Many think that only wealthy individuals and families or those in high risk professions need an asset protection plan. But, anyone can get sued and have their finances destroyed. A car accident, medical bills, a foreclosure and many more things can bring on a monetary judgment against you. Here are three tips that can protect your assets right now from creditors, predators and lawsuits.
What Exactly is Asset Protection Planning?
Before you can understand why it is important to have an asset protection plan, you need to know what it is all about. Assets protection planning is using legal structures and strategies to protect or partially protect, property from creditors by transforming it.
Keep in mind that this kind of planning cannot fix existing legal problems. It is used to protect you in case a legal issue comes up in the future. It needs to be done before a lawsuit is filed at the courthouse and even before it has been suggested. Use these tips now to protect your assets, before it is too late.
Tip #1 – Load Up on Liability Insurance
The first step in protection is having insurance. Homeowner’s, automobile, business, professional, malpractice, long-term care and umbrella policies should all be considered. Liability insurance pays money damages but also can pay part or all of the legal fees as a result of the lawsuit. An umbrella policy is an essential and less expensive way to protect assets. A yearly check of all of your insurance policies should be done to make sure the policy limits are in line with your net worth. You will also need to be sure the coverage and benefits are adequate and have not been stripped to keep the cost low.
Tip #2 – Maximize Contributions to Your 401(k) or IRA
Federal law protects tax-favored retirement accounts from creditors in bankruptcy. This includes 401(k)s and IRAs. Maximizing contributions to either of these accounts will not only benefit your retirement savings but will keep the funds protected from creditors, predators and lawsuits. If you do not have a 401(k) at your company than invest in an IRA.
Tip #3 – Move Rental or Investment Real Estate into an LLC
Landlords and real estate flippers or investors need good liability insurance. Another way to protect your assets is by changing your real estate to a limited liability company (LLC). This can protect you from creditors, predators and lawsuits.
Concerning rental or investment property there are two types of liability. Inside liability is when the property is the source of liability, a slip or fall on the property or a fire caused by faulty wiring are examples. In this case the creditor wants to seize the LLC owner’s personal assets. Outside liability is the other type of liability. With this type, the creditor wants to seize the LLC assets to pay the owner’s debt.
Having an LLC will limit inside liability to the value of the related real estate property. Many states do not allow the outside creditor of the member of an LLC to get the member’s ownership interest in the company. States laws will need to be reviewed because in some this will only work for multi-member LLCs but in others it will also work for a single member LLC. This outside protection is called “charging order” protection. A creditor will look at the liability insurance and any unprotected assets to collect their claim.
Call our office and allow us to help you set up an asset protection plan for your investment real estate as way of an LLC. You will need an attorney that understands the LLC laws of the state in which your property is located in order to insure inside and outside liability protection.