With the prevalence of litigation in the U.S., anyone with accumulated wealth in investment accounts, real estate, or business interests needs to consider a thoughtful strategy to protect assets from potential creditors. There is no “one size fits all” solution but rather a diverse array of tools and techniques which are legally available. Although some situations require complex planning, here are examples of some scenarios where a fundamental level of asset protection should be considered:
- Home ownership
- Considerable time spent driving or higher-risk driving such as elderly or teenage drivers
- Potential hazards on premises such as a swimming pool or trampoline
- Serving on the board of a local, non-profit organization
- Owning pets
In addition to avoiding unnecessary risk and identifying and correcting potential hazards associated with property and real estate, the following are some fundamental strategies to consider:
- Increase or maximize underlying liability coverage on homeowners and auto insurance policies.
- Purchase a personal umbrella liability policy, which can provide additional coverage in excess of auto and home policies. These policies typically begin at $1 million in coverage and require that certain liability limits on underlying auto and home policies are in place. Cost for these policies is usually quite reasonable; $200 to $300 in annual premium can secure $1 million in coverage.
- Declare your personal residence a homestead. The homestead laws refer to special privileges benefiting owners of homesteads including a law exempting a homestead from attachment or sale to satisfy debts or bankruptcy. In some states, the homestead declaration is automatic while other states require a legal filing, and the amount of protection will vary.
- Transfer or title ownership of assets. An example of this strategy may include transferring ownership of a home from a higher-risk spouse to a lower-risk spouse. Of course, there are certain serious drawbacks, including divorce or limitations, if the individuals reside in a community property state. In some states, jointly owned assets can be titled as “tenants by the entirety,” which means creditors generally cannot attach joint assets to pay for one spouse’s debts.
These strategies represent just a few of the options you can consider when implementing an asset protection plan. As with any legal strategies, it is critical to consult with a legal professional knowledgeable with specific state laws.
For more information, download our Asset protection: basic principles and strategies for safeguarding your wealth investor education piece, or watch our Asset protection is a key part of financial planning video series.
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