A common misconception is that only wealthy families and people in high-risk professions need an asset protection plan. However, the reality is, anyone can be sued. A car accident, foreclosure, unpaid medical bills, or an injured tenant can result in a monetary judgment that will decimate your finances.
What Exactly Is Asset Protection Planning?
Asset protection planning is the use of legal structures and strategies to safeguard property that creditors might snatch away, by completely, or, at the very least, partially, protecting it from the creditor’s reach.
Unfortunately, this type of planning cannot be done as a quick fix for your existing legal problems. In fact, if you transfer assets to shield them from existing creditors, it could be considered a fraudulent transfer, resulting in legal penalties. Instead, you must put an asset protection plan in place before a lawsuit is imminent, let alone filed at the courthouse. So, now is the time to consider implementing one or more of these tips.
Below are three tips that you can use right now to protect your assets from creditors, predators, and lawsuits.
Asset Protection Tip #1 – Load Up on Liability Insurance
The first line of defense is insurance, including homeowner’s, automobile, business, professional, malpractice, long-term care, and umbrella policies. Liability insurance not only provides a means to pay money damages, it often includes payment of all, or part of the legal fees associated with a lawsuit. If you do not have an umbrella policy, then now is the time to get one, since it is relatively inexpensive compared with more advanced ways to protect your assets. You should also check all of your current insurance policies to determine if your policy limits are in line with your net worth and make adjustments as appropriate. You should then review all of your policies on an annual basis to confirm that the coverage is still adequate, and the benefits have not been stripped to maintain the same premiums.
Asset Protection Tip #2 – Maximize Contributions to Your 401(k) or IRA
Under federal law, tax-favored retirement accounts, including 401(k)s and IRAs (but excluding inherited IRAs), are protected from creditors in bankruptcy (with certain limitations). Therefore, maximizing contributions to your company’s 401(k) plan is not only a smart way to increase your retirement savings, but it will also safeguard the investments from creditors, predators, and lawsuits. On the other hand, if your company does not offer a 401(k) plan, then start investing in an IRA for the same reasons.
Asset Protection Tip #3 – Move Rental or Investment Real Estate into an LLC
Your primary residence is your homestead and, in Florida, putting as much money into your homestead as possible is good asset protection. But what about if you own investment properties that are not protected by homestead law? If you are a landlord or a real estate flipper or investor, then aside from having good liability insurance, moving each of your real estate properties into a separate multi-member limited liability company (LLC) can be a great way to help protect your assets from creditors, predators, and lawsuits.
There are two types of liability that you should be concerned about with rental or investment property: (1) inside liability (where the rental or investment property is the source of the liability, like a slip and fall on the property, and the creditor wants to seize an LLC member’s personal assets) and (2) outside liability (where the creditor of an LLC owner wants to seize LLC assets to satisfy the member’s debt).
An LLC will limit your inside liability related to the real estate, such as a slip and fall accident or a fire caused by faulty wiring, to the value of the property. In addition, in many states, the outside creditor of the member of an LLC cannot get their hands on the member’s ownership interest in the company (in some states, including Florida, this will only work for multi-member LLCs, while in others, it will also work for a single-member LLC). At a maximum, the outside creditor would only be entitled to the member’s share of the assets once they are distributed, and would have no voting or management rights, so the creditor would be unable to “force” a distribution. This type of outside creditor protection is often referred to as “charging order” protection. With this type of protection, a creditor will be forced to look to your liability insurance and any unprotected assets to collect on their claim or wait for distributions. Many creditors will be more willing to settle for less than 100% of a judgment amount if they have these types of legal hurdles in the way of collection.
If you are interested in asset protection planning for your investment real estate using LLCs, then you will need to work with an attorney who understands the LLC laws of the state where your property is located to ensure that your LLC will protect you from both inside and outside liability.
You have worked hard to accumulate the assets you have. Don’t let a lawsuit take it all away from you. Give me a call today at (813) 538-2853 so I can help you evaluate your situation and craft a customized asset protection plan that best serves you and your family.