It is nearly guaranteed you will see at least one billboard advertising legal services when you drive on a highway these days. Although accident and injury litigation are seemingly advertised the most, family and business conflict litigation are common as well. Due to the widespread use of “contingency fees”, individuals can sue one another without having to pay a dime in legal fees. Given the realities of this environment, the risk of loss that exists for individuals with significant assets is extremely high. The good news is that proper asset protection planning can help ensure that one’s assets are shielded from most legal claims.
Asset protection planning plays an extremely important part in helping to safeguard the assets you have accumulated over time. Unfortunately, we are all subject to the risk that someone could hold us liable for damages or claim ownership of our business or personal assets. This risk may be elevated when minor children or negligent employees are in the picture, or when dealing with divorce and estate matters.
Safeguards That Already Exist Through Specific Federal and State Laws
There are certain assets held within an estate that have safeguards around them through specific federal and state laws. For example, retirement savings accounts like Individual Retirement Arrangements (IRAs) and your employer’s 401(k)/403(b) account are protected by federal law and exempt from creditor compensation. Additionally, education savings accounts like 529s, as well as Social Security and Disability income are protected by federal law1. Even certain personal property such as household furniture, clothing, jewelry, or tools of a trade or business may be exempt from certain creditors.
Outside of items protected by federal law, it is also important to consider the state you reside in when evaluating asset protection, as state laws vary on the treatment of many items. For example, in certain states including Florida and Texas, your primary residence is protected from creditors in the case of bankruptcy or legal compensation, while Illinois only offers $30,000 in equity protection on a home. Creditor protections also vary by state regarding life insurance and annuity benefits2.
Asset Protection Planning
For assets that are not exempt from creditor protection through specific federal and state laws, there are a variety of safeguards and methods that can be put in place to help protect assets from a liability perspective. Below are three common methods.
Method 1: Insurance
Having adequate insurance coverage is critical in helping to protect assets within an estate. Basic coverage, including homeowners and auto insurance, is key for homeowners and drivers. Many auto insurance policies stop at a maximum of $300,000 per person or $500,000 per accident for liability protection. Many homeowners policies provide a limit of $300,0000 to $500,000 of liability protection. For those with larger estates, higher levels of income, or elevated risk (e.g., teenage drivers!), umbrella insurance provides extra liability protection on top of what is typically covered by homeowners and auto insurance policies. One can typically purchase increments of $1,000,000 in umbrella liability coverage for relatively modest annual premium costs.
Method 2: Trusts
Trusts can be used to help transfer assets out of the control of an individual and into the control of an independent Trustee of the trust. Having a properly drafted and planned trust allows an individual and their beneficiaries to maintain benefits from certain assets while isolating them from their direct control in the court’s eyes. This can provide needed protection to trust assets from claims of creditors, from family members through divorce or inheritance conflicts, or even from the beneficiaries themselves.
Method 3: Business or Entity Structures
Business or entity structuring can also be extremely important for asset protection. While many other considerations need to be evaluated, such as the tax consequences involved, the choice of entity used by a business can provide layers of legal protection to a business owner. For example, a business held through a sole proprietorship can subject that business owner’s personal assets to legal claims against the business. By instead utilizing a Limited Liability Company (LLC), that business owner may protect his or her personal assets, thereby limiting claims against the business to only the investment in the venture.
Considerations for Putting an Asset Protection Plan in Place
While it can be easy to discuss the importance of an asset protection plan, it sometimes is a challenge to actually take steps to put one in place before having the need. At Capstone, we stress the importance of putting an asset protection plan in place as early as possible. This is especially important for insurance planning, as coverage cannot be added after the occurrence of a claim. Also, courts often do not look favorably on last-minute endeavors to hide or move assets from ownership, or transfer assets after a debt or action has been established. Putting a plan in place before creditors come calling is integral to ensuring that assets are not lost through one frivolous lawsuit.
Assets protection planning can take many forms, and no one plan will work for all individuals or businesses. We consider this aspect of financial planning essential for all our clients and work closely with legal counsel to do as much as possible to ensure that their interests are protected. Please contact us if you would like to discuss these or other asset protection strategies further.
1Introduction to Asset Protection Planning; Michael A. Dalton & Thomas P. Langdon (2013)
2John Hancock Insurance, Creditor Protection and Life Insurance