You work hard to create wealth, enjoy the lifestyle you desire, and secure your family’s future. But, 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.
Why should you plan to protect your personal assets?
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 thirteen 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 considerably 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.
Using Business Entities Such As a Limited Liability Company or Corporation
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 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.
Using Different Types of Insurance
Insurance coverage protects you when life throws a curveball at you. Depending on your occupation, you may need:
- Professional Liability insurance (PLI): A professional liability policy protects physicians, lawyers, and other professionals against malpractice or negligence claims, except in criminal prosecution cases. Specific policies may differ depending on the profession they target (doctors, accountants, etc.)
- Commercial Liability insurance: This type of insurance policy protects you if someone sustains an injury, like a slip and fall, on your business premises, or if one of your employees damages a client’s property during work (e.g., breaking a client’s fence while mowing their lawn). Additionally, this type of insurance protects your business against libel or slander claims.
- Worker’s Comp: Most jurisdictions require employers to carry workers’ compensation insurance to compensate employees who get hurt while working. Failure to carry worker’s compensation insurance is a criminal offense.
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:
- Homeowners insurance: Homeowners insurance helps cover damages if someone sustains an injury on your property.
- Auto insurance: An auto insurance policy will protect your assets in case you are involved in an auto accident and the other party sues you.
- Umbrella coverage: An umbrella insurance is a type of backup insurance that activates in case your homeowners, auto, or other liability coverages don’t supply sufficient protection. Umbrella coverage pays benefits capped at the policy’s limit. For example, let’s say you need to pay $500,000 following an auto accident. If your auto insurance covers damages up to $300,000 and you have umbrella coverage up to $1 million, your umbrella insurance will cover the extra $200,000.
- Life insurance: Life insurance policies are typically exempt from your creditors. However, your beneficiaries’ creditors may still seize the proceeds.
- Long-term Care insurance: Long-term care insurance covers in-home or nursing home care costs for chronic conditions like dementia, Alzheimer’s, paralysis, strokes, and more. Make sure you get coverage before a developing ailment disqualifies you from most policies.
Homestead Exemptions
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.
Using IRAs
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 the government adjusts every three years. As of April 2022, this amount was slightly over $1.5 million.
Asset Protection Trusts
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.
Domestic Asset Protection Trusts
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.
Offshore Asset Protection Trusts
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.
Taking Advantage of Your State Laws
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 practical examples of how this may work:
- In Florida, you can take advantage of unlimited homestead exemptions, but keep in mind that qualifying property must be up to a half-acre in municipal areas or up to 160 acres in unincorporated counties.
- Alaska property owners enjoy DAPT-friendly laws that provide a high level of asset protection from creditors. In Alaska, creditors have to prove actual fraud to claim against DAPT assets and can’t force a trustee to make fund distributions from a trust.
- In Delaware, property owners can avoid transfer taxes when making a gift through a state DAPT.
- Nevada, apart from its other favorable asset protection laws, is almost the only state that doesn’t recognize ex-spouses as exception creditors for DAPTs. In nearly all other states, an ex-spouse can claim against a DAPT to collect alimony.
Creating An Asset Protection Plan That Suits You
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.
Blake Harris Law: We Protect Assets for Your Peace of Mind
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. Contact us online by filling out our contact form to schedule a consultation.
