If you think only wealthy people or those in high-risk professions need to worry about lawsuits, take a closer look. The truth is, anyone can be sued, and no matter how risky your job or how high your net worth, it’s a good idea to have an asset protection plan in place. Car accidents, foreclosures, unpaid medical bills, and injured tenants can happen to anyone at any time, and the resulting monetary judgment can devastate your finances if you aren’t prepared.
Asset Protection Planning: What is it and How Does it Work?
Asset protection planning means developing strategies and applying legal structures to safeguard property that creditors might take from you in the event of a judgment. Often, these strategies and structures protect assets from the creditor’s reach.
But an asset protection plan won’t usually work if it’s applied as a quick fix after the fact. The time to put a plan in place is well before—not in the middle of—a legal problem. In fact, transferring your assets while dealing with a legal hassle can be considered fraud, which is a crime that can bring additional legal penalties including jail. You must do asset protection planning proactively.
Develop your asset protection plan and put it in place long before any lawsuits are filed against you. Even better, engage your plan before such lawsuits are imminent, or even likely. For example, when you become a landlord, protect your tenants as well as you can. But as you do so, you’ll also want to protect your assets in case something goes wrong. Here are three tips that you can use right now to shield your assets from creditors and lawsuits.
Tip 1: Secure Liability Insurance
Liability insurance (including homeowners, auto, business, malpractice, long-term care, and umbrella policies) can help you pay for monetary damages in the event of a lawsuit, and your policy may also include payment of your legal fees. Umbrella policies are ideal; they’re relatively inexpensive, and they can protect you from the truly unexpected events that some other methods exclude.
While you’re reviewing your insurance safeguards, start checking your existing policies every year to make sure your policy limits are in line with your changing net worth, and make adjustments as needed. Turn this practice into an annual ritual; check your policy limits, confirm that your coverage is still adequate, and make sure that you’re not letting your benefits be stripped in exchange for maintenance of the same premiums.
Tip 2: Maximize Contributions to Your 401(k) or IRA
If you contribute to a tax-favored retirement account, including a 401(k) or an IRA (but not an inherited IRA), these funds may be protected from creditors if you declare bankruptcy. You already know that it’s a good idea to contribute to your company’s 401(k) plan, but keep in mind that your plan can also protect your investments from creditors and lawsuits. If your company does not offer a 401(k) plan, gain the same benefits by investing in an IRA.
Tip 3: Move Your Rental and Investment Real Estate into an LLC
Landlords, property investors, and real estate flippers should all have strong liability insurance (if you own an investment property you probably know this already). But in addition to holding liability insurance on your property, you’ll want to consider moving your real estate into a limited liability company (LLC) to protect your assets if something goes wrong.
There are two types of liability that should concern you as a property investor:
- Inside liability; in this case, the property is the source of the liability. This includes (for example) a slip and fall in which the creditor wants to seize an LLC member’s personal assets.
- Outside liability; in this case, the creditor of an LLC owner wants to seize LLC assets to satisfy the person’s debt.
An LLC will limit your inside liability to the value of the property in the event of legal claims related to slip-and-falls or fires due to faulty wiring. In many states, the creditor of the LLC member can obtain the value of the property, but they cannot get their hands on the member’s ownership interest in the company. At a maximum, the creditor would only be entitled to the member’s share of the distributions and would have no voting or management rights. This type of protection from an outside creditor is often called “charging order” protection. If the protection is in place, a creditor will look to your liability insurance and any unprotected assets to collect on their claim, but your LLC will be off-limits.
In order to protect your real estate investment with an LLC, you’ll need to choose an attorney who understands the laws in your state and can make sure your LLC shields you from both forms of liability.
You’ve worked hard to accumulate your assets! Don’t let a lawsuit or an unexpected event sweep them away. Call our team today and we’ll work together to build an asset protection plan that best serves you and your family.