We all think we’re safe from a lawsuit. Everything you do is above board, and you’re an honest person who runs a good, clean business. There’s no way that you would find yourself in a situation where you’re being sued by a creditor. Sadly, even the best people run into trouble sometimes. In the US alone, there are an average of 40 million lawsuits filed every year. With such a high number, you have only luck to thank for the fact that you haven’t been caught up in a legal battle yet.
Having to face such awful numbers and the knowledge that one lawsuit could mean the end of everything you have built can be terrifying. However, there are ways to protect yourself in case you do find yourself on the receiving end of a creditor’s lawsuit. Setting up an asset protection plan is the best way you can ensure that your wealth stays with you no matter what happens.
What Is Asset Protection?
Asset protection is a series of strategies that you as a debtor will put in place to protect your wealth from being claimed by a creditor. Asset protection strategies are used by both private individuals and corporate entities to restrict creditors’ access to certain valued assets while remaining within the parameters of debtor-creditor law. If you have a considerable amount of wealth, you should contact a business planning attorney and start planning some form of asset protection. When you’re already sitting with a lawsuit in front of you, it’ll be too late to think about asset protection so the sooner you start, the better.
You can decide how simple or complicated you’d like to make your strategy; it depends on your individual needs. The amount you can expect to pay for your asset protection would be based on your needs too. Do extensive research on your options and then sit down with your business planning attorney so the two of you can formulate a protection strategy that works best for you.
Asset Protection Strategies
To create an efficient asset or wealth protection strategy without breaking the law, one must first evaluate the possible creditor’s scope. In essence, the owner of the asset cannot conceal funds, but they can be moved about to make it appear as though they do not belong to them. Understanding risk variables is also crucial when making plans to protect assets. Liability is higher for assets like stocks, rental houses, cars, and manufacturing equipment. Savings accounts, equities, and bonds, on the other hand, do not involve the same level of risk.
Depending on your assets and who the creditor is, there are various protection strategies that can be used.
Limited Liability Companies (LLCs)
One of the most common laws when it comes to asset protection is “own nothing but retain control of everything.” The most successful way to do this is by transferring your assets to an LLC.
Limited liability has always been a favorite method to protect your assets. It means that the company is separate from the owner. According to Investment News, one of the reasons this technique safeguards assets is that the creditor is frequently restricted to a charge order against the membership interest. Essentially, this means that even if someone is the sole owner of a company, they cannot be held liable for the company’s debt. Alternatively, if the debt belongs to the company, it could potentially lose some of its assets.
Family Limited Partnerships (FLPs)
Due to their status as a business and the fact that they are held by family members instead of a single person, FLPs offer wealth protection. Creditors can’t seize the assets of an FLP partner since there are several owners of the business enterprise.
It is important to note that many states view FLPs and LLCs as unethical business practices and may rule against you, allowing creditors to still seize your protected assets.
Domestic Asset Protection Trust
This is considered the most cost-effective way to protect your assets. This form of trust enables you to shield your acquired money from potential creditors so that you can leave your assets to your loved ones after you pass away. You might not require this kind of trust if you do not anticipate any future risk from creditors. These trusts are established as irrevocable trusts and are permitted in 17 states. Typically, once an irrevocable trust has been established, it cannot be modified or repealed.
Cash, stock, LLCs, commercial property, and real estate are all acceptable asset types for domestic asset protection trusts. Remember that the trust can be required to pay taxes, alimony, and child support.
Asset Protection Trusts (APT)
If you have a certain level of wealth, you will be able to open an APT or a trust bank as a way to protect your assets. When you do this, you will become a beneficiary of your trust. Doing this will give you full control over your assets, but you won’t have the power to revoke the trust. Since the assets technically don’t belong to you, creditors won’t be able to claim them.
It’s worth noting that even though you don’t own your assets and they are protected, you won’t be able to access them either. However, you will receive certain tax benefits from opening an APT.
Offshore trusts aren’t as common as other asset protection strategies because only a select few people have the ability to do this. This is a way for debtors to own property or open savings accounts in a country outside of their own. Offshore trusts can also help debtors avoid paying certain taxes. A Reno, NV tax planning attorney will be able to help you determine what taxes you can legally avoid through your offshore trust.
An offshore trust enables clients to maintain beneficial ownership of their assets, so they can continue to use and enjoy their property. However, the trust’s management is located outside of the US, protecting clients from having their assets forfeited in response to US court judgments. However, just because assets are held in a foreign country doesn’t mean the debtor is free from the laws of their home country. In some instances, the debtor could be issued a repatriation order, forcing them to return their assets to their native country or they will need to pay a hefty fine.
Transfer of Property
One way to shield owners’ assets from creditors’ claims is by passing them to their friends or family. By doing this, the assets won’t have a direct connection to the owner. While this method can be beneficial, it also comes with a number of risks. For one, if you pass your assets onto someone who you can’t fully trust, they may refuse to give them back to you, which results in your losing your assets anyway.
This method of asset protection makes it difficult for creditors to identify the rightful owner of the property and seize it. This is because even though the heir takes over ownership, the original owner continues to have access to the property.
Transfer of property is heavily regulated since many states look at it as fraud, so you should be wary when using this strategy. You may want to chat with an attorney who specializes in estate planning in Reno, NV to help you work around any fraud claims.
Certain insurance policies will protect your assets in the event that you are facing a lawsuit from a creditor. There are two main policies that will protect your funds and assets:
- Umbrella policy: Your existing liability coverage from your home policy, vehicle policy, or other forms of policy is supplemented with an umbrella policy. Let’s imagine a car accident results in a $1 million court judgment against you. Liability restrictions that set a payment cap are part of your auto insurance policy. For instance, you might set a cap of $500,000 for bodily injury claims against third parties and $200,000 for property claims. The remaining $300,000 might be covered by an umbrella policy if those restrictions have been reached.
- Malpractice policy: If you’re a doctor or any other type of healthcare professional and you happen to face a malpractice lawsuit, a malpractice policy will protect some of your assets in case you lose.
The importance of asset protection for practically everyone at every financial level, from the millionaire running a hedge fund to the janitor working in a hedge fund office, cannot be emphasized enough. Too many people are preoccupied with accumulating riches and don’t consider protecting them until it is too late. Asset protection is the legal process of shifting your personal and company assets so that they are out of the reach of potential threats, creditors, and obligations in the future, while still allowing you to benefit from those assets.
Although insurance offers some asset protection, it cannot replace a well-thought-out asset protection strategy that guards all of your assets against monetary risks. Utilizing corporate companies to secure your real estate, property, and liquid assets such as money, as well as assets like machinery, equipment inventories, intellectual property, automobiles, yachts, and planes, is part of comprehensive asset protection.
Don’t wait until you’re facing a lawsuit head-on to start thinking about protecting your assets. Get in touch with your business planning attorney today and protect yourself and your assets.