Through hard work, sacrifice, and dedication, you accumulated the assets in your nest egg. Your nest egg will empower you to retire comfortably, cover your expenses in your later years, and accomplish other long-term goals – like paying for your children’s education. If your nest egg is managed well, you’ll meet your goals. But if substantial portions are taken from your nest egg, you won’t retire with dignity, you’ll run out of funds years before you die, and you won’t be able to provide for anyone. Asset protection protects your nest egg. More specifically, it protects your nest egg from lawsuits.
Asset protection is NOT about defrauding people, avoiding tax obligations, or using illegal means to horde ill-gotten gains!
Who Needs Asset Protection?
Who needs asset protection? People in certain professions are highly likely to be sued at some point in their career. The top ten lawsuit targets by profession include obstetrician gynecologists, nurses, real estate agents, accountants, and lawyers. Outside these professions, many other occupations carry a high risk of lawsuits. For example, employers must navigate a landmine of local, state, and federal labor laws to avoid costly lawsuits. The many laws and regulations against landlords make them easy targets for suits, especially in certain states. If you’re married or have minor children, the statistical likelihood of being sued by your intimate partner in a family law court is quite high. Furthermore, you’re likely to be sued in some locations more than in others. For example, Florida often tops the list of states with the highest rates of lawsuits per capita. Similarly, California, Illinois, and Louisiana are frequently cited as having the least fair and reasonable litigation environments.
Avoidance of Lawsuits
Now let’s turn to asset protection strategies. There are two parts of asset protection. The first is to avoid lawsuits in the first place. The second is to defend your assets by strategically allocating them and using layers of tools to protect them from judgment creditors.
You can take steps to avoid lawsuits or to obtain more favorable results if they happen. Proactively consult experts on your activities or types of business to be sure you comply with all applicable laws and regulations. For example, consult an employment attorney before you hire an employee. Carefully avoid associating with the wrong people in business and in intimate relationships. You cannot do enough investigating and vetting of potential partners. If you’re planning to marry, obtain a premarital agreement. Keep your assets quiet. If you drive an expensive vehicle, live in the biggest house in town, and have valuable assets in your name, you’re a lawsuit target. This is where anonymity plays a role in asset protection. If a public records search quickly reveals that you own real estate, successful businesses, or other valuable property, you’re an attractive lawsuit target. If an ornery tenant knows you own his rental, you’re a lawsuit target. Through a combination of LLCs, trusts, and prudence, you can and should keep your ownership of valuable property off the public record.
Basic Layers of Asset Defense
Let’s consider the basic layers of asset protection. Insurance policies provide an essential first line of defense. Carry as much insurance as possible, along with an umbrella policy. Remember, however, that insurance companies won’t pay if they can avoid it. Be sure to check and double-check the exclusions, limits, persons and entities insured, and the exact requirements for making claims. Another great tool for protecting your assets is by stripping them of equity. A property that’s worth little after the liens are paid isn’t worth a creditor’s time to pursue. This strategy can be used with real property, vehicles, boats, planes, business equipment, and anything else that might be purchased with financing. Limited Liability Companies or LLCs provide a basic layer of protection for investment assets. This protection is greater in some states than in others.
Advanced Layers of Asset Defense
More advanced strategies for asset protection include Domestic Asset Protection Trusts or DAPTs, which are available in about 17 states. If your state doesn’t allow DAPTs, you might be able to establish a DAPT in another state. Or your state may have other options. California, for example, offers a Private Retirement Trust, which provides some of the best protection available in California for high-income earners who intend to retire in the state. Foreign or Offshore Asset Protection Trusts located in jurisdictions like the Cook Islands, the Isle of Man, Belize and Nevis, provide the most powerful protection for your assets. Although these advanced strategies can provide powerful protection, they also have some disadvantages. They are costly to establish and maintain. Also, they require relinquishing control of assets to some degree.
No Guarantees!
Every layer of asset protection can help you avoid lawsuits or obtain more favorable results if you’re sued. However, no asset protection structure can be guaranteed. Determined creditors and judges who hate the removal of assets beyond their reach may work to unravel any asset protection structure.
When to Implement Asset Protection
When should you take steps to protect your assets? Now. You must be proactive to protect your assets. After you’re sued, it’s generally too late. Why? Because almost every state has a version of a fraudulent transfer or voidable transaction law. Under fraudulent transfer or voidable transaction laws, a court can void a transfer of assets you make after you know or reasonably should know facts giving rise to a potential lawsuit. Several states make fraudulent transfers a criminal offense. Unfortunately, many people seek asset protection when it’s too late. Although you may be able to do some things to protect your assets after you’re sued, it will be too late to implement most of the basic layers and all of the advanced layers of asset protection.