If you’re like most people, when you hear “estate planning” or “asset protection planning,” you think of someone like JR Ewing of the 1978 show Dallas, Bill Gates, or the Kennedys.
WARNING: Common Misconception
A very common misconception is only wealthy families and people in high-risk professions need asset protection planning.
But in reality, anyone can be sued and lose all of his or her assets.
A car accident, foreclosure, job loss, medical crisis, business failure, or an injured tenant can result in a huge monetary judgment, decimating your finances.
The goal of this newsletter is to provide you with a quick overview of asset protection strategies. 0
What Exactly is Asset Protection Planning?
Asset protection planning is the process of taking property currently vulnerable to seizure by creditors, predators, and lawsuits and positioning it in a way to discourage lawsuits, provide a valuable bargaining chip if a lawsuit arises, and minimize loss.
Basic, Every Day Asset Protection Planning
It may surprise you to know that you are likely taking advantage of basic asset protection strategies without knowing it.
For example, the first line of defense against liability is insurance, including homeowner’s, renter’s, automobile, business, professional, malpractice, long-term care, and umbrella policies.
Planning Tip: We suggest you check your insurance policies to determine if your policy limits are in line with current assets and net worth; make adjustments as appropriate. Then, be sure to review your policies on an annual basis to confirm that the coverage is still adequate and benefits have not been stripped to keep premiums the same.
For example, Randi owned a rental property near the state university. A balcony collapsed when too many college students gathered for a party. Randi was sued and ultimately settled the case for $950,000, just under her umbrella liability policy of $1 million. Randi’s personal and business assets were protected.
Planning Tip: In some states, married couples are afforded asset protection in the form of “tenants by the entirety” (TBE). With this type of ownership, the creditor of one spouse cannot attach a judgment to the couple’s TBE property.
For example, Bob and Sue are married and own their home as TBE. Bob goes through a red light and crashes into a school bus. Many children are injured. He is sued and the jury determines Bob is liable and must pay out $1 million dollars. Though other assets might be taken, the home cannot be seized because it’s owned as tenants by the entirety.
Planning Tip: Another type of basic planning 401(k) or IRA investment. Under federal law, 401(k)s and IRAs (excluding inherited IRAs*) are protected from creditors in bankruptcy (with certain limitations).
Maximizing contributions to your 401(k) if you still are working will not only increase your retirement savings, but will also keep the investments away from creditors, predators and lawsuits.
For example, Andrea lost her job and went bankrupt. She was sued and lost many assets; however, the law protected her retirement plan.
*If you want to assure retirement plans are protected when they pass to your loved ones, we can show you how to do that as well.
Sophisticated Asset Protection Planning
If you are a landlord, real estate investor, business owner, work in a high-risk profession, or have accumulated or inherited a significant amount of unprotected property, we recommend you consider sophisticated asset protection planning.
Please note that sophisticated planning will usually require giving up some or all control and, perhaps, ownership of the property.
We would like to help you determine whether sophisticated asset protection planning is required in your individual situation. The use of advanced asset protection strategies requires the expertise of a legal advisor who understands all of the applicable laws and specializes in the implementation, and, just as important, the maintenance, of sophisticated asset protection plans.
WARNING: You Must Plan Ahead
To protect your assets, you must plan ahead. Asset protection planning cannot be done as a quick fix for your existing legal problems.
Your plan must be in place before a lawsuit arises. And, in some situations, a significant period of time must pass before the asset protection plan is effective (up to 10 years in some cases).
The bottom line is that everyone needs some form of asset protection in place.
To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer’s particular circumstances.