Strategies For Asset Protection

Asset protection strategies are important to implement, no matter how much money you’ve saved up or how much real estate you own. That’s because making a point to invest in asset protection trusts, tactics and planning may ultimately save you big in the end should you encounter financial hardship or unexpected legal concerns.

From real estate to annuities to business assets, thinking about estate planning and defending your holdings against creditor claims is just good business. After all, the best defense is a good offense. Let’s take a closer look at what asset protection is, how it works and what you need to know about trusts, LLCs and other protective vehicles and solutions.

What Is Asset Protection?

Asset protection is a broad term, but it generally speaks to tools, tactics and strategies such as trusts and LLCs that you might use to defend assets from creditors, lawsuits, divorces and other challenging scenarios. Any given asset protection plan will be tailored to an individual’s financial situation and living circumstances.

That said, a variety of common vehicles such as prenuptial agreements, LLCs and asset protection trusts are often utilized to discourage litigation. These solutions can also help you get access to necessary funds before, during and after any legal proceedings that you might encounter.

Why Is Asset Protection Important?

Embracing asset protection is beneficial because it can help you maintain ownership of funds, real estate property and other valuables that you’ve amassed over the course of your life and career.

Under a variety of general circumstances, assets that are held in an individual’s name can be subject to legal seizure. That means ownership claims can be forfeited, wages may be garnished and judgments can be utilized to effect certain property and financial transfers that you may not personally welcome.

But when asset protection plans and strategies are employed, you may be able to legally shield your assets from being taken from you. For example, should you have a business that goes bankrupt, debt collectors may be limited solely to the ability to seize only bank accounts, equipment, property and holdings that are held in the company’s name. Similarly, if you have an asset protection trust in place, your owned items effectively get transferred to a separate legal entity that may shield them from creditors or former spouses in the event that you find yourself going through a divorce.

What Are Some Methods Of Asset Protection?

A variety of legal methodologies exist that can help you safeguard and protect your assets, depending on your individual financial circumstances and everyday operating situation.

LLCs

A limited liability company is a type of corporate entity that effectively protects you as an owner from retaining liability for company debts. In other words, if your firm borrows money it can’t repay, is unable to sustain profitability or inadvertently goes bankrupt, creditors generally can’t go after your personal holdings as recompense.

That said, registering to open an LLC is often a good idea as a form of asset protection not just for businesses of all sizes, but for freelancers and independent contractors as well. However, be advised that purchasing assets such as equipment, property and vehicles in the business’s name means that they may be subject to seizure.

In effect, an LLC helps keep company assets separate from personal assets so it’s clear what creditors can and can’t go after in the event of a default or judgment.

Asset Protection Trusts

An asset protection trust is a legal entity that can hold and safeguard your individual assets as a way to shield them from legal claims and creditors. As one of the strongest forms of asset protections available, asset protection trusts can help you defend against judgments – and even discourage or stave off lawsuits before they’re filed.

Under the terms of this kind of trust, which can be domestic or offshore in nature, you can structure your holdings to your benefit and keep creditors from touching contained assets. Depending on your level of legal exposure, you may wish to transfer over a variety of different assets such as real estate, cash accounts and various investments or securities into the trust for safeguarding.

Insurance

Several kinds of insurance policies can also offer you a form of asset protection. There are a number of options that insurers may provide you, such as the ones below.

• Umbrella – Umbrella insurance is personal liability insurance that offers protection if you’re hit with a legal claim for more than your renters insurance, homeowners insurance or auto insurance is able to cover. It may also offer added financial coverage for any liability that you face relating to legal concerns such as slander or libel. Taking out an umbrella policy essentially presents a way to supplement an existing insurance policy in the event of a large payout that exceeds the maximum cap of your current insurance policy.
• Malpractice – Malpractice insurance is meant to help protect assets of medical and health care workers. It essentially covers doctors, dentists and others who work in the field of medicine against legal claims relating to medical negligence or injury that are filed by or on behalf of patients.
• Life Insurance – Life insurance policies provide a payout to your surviving heirs in the event of your passing. They can provide a form of asset protection as well because life insurance policies and proceeds are generally exempt from seizure by outstanding creditors.

Prenuptial Agreements

A prenuptial agreement (usually referred to as a “prenup”) is an agreement entered into by a couple prior to marriage. It specifies who will retain ownership of certain assets in the event of a divorce.

But a prenup can do more than just help you keep money or property. It can also help you safeguard inheritance rights for your children and protect one spouse from another’s incurred debt.

Because of this, prenuptial agreements are a commonly utilized and important tool in many marriages today.

Retirement Plans

A variety of different retirement plans such as an IRA or a 401(k) may also be considered part of an asset protection strategy. That’s because these savings plans are typically exempt from seizure by creditors. By proxy, that means that such holdings are shielded from lawsuits and debts that you may face over your lifetime.

Estate Planning

The practice of estate planning speaks to managing and planning for assets left behind in the event of your passing. It involves creating plans for transferring holdings to loved ones, friends and charitable causes, and can help you avoid probate and other legal concerns.

Proper estate planning allows you to determine who will receive your assets and ensures their timely provision to your beneficiaries and heirs. It also helps spell out who will be handling certain responsibilities relating to your assets, and helps you minimize estate, inheritance and capital gains taxes that any surviving parties are required to pay.

Homestead Exemptions

If you meet eligibility requirements for a homestead exemption, which differ by state, you can utilize it to protect your primary residence from debt collection efforts. It can, for example, safeguard any equity that you have saved up in your residence and potentially help you stave off legal threats of having your property seized due to outstanding debts.

Tenants By Entirety

The legal concept of tenancy by entirety describes a form of ownership in which married couples hold equal interest in a real estate property in addition to survivorship rights that keep the property out of probate. It can also provide limited asset protection as creditors cannot look to the residence as a form of collateral used to satisfy their outstanding debts. Note that such asset protection benefits extend to the surviving member of the marriage.

FAQs: Asset Protection

Naturally, it’s common to hear a number of questions about asset protection strategies and solutions. Answers to some of them can be found below.

Can I protect assets after a lawsuit has been filed?

Be advised that attempting to hide assets after a lawsuit or judgment has been filed can be considered fraud. The best time to protect your assets is before legal trouble begins to avoid any inadvertent concerns from being raised or subjecting yourself to possible questioning.

What isn’t safeguarded by asset protection?

 A variety of assets may not typically be protected from creditors in certain circumstances. These assets might include any stocks, bonds, checking accounts, savings accounts, money market accounts, brokerage accounts, certificates of deposit (CDs) and money owed to you.

If I designate a family member as power of attorney (POA), will that help with asset protection?

POA documents certainly allow others to make legal and financial deeds for you. At the same time, they do not specifically help in the practice of asset protection.

The Bottom Line: Asset Protection Makes Sense

No matter how much money you’ve managed to save, or how many properties and holdings you’ve successfully amassed over your lifetime, be advised that the practice of asset protection is always smart to invest in.

Doing so not only helps you shield your assets from creditors and legal concerns, it also helps protect those assets from divorces, judgments and unexpected lawsuits. Plus, it can aid you in estate planning and enjoying maximum savings and tax benefits from your financial activities as well.

Interested in learning more about where every dollar is going, and how various savings strategies, asset protection tactics and other smart budgeting activities can help you keep more of your money on hand? Download the Rocket Money℠ app and start tracking your finances today!