People work for years to build up their assets, but the hard truth is a single lawsuit, mistake, or catastrophe can wipe them out. An asset protection plan is a way to help protect those assets when the unexpected happens.
An asset protection plan is a framework that combines multiple forms of asset protection as appropriate for an individual’s or family’s risk exposure. You need an asset protection plan if you have or ever intend to own assets. For many people, this plan will look relatively simple and may consist entirely of basic insurance policies such as car and health insurance.
However, a more complicated asset protection plan may be necessary for individuals or families with a bit more wealth or complexity in their personal and business lives.
Forms of Asset Protection
There are dozens of forms of asset protection, ranging from simple insurance policies to complex estate planning tools. Here are some examples of various forms of asset protection that, when combined appropriately, can work together to form a unified asset protection plan.
Personal insurance policies such as car or health insurance form the basis of most people’s asset protection plans. These protect your wealth in case the unexpected happens so that a car accident or chronic illness won’t bankrupt you.
Umbrella insurance is a kind of insurance that can provide another layer of protection beyond what your other policies will cover.
If you own a business, you probably need special kinds of insurance to offer you some protection if you are sued by a client, customer, employee, or other party affected by your work.
For example, as a CPA, I have an errors and omissions insurance policy for my firm that protects it from lawsuits brought by clients — or former clients — claiming that my staff or I made some mistake in providing our services that resulted in damages to the other party.
Other kinds of business insurance include general liability insurance, malpractice insurance, workers’ compensation insurance, and cybersecurity insurance.
If you run your business as a sole proprietorship — meaning that you don’t have a separate business entity set up — then there is no legal (or tax) distinction between yourself and your business.
If you are sued for a personal matter, both your personal and business assets are fair game to that creditor. If you are sued for a business matter, both your personal and business assets are a target to that creditor as well.
While you could easily form an LLC or corporation yourself directly with your state’s secretary of state, a lawyer may be particularly well-suited to advise you of any pitfalls or mistakes you could make in setting up, administering, and operating your business entity — mistakes that could expose you to unnecessary legal risk in the event of a lawsuit.
So if you have a business and have not done so already, it may be worthwhile to discuss running your business as a limited liability company (LLC) or corporation with an attorney.
Creditor-Protected Retirement Accounts
Let’s say you’re successfully sued, and a creditor now has a judgment against you.
Investments you own within a taxable brokerage account are generally fair game to be garnished by a creditor.
However, some retirement accounts are protected from creditors. ERISA-qualified plans such as 401(k) plans and 403(b) plans, for example, are universally untouchable from creditors, both in and out of bankruptcy, under federal law.
On the other hand, traditional IRAs and Roth IRAs do not have any federal protections from creditors outside bankruptcy but have some limited protections in bankruptcy.
That said, the laws in your state may provide additional protections from non-ERISA-qualified retirement accounts.
Research these laws and consider prioritizing contributions to creditor-protected retirement accounts.
The previously-listed forms of asset protection protect your assets while you are alive, but protecting your assets after you pass away is just as important.
That’s where a living trust can come in.
A living trust is a trust that you create during your lifetime. In the trust document, you describe the property that will be held in the trust and what you would like to happen to this property after you pass away. It’s important that this property is actually transferred to the trust as well.
While you are living, you can be the trustee — the controller of the trust — or you can name someone else as the trustee.
After you pass away, you obviously can’t serve as the trustee of your trust, so the trustee that you appoint to manage the trust after your death ensures that the assets in the trust are distributed or otherwise managed appropriately according to your wishes as expressed in the trust document.
Note that living trusts are not trusts to avoid or mitigate estate taxes; if you think you will have a taxable estate after you die, you may require more complex trusts as part of your estate plan.
How to Make an Asset Protection Plan
Depending on the complexity of your financial situation, you may be able to make your own asset protection plan. The steps below will show you how.
Of course, licensed professionals such as attorneys can help you through this process, so don’t be afraid to seek qualified counsel to assist you in putting together your asset protection plan.
Step 1: Identify Risk Exposures
Think through every major component of your life and business and consider what could go wrong in each of these areas that could jeopardize your wealth.
For example, let’s say you own a rental property. Here is just a partial list of things that could go wrong with your rental property:
- A tenant — or tenant’s guest — is injured on your property and sues you.
- A fire burns down your property.
- A prospective tenant sues you for housing discrimination.
- A tenant stops paying you rent but continues to live in the property.
Step 2: Determine Asset Protection Options
Now that you have a list of things that could go wrong and expose your assets to attack, consider what asset protection strategies you could utilize to eliminate or mitigate your risks.
This could be a combination of insurance products, business entities, legal documents, and other strategies. Again, don’t be afraid to seek qualified counsel to help you.
Step 3: Put the Plan in Place, Piece by Piece
Finally, once you know what asset protection options are appropriate for your various risk exposures, you need to put your plan in place.
It’s important that you understand how each piece fits with the others, and don’t forget to consider the tax ramifications of any moves you make!
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.