It is a common misconception that only affluent families and individuals in high-risk professions require an asset protection plan.

In reality, anyone can be subject to litigation. Incidents such as car accidents, foreclosures, unpaid medical bills, or injuries sustained by tenants can result in monetary judgments that could severely impact your financial stability.

What Exactly Is Asset Protection Planning?

Asset protection planning involves the use of legal structures and strategies to safeguard property from creditors. This can be achieved by either fully or partially protecting assets from creditor claims.

It is important to note that asset protection planning cannot be used as a quick fix for existing legal issues. Transferring assets to shield them from current creditors may be deemed a fraudulent transfer, leading to legal penalties. Therefore, it is essential to establish an asset protection plan before any claims are made or lawsuits filed.

Below are three tips that can be implemented immediately to protect your assets from creditors, predators, and lawsuits.

Asset Protection Tip #1 – Load Up on Liability Insurance

The first line of defense is insurance, including homeowner’s, automobile, business, professional, malpractice, long-term care, and umbrella policies. Liability insurance not only provides a means to cover monetary damages but often includes payment of legal fees associated with a lawsuit. If you do not have an umbrella policy, now is the time to obtain one, as it is relatively inexpensive compared to more advanced asset protection methods. Additionally, review all current insurance policies to ensure that policy limits align with your net worth and make necessary adjustments. Annually review all policies to confirm that coverage remains adequate and benefits have not been reduced to maintain the same premiums.

Asset Protection Tip #2 – Maximize Contributions to Your 401(k) or IRA

Under federal law, tax-favored retirement accounts, including 401(k)s and IRAs (excluding inherited IRAs), are protected from creditors in bankruptcy (with certain limitations). Therefore, maximizing contributions to your company’s 401(k) plan is a prudent way to increase retirement savings while safeguarding investments from creditors, predators, and lawsuits. If your company does not offer a 401(k) plan, consider investing in an IRA for similar protection.

Asset Protection Tip #3 – Move Investment Real Estate into an LLC

For landlords, real estate flippers, or investors, aside from having adequate liability insurance, transferring real estate into a limited liability company (LLC) can be an effective way to protect assets from creditors, predators, and lawsuits.

There are two types of liability to consider with rental or investment property: (1) inside liability, where the property is the source of liability (e.g., a slip and fall on the property), and the creditor seeks to seize an LLC member’s personal assets; and (2) outside liability, where a creditor of an LLC owner seeks to seize LLC assets to satisfy the member’s debt.

An LLC limits inside liability related to the real estate to the value of the property. Additionally, in many states, an outside creditor of an LLC member cannot access the member’s ownership interest in the company. In some states, this protection applies only to multi-member LLCs, while in others, it also applies to single-member LLCs. At most, an outside creditor would be entitled to the member’s share of distributions without voting or management rights. This type of protection is often referred to as “charging order” protection. Properly protected, a creditor will have to rely on liability insurance and any unprotected assets to collect on their claim, not the LLC.

If you are interested in asset protection planning for your investment real estate using an LLC, it is advisable to consult with an attorney who understands the LLC laws of the state where your property is located to ensure comprehensive protection from both inside and outside liability.

Contact Davis Law Group

You have worked diligently to accumulate your assets. Do not let a lawsuit jeopardize your financial security. Contact Davis Law Group today and one of our experienced attorneys can evaluate your situation and develop an asset protection plan tailored to your needs and those of your family.