While most people assume only the extremely wealthy need to worry about asset protection, those with less wealth and fewer assets may be at even greater risk. For example, if you’re a multi-millionaire, a $50,000 judgment against you might not be that big of a burden. But for a family with a modest income, home, and savings, it could be catastrophic.
Asset protection planning isn’t something you can put off until something happens. Like all planning, to be effective, you must have asset protection strategies in place well before something happens. Plus, your asset protection plan isn’t a one-and-done deal. It must be regularly updated to accommodate changes to your family structure and asset profile.
There are numerous asset protection strategies available, but five of the simplest and most common include the following:
- Insurance
Purchasing different forms of insurance—health, auto, watercraft, and homeowner’s—should always be the first line of defense to protect your assets. Whether you’re ultimately found at fault or not, if you’re ever sued, defending yourself in court can be extremely costly.
Insurance is designed not only to help you pay if a lawsuit against you is successful, but the insurance company is also responsible for hiring you a lawyer and paying his or her attorney’s fees to defend you in court, whether you lose or win. However, insurance policies come with various amounts of coverage, which can be exceeded by large judgments, so you should also seriously consider buying umbrella insurance.
Should your underlying insurance policy max out, an “umbrella” policy will help cover any remaining damages and legal expenses. We can evaluate your current policies and advise you about the types and amounts of insurance you should have for maximum asset protection.
- Statutory Exemptions
Another way to protect your family’s assets is by taking full advantage of federal and state laws that make certain types of assets “exempt” from creditor claims and judgements. Depending on your state, the availability and amount of protection offered by such exemptions can vary.
For example, many states offer a homestead exemption, which protects a certain amount—or even the full value—of the equity you have in your primary residence from creditors. If your state provides a generous homestead exemption, paying down your mortgage could protect funds that are otherwise vulnerable.
Similarly, federal and state laws classify many retirement plans, such as 401ks and IRAs, as exempt assets, while some states also offer significant, or complete, exemptions for life insurance policies and annuities, as well. If you are a California resident, you can set up a Private Retirement Plan as well, which exempts assets in the plan and can protect millions of dollars from creditors if administered properly.
Even though exemptions won’t offer you total protection, they can provide significant shelter for certain assets. Plus, using statutory exemptions is something that can be accomplished without investing anything. All that’s required is for you to understand how best to structure your investments to take advantage of these exemptions.
- Business Entities
Owning a business can be an incredible wealth-generating asset for your family, but it can also be a serious liability. Indeed, without the proper protection, your personal assets are extremely vulnerable if your company ever runs into trouble. For example, if your business is currently a sole proprietorship or general partnership, you are personally liable for any debts or lawsuits incurred by your business.
Structuring your business as a limited liability company (LLC) or corporation is typically the best way to go for many small businesses. When properly set up and maintained, both entities create an impenetrable barrier between your personal assets and your business activities, and can prevent others from piercing the corporate veil. Creditors, clients, and other potentially litigious individuals can go after assets owned by your company, but not your personal assets.
If you own any kind of business, even just a side gig to earn extra income, you should seriously consider creating a protective entity to ensure any liabilities incurred by your company won’t affect your personal assets. If you have a business with multiple distinct streams of income, consider setting up another entity to shield the assets of the other business from liability.
- Estate Planning
While each of the asset-protection scenarios shared above are “maybes,” there is one certainty in life—death. It’s coming for all of us. And your death, or an incapacity before it, is the biggest risk to your family’s assets. Planning in advance for what is certain to come is a gift to the people you love the most. You can also protect your inheritances for your children and future generations using a Lifetime Asset Protection Trust.
- Income Tax Planning
Even if you make a modest income, you must pay your taxes. You should consider your tax liability a risk that you must protect against. The more money you save in taxes, the more wealth you have to pass on to your family. Also, if you make a mistake on your tax filings, the IRS and state taxpayer agency will charge fines, penalties, and interest, which can quickly deplete your savings and accumulated wealth.
A solid income tax plan for every family will minimize taxes, reduce the risk of audit, and secure wealth for future generations instead of losing more money to the government. There are numerous simple strategies that even the most educated individuals miss. Check out four main tax savings strategies for the 2019-2020 tax years here.
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Dahl Law Group
