7 Asset Protection Strategy Tips
You do not have to be negligent, nor do you have to do something illegal or harmful to others to be sued. Creditors have whole systems set up and ready to seize assets to satisfy judgements. There is a lawyer somewhere looking for a payday, and you do not want to be a cash machine. Here are 7 tips to help you to protect your assetsi.
Tip #1: Set up your business for protection.
While most of us go into business to grow our personal wealth over time, leaving our personal wealth at risk while doing so is unnecessary and easily avoidable.
- Get away from sole proprietorship – leaving your personal and business entities together puts all your assets in both at risk.
- Consider a partnership if appropriate – there are two types of partnerships with quite different risk profiles:
- General Partnership – you and a general partner are considered one and the same in some respects as a business entity. Your partner can lose a lawsuit or have a judgement filed against them and it can back up to you as well.
- Limited Partnership – investing as a limited partner in the business dramatically reduces your risk profile. You can only be sued for what you have invested in the business. You can lose your entire investment, but your personal or other investments or businesses are not at risk.
- Corporation – corporate structures protect their owners from suits and judgements against the corporation in most cases. While the asset protection is much the same, the C Corporation and S Corporation are two types that are taxed differently.
- LLC, Limited Liability Company – The LLC combines good points from both the partnership and the corporate structure. It protects the owners from business lawsuits with fewer restrictions than the S Corporation. Owners are also allowed to choose between filing federal taxes as a partnership or a corporation.
Tip #2: Acquire Insurance
The purpose of most insurance is to mitigate risk or insure against it. Some professions inherently are subject to more lawsuit risk than others, notably real estate, legal, accounting, and medical professions. Malpractice and Errors & Omissions insurance is common for those professions.
- Worker’s Compensation Insurance – Mandatory in most states, this insurance covers the employer and employee when an employee is injured on the job.
- Auto Insurance – While auto insurance is required in most states, you should buy additional liability coverage, especially if you have employees driving your vehicle(s).
- Commercial Liability Insurance – This insurance protects the business if customers or other members of the public are injured on your business premises or due to the actions of an employee.
- Umbrella Coverage – This coverage kicks in when your other insurance coverages are inadequate, a backup to your other policies.
Tip #3: Retirement Account Protection
There are both state and federal laws that protect assets in retirement accounts from lawsuits and bankruptcy. Federally qualified retirement plans have unlimited protection and IRAs have up to $1 million in protection. Some states provide even more protection.
Tip #4: Homestead Exemption Protection
Some states are very protective of homeownership equity, with prohibitions to seizing homestead property by creditors or in bankruptcy. If your state has generous protection, you can protect more of your other assets by making extra equity payments on your home.
Tip #5: Life Insurance and Annuities
Each state has its own protections of life insurance value and annuity income, so check your state to see if they are significant enough to add to your insurance or get an annuity.
Tip #6: Re-title Property
In some states you can protect your home by titling it with you and your spouse owning it as tenants by the entirety. This gives each of you an indivisible ownership interest, so if either of you gets sued, your home is not at risk.
Tip #7: Use Trusts
If you do not own an asset your creditors or lawsuit opponents cannot seize it. Using irrevocable trusts by transferring ownership to them will remove the asset from your ownership and remove risk of loss as well.
These tips are an overview of available asset protection strategies. Do your own research and consult professionals to put asset protection into play for you.
i Asset protections article, MoneyCrashers.com