Asset protection is just what the name suggests. It’s about setting up your affairs and your assets – bank accounts, mutual funds, stocks, residence, rental properties, vacation homes, etc., — in a way that safeguards them from risks. In a perfect world, there would be no need for asset protection planning, but in today’s victim-oriented society, where people seem to sue one another over just about anything, you are vulnerable every time you drive your car, hire an employee, perform a service, or even have a guest at your home or business. Once reserved for those in certain professions which are subject to an unusually high number of lawsuits – physicians, attorneys, real estate developers, and the like – asset protection is important for everyone.
When you think about asset protection, ask yourself some questions:
- Do you have adequate insurance? Proper insurance on your home, auto and business is the first line of defense.
- If you own multiple properties, are they all titled in your own name? If so, your properties are exposed in the event a lawsuit.
- If you own a business, do you keep your business assets segregated from your personal assets? Do you maintain the required corporate documents for your business? This is called corporate housekeeping and improper corporate housekeeping is the number one reason personal assets are awarded in lawsuits, i.e. paying for your dry cleaning with a personal check. That is all it takes.
- Properly running your business is critical to protecting both your business and personal assets.
- Finally, do you have an estate plan which will shield your assets upon your death or incapacity?
These are just some of the questions to consider when thinking about asset protection. The biggest issue with asset protection is you must think about it before you need it. Once you are sued it is too late. The Fraudulent Conveyance statute says you cannot move assets if you think or know you might be sued currently or in the future. DBL gets a lot of phone calls after the car accident or once someone is served with the lawsuit. Of course, our firm can certainly help with the litigation, but under these circumstances, we cannot protect your assets. If everything is in your name it is all fair game to the potential creditor. In a perfect world, what should people do?
Business in Entities
If you run your own company put it in an entity. One of our favorites is an LLC because of its versatility in how it is taxed. When you first open one it can be a single member LLC which is disregarded for tax purposes. Meaning it does not need to file its own tax return. Once your business is doing well you can choose to tax it as an s-corp or a c-corp.
LLCs in the state where the property is located. If you have multiple properties each property should be in its own LLC. If an LLC is sued whatever is in that LLC is subject to that lawsuit. Therefore, if you put multiple properties in the same LLC you are putting all of those properties at risk. When an LLC is sued everything the LLC owns is at risk. That is why we recommend putting each property in its own LLC.
Large Amount of Assets in Stock Account or Bank Account
It is very easy for a creditor to take money out of an after-tax investment account or a bank account. The reason this can happen is there are no statutory protections for assets of this nature. There are statutory protections for money in 401Ks, IRAs and Life Insurance. Therefore, the best way to protect that money is to put it in an LLC in a charging order only jurisdiction. A charging order is a lien. If you set up an LLC in a “charging order only” jurisdiction, if a creditor gets a judgment against you, then the only way he/she can get money from the LLC is if you take it out. He or she cannot force you to take it out as long as you have a properly worded operating agreement.
Asset Protection Trust
If you have a lot of assets you want to protect the best way to do so is with an asset protection trust in the right jurisdiction. Generally, an asset protection trust is set up with LLCs in the same jurisdiction. Asset protection trusts are self-settled trusts that offer asset protection to the Grantor. In plain English, it means the asset protection trust offers asset protection to the assets of the person who sets it up. Only 16 states allow for some sort of asset protection trust.
Not every state statute is created equal. It is important to choose the jurisdiction that is right for you. The knowledgeable attorney at DBL can help you choose the right jurisdiction. Contact DBL today to help you with any of the following:
- Insurance policy reviews
- Business entity formation and corporate documentation
- Segregation of assets
- Powers of Attorney
- Domestic trusts
- Foreign trusts
- Equity stripping devices
- Asset isolation strategies
- Coordinated estate planning