Table of Contents
You work hard to create wealth, enjoy the lifestyle you desire, and secure your family’s future. However, have you ever stopped to consider how a civil lawsuit could decimate your personal assets—and what you might do to safeguard your estate?
Personal injury claims, business-related lawsuits, and divorces can be extremely costly. Luckily, strategies exist to protect your assets. The key to successful asset protection planning is acting long before you expect a threat.
Read on as our legal strategists at Blake Harris Law explain how you can arm yourself against a potential lawsuit—and why you should do it today.
People working in litigation-prone professions, like doctors, architects, or corporate executives, often face patient or client lawsuits. Nearly every physician will deal with a malpractice claim at some point in their career.
Divorce settlements often come with a hefty price tag as well. While few can match the extravagance of the 1999 Wildenstein divorce, which ended in a $2.5 billion settlement and a $100 million annuity income for 13 years, divorces frequently involve big claims and costly court battles.
You never know when a business lawsuit or a marital crisis may take place, and it’s a lot more difficult to protect your assets when trouble is already looming ahead.
For example, if you place property in an asset protection trust, a state’s laws typically stipulate a look-back period of two to four years before a protected asset becomes immune to creditor claims. Once a lawsuit is under way, a court may view setting up a trust or using other strategies to protect your assets as an attempt to cheat a possible judgment creditor.
Let’s outline a few methods you can implement as part of your asset protection strategy.
If you operate a business, make sure to separate your personal and business assets to protect personal assets from business creditors. When creditors sue business entities like limited liability companies (LLCs) or corporations, they typically can’t make a claim against the business owner’s private assets.
A sole proprietorship offers no personal liability protection, and a general partnership may drag you into any of your business partners’ lawsuits. In contrast, a limited liability company or a corporation will protect your assets from creditor claims arising from that business.
Compared to corporations, LLCs are easier to set up and allow more flexibility in taxation. Small to mid-size business owners may prefer the simplicity of an LLC, while the structure of a corporation may make more sense for larger business entities with lots of outside investments.
In certain jurisdictions, limited liability companies also offer the advantage of charging order protection. This means that, if a court awards business shares to the creditor, the creditor can’t force the company to distribute funds but still pays taxes for the shares. This catch can help you settle business lawsuits on better terms.
Insurance coverage protects you when life throws a curveball at you. Depending on your occupation, you may need:
For better protection, we recommend getting more than the minimum legal liability coverage. Your total liability coverage should equal at least your total assets. Read your policy’s fine print to make sure you know what you can count on when you purchase an insurance plan.
Besides business insurance, make sure you carry adequate personal insurance such as:
Homestead protection laws can shield your primary residence from creditors in cases of bankruptcy or the death of one spouse. Homestead exemptions can prevent the sale of a primary residence and supply tax relief for a surviving spouse by removing part of the property’s value from taxation.
Exemptions for homesteads vary by state. For example, while Florida offers an unlimited homestead exemption amount, in Indiana this amount is under $20,000 for an unmarried individual.
While the homestead exemption may not help the homeowner if they failed to make timely mortgage payments on their property, this exemption can be a game-changer for small business owners whose personal assets may serve as collateral. For instance, you could invest available funds in your property rather than leave them in a bank account subject to creditor claims.
Although individual retirement accounts can shield funds from creditors, they offer a lower level of protection compared to employer-sponsored 401(k) retirement plans that fall under ERISA (Employee Retirement Income Security Act).
By federal law, government agencies can tap into your individual retirement account to pay federal debts, like any back taxes you may owe to the IRS. Additionally, states may garnish IRAs to force the account owner to pay debts like alimony or child support.
If you declare bankruptcy, your IRA funds are safe from creditors up to a certain IRA exemption limit that the government adjusts every three years. As of April 2022, this amount was slightly over $1.5 million.
Asset protection trusts are among the most popular strategies to safeguard your property. Trusts work on a simple principle: once you transfer assets to a trust, you relinquish legal ownership of these assets. Thus, the assets become the trust’s property and therefore are safe from the claims of any creditors.
It is vital to work with an experienced asset protection attorney to make sure your trust offers both meaningful protection and continued access to your assets.
A domestic asset protection trust (DAPT) is a type of irrevocable trust operating within the U.S. jurisdiction. DAPTs can protect virtually any property, including cash, IRAs, real estate, and more.
While domestic trusts offer significant protection, they involve some limitations. For instance, most states recognize ex-spouses as exception creditors, so a civil court may accept their claim even while a claim from any other civil creditor would fail.
An offshore asset protection trust works outside of the U.S., typically in locations with favorable asset protection laws like The Cook Islands or Saint Kitts and Nevis. An offshore trust offers excellent protection for all types of assets which can be held outside of the U.S.
You can use a range of legitimate strategies to protect your property from lawsuits and creditor claims. However, for effective asset protection planning, you should use a combination of domestic and offshore planning strategies.
At Blake Harris Law, our attorneys can advise you on choosing the best legal strategy to protect the assets in your state.
Here are some examples of how this may work, practically:
While none of the methods above will give your assets unlimited protection, the right combination of legal strategies can defend your personal and business assets against lawsuits and claims. Be sure to work with an experienced asset protection law firm to protect your assets, using a comprehensive plan that covers all the bases.
Keep your assets safe from unexpected civil lawsuits. Protect your financial assets by working with us at Blake Harris Law, a legal team focused on strategic asset protection planning. Call us at 786-559-1209 or contact us online to schedule a consultation.