The Need for Asset ProtectionSubmitted by JMB Financial Managers on June 19th, 2019
In our modern, litigious society, there are certain typical problems which, if not properly planned and prepared for, can cause you to lose the entirety of your savings, investments, home and/or business. The result of such a loss would create a great burden for you and those that depend on you. Asset protection is an antidote for such problems.
What is Asset Protection?
Asset protection is a type of financial planning that uses a specific set of legal techniques built upon a body of existing laws. These laws cover the protection of the assets of individuals and businesses from civil judgments, creditor claims, divorce, and liabilities stemming from litigation.
A properly crafted asset protection plan can limit - or even eliminate - these problems and protect and preserve your net worth. With such a plan in place, a legal opponent or creditor will recognize that you are not an easy target. This puts you in a powerful position, which can deter a lawsuit, or in the event of a lawsuit, provide you with substantial negotiation leverage.
Most asset protection strategies you can employ will be most effective if they exist before a claim or liability arises. Very few things will protect you afterwards. This is because the actions you undertake once a potential claim exists can be overturned in a court of law under the concept of “fraudulent transfer”. Therefore, acting today, well before a problem arises, is critical to protect what you’ve accumulated from your lifetime’s work and energy.
There are a variety of legal techniques you can implement that provide a range of protective features. This can be as simple as financial privacy, all the way up to judgment-proof asset protection. The planning is tailored to the assets, risk and comfort level of the individual, family, or business seeking protection.
Finding the Right Form of Asset Protection for Your Situation
Trusts, business entities, insurance policies and the homeowners’ exemption form the core and foundation of an effective asset protection plan. Let’s take a quick overview of these:
Asset Protection Trust
An asset protection trust is a separate legal entity that splits the beneficial enjoyment of trust assets from their legal ownership, thus providing the protection.
The beneficiaries of a trust are the beneficial owners of equitable interests in the trust assets, but they do not hold legal title to the assets. Such trusts must be irrevocable, as a revocable trust will not provide asset protection. Most of them contain a spendthrift clause preventing a trust beneficiary from alienating his or her expected interest in favor of a creditor.
Asset protection trusts are permitted under the laws of Alaska, Delaware, Hawaii, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia and Wyoming.
A corporation is a separate legal entity organized and operated under state law. The owners are generally not liable for the debts and liabilities of a corporation beyond the money they used to purchase their shares of stock, thereby creating a protective barrier.
Corporations come in several varieties. A C Corporation, S Corporation, or a limited Liability Company (LLC) may be recommended depending upon your specific circumstances.
Proper insurance coverage integrated with various trusts and business entities is a must for any asset protection plan. An asset protection plan doesn't create liquidity (money) to pay legal fees to defend against a lawsuit. If you get sued, the insurance company will pay to defend you and pay any claim -- that's why you pay premiums.
This doesn’t just mean having basic homeowner’s insurance, auto insurance, and umbrella liability insurance – it means delving into the details of these policies to make sure your assets are fully covered. You may also require additional policies such as a comprehensive commercial insurance policy, worker’s compensation insurance, errors and omissions insurance, malpractice insurance, and commercial or product liability insurance.
The homeowners’ exemption is based upon state law that prohibits courts from awarding home equity to creditors, thereby providing some protection for your primary residence.
In some states, including Texas and Florida, state law protects an unlimited amount of home equity. Other states, such as California, provide relatively little protection ($26,800) to home equity in the event of bankruptcy.
Check the laws in your state – if your state provides a generous homestead exemption, consider taking advantage of this legal provision.
Protect Your Net Worth
While trusts, business entities and multiple insurance policies can sound daunting (and expensive), let’s not lose sight of the fact that the U.S. justice system is quite unpredictable. Defendants are faced with ever-expanding theories of liability, being sued just because they appear to have “deep pockets,” and judgments entered against them based on desired outcomes instead of the law.
Knowing the best asset protection strategies to secure your assets is just the first step. You actually need to create an asset protection plan and use the proper tools if you want financial security for the legal predators out there.
Educate yourself. Reach out to us today to take action and set up the asset protection strategies that are right for you.