Economic uncertainty is a way of life. Even in the best of times, a recession is only just around the corner. Smart preparation requires taking practical steps before the market loses value or legal problems arise.
One of the best ways to plan for ups and downs is through asset protection. If you’ve never considered asset protection or developed a strategy to accomplish it, the time to do so is now.
What is Asset Protection?
Asset protection is the use of various legal tools to shield your personal property from lawsuits, court judgments, liens, and fraud. Asset protection exists because there are financial risks that insurance simply does not protect against. A comprehensive asset protection plan aims to minimize the risk of financial ruin that may come with:
Litigation: Lawsuits, court judgments, and liens present a constant threat to the wealth and property that you have built. For example, if your business and personal assets are commingled, and your business is sued for a tort or breach of contract, the plaintiff may be able to liquidate your property to cover a court judgment. Asset protection can avoid this.
Divorce: Certain assets are vulnerable to divorce and property division without an asset protection plan. For instance, a bitter ex-spouse may threaten to seize your child’s inheritance. You can shield these and other assets through the use of an inheritor trust, keeping more of your wealth in the family.
Business downturns: Even if the economy is doing well, there is no guarantee that your business will thrive. A sudden dip in the market or unexpected circumstances could result in losses and litigation. Asset protection begins with ensuring your personal assets are protected from employee, partner, and co-owner lawsuits. It can also address other risks, such as fraud.
Medical emergencies: The cost of healthcare is higher than ever, with no end to rising expenses. One medical emergency can easily wipe out your savings. And while having a robust emergency fund is important, you need more intensive planning to protect your home and other property from significant, unforeseen medical bills. In an uncertain economy, these risks can be magnified, and the consequences of inaction can be severe.
Proactive asset protection helps you safeguard your wealth, maintain financial stability, and give your family peace of mind, no matter what challenges arise.
Common Asset Protection Tools
There are many different asset protection strategies and tools. While the right ones for you will depend on your exact circumstances and goals, some of the most common include:
Trusts: A trust is a legal structure into which someone can transfer assets. A trustee manages trust assets for the benefit of designated persons known as beneficiaries. Irrevocable trusts can shield assets from judgments, creditors, and others who may otherwise be able to make a claim against this property.
Limited liability companies (LLC) and corporations: One of the most important steps that you can take as a business owner is separating your business and personal assets. Forming an LLC or corporation can do this. Understanding the differences between these, including their advantages and disadvantages with respect to liabilities and taxes, can help you select the right entity for your business.
Retirement accounts: Many workers give little thought to their retirement accounts. Often, they open these accounts at the outset of their professional careers, and simply assume the money will be there once they stop working. But life events can jeopardize your retirement, with divorce being a prime example. Planning for a comfortable retirement requires anticipating these and other threats.
Other tools may be available depending on your situation and goals. Working with an asset protection attorney ensures your plan is properly structured and legally sound.
Common Asset Protection Misconceptions
Perhaps you have considered asset protection in the past, but you chose an alternative route to ostensibly accomplish the same thing. You may have been misled by common misunderstandings and misconceptions that surround this topic. The following are some examples of these.
Asset Planning is Only for the Wealthy
Any mention of trusts naturally conjures up images of the wealthy and powerful shielding their assets. And while they certainly use trusts to do so, lawsuits and liabilities can threaten individuals and families at all income levels. Everyone from every background should consider asset protection.
All Trusts and Legal Entities are Created Equal
If you have thought about using a trust or a formal business entity (e.g., LLC) to protect your assets, you could be misled into thinking that one is as good as the other. But there are major differences between revocable and irrevocable trusts, and LLCs and corporations. Understanding these is important to wisely plan for the future.
You Can Plan After a Problem Has Already Arisen
Many people only think about asset protection when they are already in the middle of a crisis, such as administering a loved one’s estate or dealing with a lawsuit. Some issues that come up include “Can I reimburse myself from an estate account as an executor?” or “Can I mix personal and fiduciary funds?” The line between financial and legal boundaries can easily be blurred.
Waiting until a lawsuit, major medical bill, or other financial issue appears to shield assets can trigger allegations of fraud. Transferring property or moving money after the fact can create legal exposure and may be reversed by courts. Asset protection planning is designed to prevent these issues before they arise, not to fix them after the fact.
Turning Uncertainty Into Peace of Mind
Nobody wants to be vulnerable to economic uncertainty. By planning early, you and your family can have the confidence you need to encounter any season in life. Whether you’re just starting or updating a plan, working with a lawyer ensures your asset protection strategies are implemented correctly and actually provide the protection you need.
