- Personal Finance
What Is Asset Protection
The question is asked every time I tell people what I do. It is a term that is used to mean many things, but as an area of law, it is relatively new. Even attorneys ask me what I mean when I say I practice in the area of asset protection. Basically, it is a field of practice solely for the purpose of ensuring you don’t lose all of your money if you get sued, have a divorce, or have some other major event that would normally leave you penniless. In simpler terms, it is a method of saving for the future in a way that nobody can touch.
Many people think that asset protection isn’t for them. It’s a common misconception that asset protection is only for the rich. What would you do if you lost your savings, home and car all at once? What would you do if the sheriff took the clothes out of your closet? Personally, I would be distraught. That’s why it is so important to plan ahead. Nobody ever plans on losing everything, but at the unfortunate point of that happening, asset protection can’t save you anymore.
Asset protection is similar in principle to liability insurance in that it protects you in case something goes wrong; however, unlike insurance, asset protection discourages litigation and protects you only after the insurance has run out. Additionally, the plaintiff will collect from the insurance company the amount they owe him, but even with a judgment in his favor, he still cannot claim any assets that are properly protected from him.
The downside is that once a judgment is rendered in the plaintiff’s favor, he has years to try to collect from you. That’s why it is beneficial for both parties to come to an agreement before a judgment is rendered. It isn’t likely that the plaintiff will recover fully with a judgment, and you’re not going to want to have a creditor waiting to take your earnings for years and years down the road. Of course, going through bankruptcy will likely eliminate that creditor's judgment; however, it will also destroy your own credit rating as well as start the court process over again where a new judge will scrutinize your asset protection plan.
Now, there are many methods to protecting your assets, so I will go over them briefly here and more in depth in later blogs on www.bobholzlaw.com.
The first area is exemptions. These are state specific categories of assets that are not available for a creditor to take without your consent. Some states protect the home, some don’t. Many will protect things like your retirement account, car, clothing or furniture, but they vary between states dramatically. It is important to determine what your state’s exemptions are in order to maximize the effectiveness of your asset protection plan. The good news about exemptions is that the courts will look to where you live to determine which exemptions apply. The bad news is that if you gave any creditor a security interest in those assets, they are no longer protected from that creditor.
The second area involves good estate planning. Certain things in estate planning, if planned ahead, can also serve as good asset protection. Setting up trusts ahead of time instead of relying on your will and the probate system has benefits to your estate plan, and if done correctly, will also protect those assets from outside attacks.
The third area is about preventative financial planning. You’ll want to be smart about how you handle your assets in order to limit their exposure. For example, you wouldn’t want a ton of cash sitting in your checking account when you could be investing it in your retirement account, home, or some form of investment product like life insurance, all depending on what works best in your state and with your financial goals. Also, some states have devises that make married property more protected than property owned individually. It may make sense financially and for security reasons to jointly own your property.
The fourth area we will talk about is how to structure your side business or small business so you’re not increasing your personal liability. The concept of limited liability was created with the corporation; however, there are many easier to use and cheaper options than the corporation that you should consider when starting your own business. There will be a later blog on which type of entity you should choose because this is a complicated decision. Just know now that sole proprietorship and general partnerships have no limited liability. If your business does something wrong, you can be sued personally if operated under one of those types.
Finally, there are legal mechanisms that can shield your assets. From the extravagant foreign trust and family limited partnership setup to simple irrevocable trusts, a lawyer who focuses on asset protection can set these up for you with different price tags for different levels of sophistication.
As with most benefits, there is a cost. In the case of asset protection, the cost is the free use of your assets and the attorney and setup fees if you go the costly route. Whether you’re giving up control over them, or ownership of your assets, you generally always have to make some sort of sacrifice in order to ensure you’ll be safe in the face of disaster.
Since you’re reading this now, you’ve already taken the first step to protecting yourself. Keep in mind that it is best to protect yourself right away because you never know when disaster strikes, and after it does, there’s not much you can do. There's something called a fraudulent transfer that pulls back the transfer of assets if the transfer was made to defraud creditors. After a creditor is known, you can't simply hide your assets from him.
Some asset protection plans cost tens of thousands of dollars, but those are for those people who feel the need for more security than the average person. If you’re one of those people, please come speak with me, and I can discuss your options. However, if you’re an average person, you can protect yourself for very little, and often times, it’s free. Free is a huge word to be tossing around, but I am serious. Certain strategies cost you nothing beyond your time and effort.
As I said, there are a lot of expensive options for asset protection that work really well, but you may not need them. If the free options are not enough for you, we're always happy to take on additional clients. We will sit down with you to devise the best strategy and help you throughout implementation to ensure that you’re protected to the highest possible level. Our prices range greatly depending on what you want. Some are free, others cost tens of thousands of dollars. We have the means to work with any budget, and do our best work no matter who you are or how much you’re protecting. We know that if you lose everything, you’ll have nothing, no matter what you started with.
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