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

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. 

 

 

Statutory protection

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
  • Wages

 

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.