If you haven’t done any asset protection planning, your wealth is vulnerable to potential future creditors and, should the worst happen, you could lose everything. Of course, that is a “worst-case” scenario.
Lawsuits, taxes, accidents, and other financial risks are facts of everyday life. And though you’d like to believe that you are safe, misfortune can befall even the most careful person. What can you do? First, identify your potential loss exposure then implement strategies that are designed to help reduce that exposure without compromising your other estate and financial planning objectives.
Asset Protection Techniques
There are three basic asset protection techniques: insurance, statutory protection, and asset placement. None of these techniques is a complete solution by itself, but may make sense as one limited component of an asset protection plan. This blog will cover basic insurance and statutory protection while a future blog will cover asset placement in more detail.
Insurance is one part of your asset protection plan. Often, the simplest way to protect assets is by shifting the risk to an insurance company. This should generally be your first line of defense. There are many types of insurance that are a must for all individuals and families. Other types apply to people who own businesses or have high net worth. You may be familiar with many of the insurance products listed below however a brief refresher may be in order. The basic types of insurance include:
- Life insurance provides the beneficiaries of your life insurance policy with funds upon your death so that your assets will not need to be used to pay final expenses and estate taxes upon your death.
- Disability income insurance pays benefits to replace part of your earned income while you can’t work due to illness or injury so that you continue to meet your financial obligations (e.g., mortgage and/or car payments).
- Health Insurance pays medical expenses incurred as a result of an illness or injury, so that you do not need to use your assets to pay for them.
- Long-term care insurance pays for certain in-home and nursing home care expenses, preserving your assets for your heirs.
- Homeowners insurance pays for certain property damage and losses so that the property can be repaired or replaced without you having to use other assets to do so. It also covers liability claims.
- Automobile insurance pays for damage to your automobile so that you can fix or replace it (e.g., collision/other-that-collision coverage). It also covers certain liability claims (e.g., liability coverage).
- Umbrella liability insurance provides liability protection above and beyond basic coverage provided by homeowners and automobile policies.
- Business or professional insurance pays for certain business losses (e.g., property damage, business interruptions, liability claims).
The types of insurance listed are the basic, front-line defense you have to protect your assets. Depending on your specific situation, personal, business, financial, etc, you may need additional insurance coverage.
Creditors can’t enforce a lien or judgment against property that is exempt under federal or state law. While exemption planning can’t offer total protection, it can offer some shelter for certain assets.
Both federal and state laws govern whether property is exempt or nonexempt in non-bankruptcy proceedings (separate federal and state laws govern whether property is exempt or nonexempt in bankruptcy proceedings). Generally, you can choose whether the federal exemption or the state exemption applies. When looking at exemption laws, be sure to find out how much of an exemption is allowed for a particular type of property – it may be completely exempt, or exempt only up to a certain amount or restricted in some way. Types of property often receiving an exemption include:
- Homestead (principal residence)
- Personal property
- Motor vehicle
- IRAs, pension plans, and Keogh plans
- Prepaid college tuition plans
- Life insurance benefits and cash value
- Proceeds of life insurance
- Proceeds of annuities
While no one wants to find themselves on the wrong end of a legal dispute, it pays to investigate the federal and state laws that apply to your personal and business assets. Making sure they are categorized in the “right” bucket well before any threat from a future creditor is essential in ensuring your assets are protected.
Speaking of putting assets in the “right” category, the next blog will specifically address the question of where to place assets in order to protect them from creditors.