Asset protection is not on everyone’s radar. But if you have substantial wealth, or if you anticipate receiving an inheritance, lawsuit settlement or judgment, sale of stock options, or other situation that will dramatically increase your wealth, there are a few asset protection strategies that you should consider.
No. 1: Consider increasing your liability insurance
Your first line of defense against potential litigation, especially if you own a business or work in a professional field such as medicine or the law, is liability insurance. If you don’t have coverage already, obtaining coverage should be a priority. If you already have a liability policy, consider increasing your liability limits. The key is to make sure your personal umbrella liability coverage is at least equal to your new net worth. It is usually wise to take care of this before you actually receive the inheritance or settlement.
No. 2. Consider creating an irrevocable trust
Protection from creditors can be accomplished with different types of trusts, but the most efficient type is an irrevocable trust. When a trust is “irrevocable” that means the terms of the trust cannot be modified or rescinded once it has been created. When you transfer your property to the trust, that property then belongs to the trust. Because it is irrevocable, the assets are no longer considered yours. As a result, that property is no longer subject your creditors or other legal liabilities. Irrevocable trusts are a great way to protect assets that you do not presently have a need for.
No. 3. Be sure to protect yourself from renters
If you own any rental property or anticipate investing in rental property, you should first create a business entity such as an LLC or corporation to protect your other assets from a disgruntled tenant. That way, if a renter sues you for any reason, the only assets at risk are those held by the entity that holds the real estate. The rest of your personal assets will generally be protected from a lawsuit or legal judgment. It may also be wise to create a separate business entity for each rental property you own.
No. 4. Consider restructuring any jointly held accounts
Any money you deposit into a joint account with your spouse, child, parents, roommate, or business partner is at risk based on any liabilities that other person may have. For example, if your business partner files for divorce or incurs a lawsuit judgment, the entire account could be wiped out, including your portion. If you must have a joint account, keep the balance as low as possible.
No. 5. Make your informal partnerships formal
Business partnerships can easily be a source of liability. Why? Similar to joint accounts, you are responsible for the actions of your partner, that includes any liabilities. However, unlike a joint account, a lawsuit against your partner can put all of your assets at risk. For instance, if you and a friend come to an informal agreement to provide consulting services and your “partner” is involved in a legal dispute regarding your consulting services, your personal assets could likewise be at risk. The best advice is to avoid basic partnerships and create an LLC or other business entity that will provide you with legal protection.
No. 6. Create business entities to shield assets
If you own a small business or do part-time work on the side without a formal business structure such as an LLC or a corporation, that means you are operating as a sole proprietorship. Although being a sole proprietor means it’s just you, unlike a partnership, all of your personal assets are at risk if you are sued because there is no real delineation between you and the business. So, be sure to create a business entity that will protect your personal assets from lawsuits against your business.
Speak to your attorney about all of the asset protection strategies available
Estate planning can accomplish many things, including protecting your assets. Guarding your property against creditors is essential to preserving your estate for your heirs. Creditors include bill collectors and anyone else who may have a legal judgment against you. Everyone can benefit from an asset protection plan, but you must create that plan before it is too late.
If you have questions regarding asset protection strategies or any other estate planning matters, contact the estate planning attorneys at Gaughan & Connealy for a consultation either online or by calling us at (913) 262-2000.