Society today is litigious. Even the smallest mistake or oversight can trigger a lawsuit, whether you run a business, own real estate, or simply drive a car. One poor investment or business relationship can also result in creditors knocking at your door. Failing to have adequate insurance coverage or an insurance denial letter may also threaten literally everything you own. Planning now can avoid losing some of the most important things in your life, including your home and other assets.
Asset protection planning is for more than just the wealthy. Even those with modest assets or income can benefit from thinking ahead and making small adjustments to protect your assets. Make 2017 the year that you finally take action to protect yourself and your family.
Keep in mind that, while you may have insurance, it is common for litigants to sue both the insurance company and you as an individual. This is especially true if you are a high-wealth individual. Because insurance companies have mastered the art creating loopholes and denying claims, it has become almost essential to have both adequate insurance and proper legal structures to protect precious possessions and resources.
Waiting until you are in litigation or litigation is threaten to create legal structures could constitute fraud, but planning before potential litigants come sniffing around is not only completely legal, it is practical and prudent. Consider the following asset protection strategies to shield your wealth in 2017.
Planning now can help you protect your assets for years to come.
Developing a Business Entity for Asset Protection
Establishing a business entity may be a great way to protect your assets and create some tax advantages. A limited partnership or Limited Liability Company (LLC) are often considered some of the best lawsuit protection devices available. Unlike a corporation, a limited partnership does not technically have to have a business. Instead, the partnership can simply hold assets without having a “true” business purpose; you can set up a limited partnership simply to provide lawsuit protection or to help with estate planning. Your reported business purpose could simply be to “hold assets”. As long as the limited partnership has a legal purpose, then it can be created and function legally.
To make a limited partnership an even stronger asset protection tool and include significant tax advantages, you can include a corporation as a “general partner.” Corporations are also useful asset protection strategies, but you have to have some business activities to create a corporation. Individuals who are not self-employed often cannot form a corporation based on their personal lives. However, in many states, you can create a corporation that is in the “business” of running all of your limited partnerships without actually running or owning a separate business venture. The reported business purpose for this Corporation might be simply to “manage assets”.
That means that you can create a corporation even if you work full time for someone else or even if you are retired. This “double protection” can be an extremely valuable tool in terms of an asset protection strategy, and there is often little cost or maintenance involved. You can find out more about using limited partnerships by viewing this video from our Premium Online Video Library.
Incorporating your self-employment business can also be very helpful for lawsuit protection. Generally, you should incorporate if you have one or more employees or two or more partners. Creating a corporation can protect your personal assets should something go wrong within the business.
Separating Assets for Maximum Asset Protection
Dividing your assets into several limited partnerships can be a good way to protect your resources. If you have a property that can be dangerous or is considered “high risk,” you should, ideally, put each of these assets in their own LLCs or limited partnership so that they do not affect your other, safer assets.
Safe assets can be in their own limited partnership while risky assets are generally divided out. Safe assets are those that have no (or virtually no) risk of causing a lawsuit. Examples of safe assets may include:
- Savings accounts
- Certificates of Deposit
- Stocks and bonds
- Artwork & Collectibles
- Brokerage accounts
A personal residence may also be considered a safe asset, but there is still a risk of a lawsuit even with a private home. For example, a visitor may slip and fall on your porch or hurt themselves on your backyard playground equipment or trampoline.
Unsafe or risky assets are those that are more likely to cause lawsuits. For example, an airplane or rental property may be riskier assets that could trigger a legal claim. Having those assets in their own LLC or limited partnership may be a good way to protect your other property if a lawsuit springs from either of those assets because then the person claiming the lawsuit often only has access to those resources within the partnership.
While you likely do not need a limited partnership or LLC for every asset that you own, it is important to assess the risk and value of your assets to determine how many entities will work best for your unique financial situation.
Asset Protection Through Irrevocable Trusts
Trusts are often used for more effective estate planning, but they can also be valuable tools for asset protection as well. Trusts by themselves typically do not provide strong asset protection except in cases when a trust is set up to be irrevocable. Just be aware that an irrevocable trust is just that, irrevocable and once completed cannot typically be undone. While this is good for protection purposes it is something that should be used with great care along with advice from a pro. Irrevocable trusts, which are trusts that cannot be canceled or closed by the creator, can shield assets from creditors. Modification is generally not possible with irrevocable trusts. The legal theory is that if you do not have access to the assets, your judgment creditors will also not have access to those assets.
Irrevocable trusts work well for asset protection because, technically speaking, the grantor (creator) no longer owns the property in the trust. Instead, the trust itself actually owns and controls the resources within the trust. Even if the grantor is a beneficiary of a trust, a creditor cannot reach the total trust assets.
In some states, the trust may be legally required to have a “spendthrift clause” to function as an asset protection device. A spendthrift clause essentially says that no other person apart from the beneficiary can transfer, use, sell, give away, or encumber a distribution of either the principal or income from a trust. Failure to have this type of clause could result in creditors being able to take whatever you receive from the trust as income or property.
It is important that the trust is irrevocable if you want to use it as part of your asset protection strategy. In a revocable trust, the grantor retains control, ownership, and the power to disable the trust. A revocable living trust does not transfer assets in the same way that an irrevocable trust does, which means that a creditor can reach all of the assets in the trust.
Consider Implementing a Land Trust
A land trust is not statutorily allowed in every state, but most states will recognize them. Land trusts allow great privacy because it is difficult to determine who owns a particular piece of land that is in a land trust. They will also rarely show up on a personal asset search, which protects the asset even further.
Keep in mind, however, that real estate often has special protections that the average asset does not have. That makes land trusts less effective as an asset protection tool compared to other avenues.
In addition, if you are compelled under oath to answer questions in court about your assets, you may find the land trust to be a weak protection method. However, if someone is considering suing you, and they are unable to find that you own real estate, they may be less motivated to start the suit because they may not think you have any substantial assets. Land trusts can also be a useful real estate investment tool as well.
Effective asset protection means keeping your property and resources safe from creditors.
Other Trust Options to Protect Assets
Trusts are extremely versatile. They can protect specific assets or protect particular types of people, such as minors or those with special needs. From an asset protection standpoint, however, certain trusts are more effective than others. Consider the following trust options.
- Offshore Asset Protection Trust. While not for everyone, this type of trust is often regarded as one of the strongest asset protection trusts available. It is established in a non-domestic jurisdiction, which prevents seizure by most creditors. This is in opposition to the domestic asset protection trust, which is often thought of as one of the worst asset protection tools available, contrary to its name.
- Totten Trust. This simple trust allows an individual to place funds into a bank account that is held until death. At that time, the funds go to a designated person. This trust helps protect funds from creditors and allows the grantor to avoid the probate process as well.
- IRA Trust. This type of trusts functions in much the same way as a Totten Trust but involves a retirement account instead of a bank account. The beneficiary must be named as someone else, often a minor or special needs child.
Generally speaking, if the grantor permanently gives away power to control, distribute, or use the assets within a trust and the assets actually change title of ownership, then the trust is more likely to be protected from creditors. This loss of power or control can be concerning for some grantors, but a creatively developed trust can still allow the grantor to benefit from the assets even though he or she may not own them outright.
Making Changes in 2017
If you have been considering making changes to protect your assets, 2017 is your year to make some moves. Planning now, while the waters are calm, can help you deal with storms in the future. It can also help you avoid potential legal problems if you start trying to move assets too late. You must act well in advance of trouble to have an effective asset protection strategy.
Creating your own asset protection plan does not have to be rocket science, and Protect Wealth Academy can help. Sign up for a free membership.