Asset protection refers to legal processes used to protect assets against lawsuits and creditor seizures. While many methods exist, some of the more common include setting up a limited partnership, asset protection trust, or limited liability corporation.
Many people believe asset protection is reserved for the wealthy, but this isn't the case. One of the greatest threats toU.S.residents is lawsuits. Believe it or not, around 50,000 lawsuits are filed every day. People often lose everything they own because they didn't engage in proper planning.
Personal lawsuits can quickly bankrupt a person's life savings and leave them swimming in debt for years to come. Professional malpractice and employment lawsuits can destroy a company that's been around for decades.
Engaging in asset protection planning can limit the risk of exposure by transferring ownership of assets into a form of ownership that is protected against creditors. Protection strategies need to be in place long before there is trouble. Otherwise, planning could be perceived as being a fraudulent transfer and will cause more harm than good.
Basic asset protection can be achieved by carrying adequate homeowner, renter, and liability insurance. In addition to obtaining replacement costs for possessions that are damaged or stolen, it's vital to carry liability insurance to cover medical costs of any person injured at your residence.
A lot of people reduce insurance coverage to lower premium amounts, but this can be a tragic mistake if an accident leads to expensive medical procedures or death. A wrongful death lawsuit can quickly deplete savings and result in forceful liquidation of assets.
Business owners and professionals need to engage in asset protection that covers both personal and business assets. Adding a blanket umbrella liability policy is one of the most affordable ways to protect business assets.
With that said, people cannot count on insurance coverage alone. Dependent on the amount of wealth and assets other strategies need to be combined to obtain the highest level of protection. One popular approach for business owners is setting up limited partnerships.
Limited partnerships are one of the more powerful asset protection and estate planning methods. However, it is vital to work with an experienced estate attorney to ensure the partnership is funded and maintained.
The types of assets placed into limited partnerships cannot be used for personal reasons. For example, personal expenses such as college tuition, healthcare, or clothing cannot be paid through the partnership. Additionally, any real estate used as a family residence or vacation home cannot be transferred to limited partnerships.
Another common approach is setting up a limited liability company. LLCs offer protection to business owners and provide income tax savings. Any liability arising from lawsuits is limited to the assets of the entity. Essentially, LLCs provide the same level of asset protection offered to corporations, but with less paperwork and aggravation.
Asset protection trusts are used to prevent creditors or litigants from attaching to assets. The type of trust and location varies dependent on the level of owned property. Wealthy people often setup offshore accounts to make certain no one can touch their assets. Others setup trusts in a different state that offers higher levels of protection or additional tax savings.
Anyone that owns valuable property should spend time learning about asset protection strategies. It's recommended to work with specialists to learn about available methods and tax benefits.
At Craton and Switzer we excel at providing a variety of asset protection planning strategies. If you're concerned about safeguarding your property against lawsuits and creditors we encourage you to contact us to arrange a consultation. We also invite you to learn more about ways to protect assets at our estate planning and asset protection blog.