For most of us, asset protection consists of the insurance policies we buy to protect our home and its contents and our autos. These policies have the added benefit of providing you a defense as well as source of funds to pay damages if you cause an accident.
The law also provides various means of asset protection, ranging from “homestead exceptions”, protection of ERISA retirement funds from creditors, joint property ownership, bankruptcy and more.
There are other types of asset protection that are used by wealthy individuals to shield their assets from creditors or the tax man.
They are popular with professionals, who can lose everything through a simple error of judgment.
Business and property owners may use them as a tax shelter and/or estate planning measure, as well as a way to avoid creditors.
The problem with most asset protection schemes is that they are expensive to implement and maintain, almost always forcing you to give up all or part of your ownership in the asset you are trying to protect and, in many cases, are illegal to boot.
Trusts, different corporate and partnership entities and off-shore accounts are popular in this field.
If you are one of those who feel they need this kind of protection, consult a very well qualified lawyer – a CPA by himself won’t do. And apply common sense. A lot of so-called professionals in this field have wound up getting their clients indicted or into serious tax problems because of miscalculations they have made.
There is also an abundance of fraud, especially with off-shore accounts. The money you deposit into an off-shore trust might simply disappear.
Don’t forget the IRS has been subpoenaing the names of people who just bought books about off-shore investing from the so-called gurus of this field and are now delving into their finances.
Finally don’t trust that the lawyer-client relationship will protect you, especially if you’re moving money off-shore. I’ve witnessed several instances of lawyers turning their clients in when the IRS or District Attorney pays them a visit.
Asset Protection for the Rest of Us
Most of us just have to worry about the simple mistakes we can make that cause personal injuries to another. A car accident or a slip and fall on your property can result in a lawsuit and a huge claim for damages.
This is where our homeowner’s or auto insurance companies step in. They will provide lawyers to defend the claim, hire experts if necessary and pay damages up to your policy limits.
In spite of the rash of lawsuits plaguing the US, most people with adequate insurance have little to worry about.
There are several reasons for this. First of all, personal injury lawyers, in spite of their reputation as sharks, really don’t want to throw defendants out of their houses, even if they could. They rather go for the low hanging fruit – in this case the proceeds of your liability insurance policy.
They know that unless you were drunk or grossly negligent, any liability award can be discharged in bankruptcy. They also know that many states have “homestead laws” that prevent the seizure of your home and that the money in your retirement plans are protected by varying degrees, depending on the state you live in.
In most cases, they will settle for the insurance policy limits, even if they are lower than what the case might be worth.
However, especially in cases with severe injuries, the lawyer might have no choice but to pursue your personal assets if your insurance coverage is not adequate and you do have other assets to attach – don’t forget your wages are an asset and can be garnished.
For this reason, anyone with a good income and the usual collection of assets, for example a home, car, IRA’s, other savings and investments, some original art, silverware, jewelry, etc should carry at least $1 million in liability coverage, maybe more if you live in high verdict states like California and New York. Your insurance agent should be able to advise you on a prudent liability limit.
This can be done by buying single limit liability coverage of $100,000 on your auto insurance and homeowner’s insurance policies. You then buy an umbrella policy with a $100,000 deductible. If you do this all through one agent, he can tie everything together so that your coverage to a million or more is seamless.
If you have already had an accident or have been sued for some reason, it is too late to try to transfer property to another. It will likely be ruled fraudulent, as will transfers made shortly before a bankruptcy filing.
If you suspect you might be sued (or might have to go bankrupt), especially for something you have no insurance for, for example, a business deal gone bad, consult a lawyer. You might still have time to transfer assets to either a relative, a trust or to another corporation.
Do not do this on your own. If done incorrectly, you might face tax consequences and/or criminal charges and still face the loss of your property.
And remember if you transfer your property to a relative, it can then be attacked by that relative’s creditors.
This article does not purport to offer legal advice. Always seek the advice of a well qualified attorney before taking any steps to shield your assets.
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By: Chris Cooper. For more personal finance articles, visit the Fnancial Planning Center.
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