Asset protection strategies can protect investors, professionals, business owners and those with significant assets from loss due to lawsuits, creditor claims and other risks. This often involves moving assets from the owner’s personal control into various legal entities in order to separate them from claims against the owner. While not necessarily simple, inexpensive or guaranteed to stop all claims, asset protection can be an important part of a financial plan. A financial advisor can help identify the assets and strategies appropriate to your individual situation.
What Is Asset Protection?
Asset protection consists of a set of legal techniques used to protect assets owned by individuals and businesses from claims arising from lawsuits, debts and taxes. For instance, these strategies can limit the amount a driver can lose if someone is injured in an automobile accident in which the driver is at fault.
Asset protection is most useful for people with significant assets. Occupation also plays a role here. Business owners, especially those with employees, are among those most likely to be subject to lawsuits for damages. Others at risk include real estate investors and highly paid professionals such as physicians, especially surgeons and obstetricians.
Asset protection can also shield assets from loss due to divorce. In that sense, anyone who is married may be a candidate for asset projection.
Asset protection is useful but has its limitations. It may involve significant cost and complexity and is a lower priority for people with few or no assets. And asset protection can’t shield against all taxes or various liens such as mechanics liens.
10 Asset Protection Strategies
Asset protection is highly individualized. Every asset protection plan is likely to be different in some aspects from all or most other asset protection plans. However, there is a finite set of tools that can be used. Here are 10 of the most important:
- Plan ahead. In most cases, when a lawsuit is filed or a tax bill is levied it is too late to try to protect assets. For best results, asset protection should be done before there is a need for it.
- A limited liability company (LLC) is one of the most common, simple and effective asset tools for protecting assets. Creating an LLC and transferring real estate, vehicles and other assets into the LLC can shield them from lawsuits or other claims against the owners of the LLC. LLCs can also manage taxes by avoiding double taxation on corporate profits.
- Asset protection trusts are irrevocable trusts that serve as repositories for assets removed from the control of the original owner. Assets transferred to an asset protection trust are often protected from creditor and lawsuit claims against an individual or business. International asset protection trusts based in offshore havens such as the Cook Islands and Nevis offer even more protection.
- Family limited partnerships let owners set themselves up as general partners of partnerships owning assets they wish to protect. Family members can be made limited partners. This is an effective way to manage estate taxes.
- Tenancy by the entirety is another way to simplify inheritance while maintaining shared ownership and survivorship benefits and also protecting assets from some creditors and lawsuits. It is a form of joint ownership by members of a married couple.
- Retirement funds offer significant tax advantages and are generally exempt from bankruptcy under federal law. They may also be safe from claims resulting from lawsuits and debts, although state laws on this vary.
- Insurance is a fundamental asset protection strategy. When liability insurance covers a claim by someone who gets injured at a residence or workplace, the insurance company pays it, not the policyholder. Life insurance can ensure that survivors are financially taken care of, and plans that build up cash value may also be protected from claims by creditors.
- Annuities can be shielded from creditors and other claims, but this varies by state. Some states provide no protection while others protect limited amounts and a few offer unlimited protection.
- Homesteads are often protected by state laws. The amount of the protection varies widely, with some states providing no protection and others shielding unlimited amounts of home equity from claims.
- Discretion is another fundamental tool for avoiding losses due to lawsuits. Individuals whose lifestyle makes them appear to have substantial assets are more likely to be targeted by torts and other claims.
Asset protection strategies can protect individuals and businesses from financial losses due to creditor claims, damages awarded in lawsuits and some taxes. Asset protection generally involves shifting assets from the ownership of an individual or business into a separate legal entity. Costs of asset protection can be significant and ongoing, and the techniques can’t always shield all assets from all claims, but the strategy is an important part of many financial plans.
Tips on Asset Protection
- A financial advisor can help you figure out what you need to protect and the best ways to do it. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Although generally asset protection has to be in place before you need it, you may be able to protect assets after a lawsuit is filed by transferring them to an international asset protection trust based in a jurisdiction such as the Cook Islands or Nevis. These jurisdictions do not recognize the authority of U.S. courts. However, domestic asset protection trusts generally must be set up and funded in advance of any need.
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