. This applies to the house in which you reside, not so-called “investment” properties. The level of protection differs depending on the state. For example, Texas, Florida, and Kansas provide unlimited home equity protection. If you live in a state with such protective legislature in place, it is well worth using any available assets to repay your home loans, as this capital would then become out of reach of creditors in lawsuits.
Another factor to consider is home titling. You can jointly own your home with another person, such as your spouse, with both of you being tenants by entirety. This means that you each own an indivisible interest in the home, and therefore neither one of you can be forced to sell in the event that the other is sued.
This is a great way to protect the entirety of your residential home assuming that you and your spouse are not jointly sued (a far less likely event). Keep in mind that this type of protection is also only available in certain states, and only applies to your personal residential property.
Annuities and Life Insurance
Annuities and life insurance policies are another asset class which are protected from being claimed in lawsuits by many states. Once again, Florida offers unlimited protection, while other states provide limited protection to annuity balances and life insurance policies.
Consider shifting some of your assets into one of these valuable asset classes, particularly if you are concerned about your assets being claimed in a lawsuit.
Transfer of Ownership
The last option for protecting your assets is to transfer their ownership away from yourself. Creditors cannot claim assets which you don’t own, so if you have a trusted person or entity you can transfer ownership to, this can reduce the concentration of risk of you owning all your assets.
One option is to transfer the ownership of your assets to a separate entity such as an asset protection trust. This is highly recommended and was discussed earlier. Another option is transfer ownership to a friend or family member, or even to gift your heirs with an “advance” on their inheritance. Transferring ownership to a person comes with more risks, as they may themselves be at risk of a lawsuit, or the relationship may turn unexpectedly sour.
The Importance of Acting Now
Whichever asset protection method or combination of methods you deem to be most appropriate for you, it is vital that you take the necessary steps today. If you wait until after you are actually hit with a lawsuit, it becomes significantly more difficult to take any of these steps to protect your assets. The courts can then quite easily rule that any transfers you make in order to protect your funds are an instance of fraudulent conveyance, and thus negate the transfers.
Indeed, there may still be a few options available to you to provide limited protection to your assets after a lawsuit actually strikes, but you are far more likely to be successful if you set up these protective layers long before you are in trouble.
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Asset protection is a highly complex area of law, and the correct approach will be different for each individual depending on their personal circumstances. That is why it is so important to enlist the help of a professional asset protection attorney to help you formulate and implement the best strategy for you and your family.