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It can take decades to build wealth. It takes only a day to lose it. To make the most of your assets, you must know how to protect them
Asset protection is on the agenda of anyone who has something valuable to lose. In this article, you’ll learn how to start protecting your savings, investments, and assets today.
1. Set Up an Asset Protection Trust
One of the strongest ways to protect your assets is to set up an asset protection trust. If your property is in this type of trust, you have a good chance of not losing it in a lawsuit, bankruptcy, or to creditors.
You can either set the trust up in the United States or opt for an offshore alternative. While creating the former, you need to remember that all U.S. assets are under the United States court jurisdiction, thus making offshore assets a safer bet.
How Does it Work?
To take advantage of this option, you transfer your assets into a trust, which is managed by an independent trustee. To protect your assets during a lawsuit, this trust must be irrevocable.
As soon as you turn your assets over to the trustee, you stop owning them. Therefore, if someone sues you and wins, they can’t force you to release your assets.
Does it mean you lose control of your hard-earned money? It’s possible to play around with the wording of the trust deed to retain a certain degree of supervision. Additionally, a probate lawyer from Orlando points out that this can also help your family avoid probate after your death.
2. Separate Business and Personal Assets
If you don’t separate your business and personal assets, in case one is sued, the other is liable. To minimize the risk, you need to show that you and your company are two separate entities.
- Opt for the right business entity — if you chose sole proprietorship or general partnership, in case of a lawsuit, you expose all your personal assets. Consider a Limited Liability Company, C Corporation, or S Corporation.
- Look independent on paper — you should have a separate bank account for your company, use the company name on all related documents, and even title the property in the business’ name. Make sure to maintain corporate records properly.
- Work on your contracts — all contracts related to your business must have the company name in them and be in order. Avoid hiring people to work for cash or signing agreements over email. The entire operation of your company has to be transparent.
- Buy business insurance — make sure to get a proper insurance policy for your business to avoid giving the plaintiff another target.
- Document personal money transfers — if you provide money to your company from personal funds (or vice versa), make sure to record this transfer as a loan from one entity to another. Otherwise, you may pierce your corporate veil.
3. Keep Homestead Exemption in Mind
A homestead exemption keeps a house safe from the creditors in case of the death of one home-owning spouse or declaration of bankruptcy. The amounts of such an exemption vary from state to state. In some states, it’s granted automatically. In others, you have to file for it. New Jersey and Pennsylvania don’t offer homestead exemption.
Depending on how much equity you have in your home, the exemption can protect you from the seizure of the property and allow you to save on property taxes.
If your state provides a big homestead exemption, you may want to cover mortgage payments quicker to gain more equity.
4. Review Titling
To protect your real estate, you should review the manner in which your property is titled. Owning a home with another person means that both of you have an equal interest in the property.
If one of you is sued, the other one can’t be forced to sell their interest. However, this applies to personal residences only and doesn’t work in all states. For any other real estate, you may want to consider tenancy in common.
5. Rethink Joint Accounts
In case of a divorce, money in joint accounts could be divided equally regardless of which one of you contributed more. Meanwhile, in case your spouse is sued, the entire account can be wiped out by the creditors.
Create separate accounts for you and your spouse as well as children, elderly parents, business partners, etc. If you must have a joint account, keep the funds in it to a minimum.
6. Set Up a Retirement Plan
Retirement accounts aren’t only a great way to save money for retirement, they can also protect your assets from lawsuits and creditors. Generally, such plans as traditional IRAs or 401(k) are protected in case you file for bankruptcy. While laws vary from state to state, in the majority of cases, retirement plans are out of creditors and the plaintiff’s reach.
To get top-notch protection for your money, opt for ERISA-qualified retirement accounts. They are usually protected against bankruptcy, civil lawsuits, and creditors. Non-ERISA-qualified plans like traditional IRAs generally have bankruptcy protection but may not withstand a lawsuit. Meanwhile, none of these accounts are off-limits to the IRS.
7. Invest in Umbrella Insurance
Umbrella insurance enhances your existing insurance policies, allowing you to avoid liability when large claims arise.
For example, your kid is having a party at your house while you are on vacation. One of his friends jumps into the pool and breaks an ankle. Your standard homeowners’ insurance can cover the medical bills. However, if that “friend” knows about your wealth, they may decide to sue you for “emotional distress”, which can turn into a hefty amount.
That’s where umbrella insurance comes in. You need this type of insurance if you have sufficient wealth in retirement accounts, rental property, significant savings, and a paid-for home. For anyone with a net worth of $500,000 or more, such insurance is a must.
If you have assets, they need protection. Failing to plan for the worst-case scenario could make it a reality. By taking advantage of the above options, when the disaster strikes, you can keep the majority of your assets and recover quickly.
You may also like: Building a Retirement Nest Egg? Here are 8 Things You Should Know about IRAs
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