An individual's main goal in estate planning is to leave as much money to their heirs as possible. And if you're like most people, you would also want estate taxes to be decreased or eliminated.
But more than taxes, litigation, divorce, malpractice, and other potential claims could reduce your net worth. As a result, safeguarding assets from future claims has been added as a planning goal.
The importance of asset protection for practically everyone at every financial level, from a millionaire running a hedge fund to a janitor working in a hedge fund office, cannot be emphasized. Too many people are preoccupied with accumulating riches and don't consider protecting them until it is too late.
If you want to protect your assets from creditors, particularly in 2022, reading this well-researched guide is the best way forward.
Why Should You Protect Your Assets?
We become increasingly convinced every year that essential asset protection starts with adopting low-cost, time-tested tactics and easy routines. No need to create anything entirely new. There are laws in place that are simple to put into effect and will offer you excellent protection in the case of a claim or litigation.
Asset protection planning is crucial in estate planning regardless of age, health, or wealth. Planning for asset protection can safeguard you and your assets while alive. In the event of a lawsuit or divorce, asset protection acts as a barrier between you and your creditors.
An asset protection strategy is crucial for business owners in today's litigious world. As you amass wealth and assets, creditors and predators pursue you.
A variety of strategies can be used to safeguard various kinds of assets. One factor unites all asset protection strategies: they make it harder for a creditor to locate or seize assets.
To protect your purchases in the event of litigation, asset protection measures may involve the use of company entities, trusts, and partnerships. Your insurance is enhanced by an appropriate asset protection strategy to satisfy creditors better.
At Bohm Wildish & Matsen, we try to comprehend each client's unique worries and objectives.
11 Ways to Protect your Assets
Limited Liability Companies (LLCs)
A limited liability company splits your private and professional affairs. By incorporating an LLC, you can protect your funds from lawsuits and corporate debt. Your responsibility is restricted to the amount you invested in the company as long as you abide by the LLC's laws, protecting your assets from creditors.
Bohm Wildish & Matsen, LLP is known to provide the best guidance for families regarding asset protection and explain the risks that might be involved.
In addition, some business owners choose an S-Corporation instead of an LLC to accomplish the same goals. With the help of your attorney, establish which of your goals offers the most significant advantages.
Separate Business Assets
One firm can be a significant liability source when several enterprises operating out of it. Years, if not decades, of arduous work and investment, could be lost due to one lawsuit or verdict rendered against the company (This is the primary motivation behind a firm's diligence in separating their clients' assets from their enterprises.) You should own as little as possible through your operational firm.
Take the assets that are essential to the operation of your firm and separate them from the operating company to reduce risk. Create distinct corporations, for instance, to lease machinery, inventories, and other assets back to the operating company.
This will enable the active business to reopen as a new company and hire help from other firms in its asset-protection portfolio if it needs to shut down due to a lawsuit.
Choose the Right Business Entity
Though there will undoubtedly be many tax-planning factors to consider, running a sole proprietorship is not the ideal option for asset preservation.
If you operate a sole proprietorship, your assets are exposed to a future lawsuit. To build your firm and safeguard your interests, it is crucial to establish an entity, such as an S corporation or LLC.
Although insurance policies won't preclude someone from suing you, their benefits might cover any court costs or awards that result from scenarios that are covered. Investors and company owners should consider various insurance options to protect their investments. For investors, purchasing homeowner's, auto, and umbrella insurance is a good idea.
In addition to typical policies like general liability, commercial property, malpractice, and workers' compensation, business owners frequently carry industry-specific policies that cover specific risks.
Under a more significant lawsuit or claim against you, umbrella policies are supplementary insurance above your other coverings that grow your coverage limits.
Additionally, lawsuits often do not pertain to life insurance policies. Moreover, annuities typically provide the same safeguards.
It is sensible to talk about how the laws in your state can disturb the death profit or cash value of your life insurance or pension because laws differ from state to state.
Using Asset Protection Trusts (APTs)
A trust bank known as an asset protection trust (APT) retains assets at the discretion of the settlor (i.e., the person investing in the faith) to shield them from creditors. It is often employed as the most operational asset protection strategy.
The owners of assets that are a component of APTs, referred to as "beneficiaries that possess equitable interest" in the support, are not legally entitled to the assets. As a result, without breaking tax avoidance regulations, the assets are shielded from creditors.
Irrevocable Life Insurance Trusts (ILITs)
An ILIT eliminates insurance profits from your inheritance for the federal estate tax, safeguarding your assets. Additionally, the trust shields both the death benefit and the cash value of the policies from creditors.
Offshore Business Entity
Protecting personal money and assets from creditor demands, pointless lawsuits, business failure, and divorce is practical and lawful when done offshore. This is accomplished by moving a person's assets from their country of residence to an offshore jurisdiction.
All of an offshore company's assets registered there are protected by Belize offshore asset protection. The help of an offshore corporation is safeguarded by strict rules, making them immune to claims from third parties and international judgments.
Asset protection is protected by law and safeguards both business owners and offshore trust beneficiaries.
In a procedure known as foreclosure, the bank may take possession of the property if you are late on your mortgage payments.
Liability for debts secured by your primary residence is restricted by federal law. There are no similar limitations on business loans, so unless you take precautions beforehand to reduce the risk, a commercial foreclosure could jeopardize other assets.
You can be held responsible even if someone else causes the collision. For instance, even if your child is insured and causes a crash, you could still be held accountable if your auto insurance is insufficient.
Make sure your coverage is adequate by checking it as well. Although your state will have minimum liability standards, awards of millions of dollars are not out of the question with today's juries. This could also be the ideal time to compare shops for the most excellent deal.
Use Retirement Accounts
In the case of bankruptcy, ERISA-qualified retirement plans are legally entitled to limitless asset protection, while IRA assets are legally protected by up to $1 million.
Although some states have chosen to forego the federal bankruptcy protections provided by the 2005 Bankruptcy Reform Act and only exempt a smaller amount, several jurisdictions offer even more protection to IRAs.
To find out how much protection is accessible to the money in these accounts, check the legislation in your state.
Domestic Bank Accounts
The majority of judgment debtors will attempt to have their bank accounts garnished. An effective technique to compel payment of a judgment is a writ of garnishment placed on the debtor's bank account.
Money exempt from garnishments, such as excluded wages, social security or disability benefits, or annuity proceeds, can be found in some debtor bank accounts.
The debtor must persuade a court that all or some of the garnishment money is exempt from creditors, as a creditor may still lawfully seize a bank account containing exempt funds.
Debtors should take proactive measures to prevent bank account garnishments after a judgment. A bank in the United States that is exempt from writs of garnishment is a practical asset preservation method.
The suspension of accounts at specific types of institutions is prohibited by state law. These banks provide FDIC-insured reports with standard features for internet banking.
As your wealth increases, litigation against you become increasingly often. Lawyers frequently see wealthy investors as having deep resources that could be utilized to make up for wrongs that the plaintiff feels they have suffered.
It's challenging to ensure that someone does not sue you, but you can protect your assets and yourself if you follow the guidelines for protecting them from lawsuits and other issues provided by Bohm Wildish & Matsen, LLP.
Originally published 27 Oct, 2022
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.