Asset protection may not be that important for consumers with few assets other than their home, car and some funds in a bank account. But for those with stock options, a second home, a business or who are expecting considerable funds from an inheritance, lawsuit or other source, shielding those assets from potential creditor suits is essential. Studies show that those with assets of at least $250,000 are 50% more likely to be sued since attorneys rarely go after people with few assets. Accordingly, consider consulting with a trusts and estates attorney before you receive your windfall or if you have no asset protection place in place.
To protect those valuable assets, here are a few suggestions for doing so:
- Get adequate liability insurance. If you have assets worth several hundred thousand dollars or more, consider purchasing an umbrella policy for at least the same amount. Keep increasing it as your wealth accumulates.
- Keep separate accounts. A joint account with anyone is subject to being seized if the joint owner is sued. If you file for divorce, half of the funds in the accounts could be awarded to your spouse especially if you live in a community property state like California.
- Form an LLC. If you have rental property, consider forming a separate one for each property. If a renter sues you, then only the property is subject to being attacked. Also, if you have a partner, incorporate or form an LLC to protect your personal assets if your partner is sued. In fact, consider an LLC for any business you operate, no matter how small.
- Land trusts. Not all states exempt the total equity in your home. Anyone can find the value of your house and the debt on it by researching the public debt. Some homeowners put their houses into a land trust where you are the beneficiary and another person acts as trustee but only the trustee’s name appears on the record. You still control the home and receive all the tax advantages and it is protected from seizure in a lawsuit since it is a separate entity.
- Consider joint ownership of an entity. If you are sued and the entity is subject to judgment, then all of it may be seized if you have 100% ownership and control. Having a relative as co-owner will only affect 50% of the asset.
- Observe the corporate or entity structural requirements. This means treating the entity according to the rules and laws governing it, not commingling funds and keeping adequate records of business decisions such as corporate resolutions. Maintain separate bank accounts and keep separate records from your personal ones. Also, obtain liability insurance for the entity such as property, auto and business interruption policies. The courts are more likely to treat the entity as legitimate in such cases or it may question its integrity and allow a creditor to “pierce the corporate veil” and allow seizure of your personal assets.
- Buy-sell agreement for businesses. If you have partners in a business, a buy-sell agreement will protect your interests and those of your heirs if you pass away. A decedent’s heirs may not have any decision making power depending on the by-laws or entity’s operating agreement. The heirs of a decedent owner may also demand a cash out and jeopardize the entity’s continued existence. Having a sound and reasonable buy-sell agreement in place can protect unwanted consequences that can diminish all you have achieved.
- Irrevocable trusts. Putting your property in an irrevocable trust does wrest control of it from you and you have no say in how it can be distributed but the trust property is protected from seizure provided it was set up properly. A trustee does distribute to the trust’s beneficiaries who can be your children or heirs though you have no power to revoke or change the beneficiaries.
Having a competent legal professional to advise and craft an asset protection strategy for you makes sense and can relieve you from the stress and anxieties that can confront anyone with considerable assets who fears diminution of all they worked so hard to obtain. There are numerous pitfalls awaiting anyone who tries to construct a plan without sound legal advice.