How to Safeguard Your Assets from Creditors or Lawsuits

by / ⠀Entrepreneurship Startup Advice / November 3, 2021

If you’re looking to safeguard your assets from creditors or lawsuits, there are many different legal vehicles that could prove beneficial.

“There’s definitely more than one method to shave a cat and there are many various tools being employed to safeguard the assets of a person,” states Blake Harris, an attorney from Florida with a specialization in asset protection.

Options for protecting assets include:

  • trusts for asset protection in the United States;
  • the Limited-Liability Company, also known as LLCs;
  • insurance, for instance, an umbrella policy, or an insurance policy for malpractice;
  • alternate dispute resolution;
  • prenuptial agreements;
  • retirement plans like a 401(k) as well as an IRA;
  • Homestead exemptions; and
  • trusts offshore.

Why do you require protection from Lawsuits?

In simple terms, if you lose a case — as in one that is filed by a creditor for example in order to collect the amount you owe — you risk the possibility of losing assets like your house, your car, and the funds in your checking or savings accounts. Additionally, a lawsuit could be a swindle to pay legal costs that take up both your energy and time, trigger stress, and damage your reputation.

“Really the most important thing to remember in asset protection is planning it ahead and the more time you’re able to plan it before an upcoming lawsuit, the more secure the assets you have will be” Harris advises.

How to Safeguard Your Assets

The strategies for protecting your assets are nearly as diverse as those assets. Here are eight options you can consider for protecting your assets from judgments by a judge.

1. Domestic Asset Protection Trusts

Author, accountant, and attorney Mark J. Kohler calls the trust for asset protection in the U.S “the most affordable tool for asset protection” accessible throughout the U.S. Trusts will shield assets so creditors cannot seize them.

This type of trust “allows you to safeguard your assets from creditors in the future to ensure that you leave your property to your loved ones when you pass away. If you don’t anticipate any threat from creditors in the near future, you might not require this kind of trust,” according to the official website, Nolo.

According to Kohler, 17 states permit these trusts. They’re created with the intention of being irrevocable trusts. Most of the time an irrevocable trust cannot be changed or revoked after it’s been established.

The assets of an asset protection trust in the United States can include cash, stock LLCs, business properties as well as real property. Remember that the trust could be required to meet obligations such as children’s support and alimony, or taxes.

2. Limited Liability Companies (LLCs)

An LLC, also known as a limited liability company, is a place to store the business’s assets. The legal structure protects you from having your assets confiscated by business creditors. This means that your house, car, or bank account would typically be secure from a commercial creditor, but your assets belonging to your business in an LLC typically aren’t secure.

Harris states that an LLC functions similar to a manhole cover for your financials. “You can place it over your assets and, if anything goes wrong with the assets, the risk will not rise and impact the other assets you have,” he says.

3. Safeguard Your Assets with Insurance Policies

Insurance policies on liability could help protect your assets. Three policies could protect your home or savings, as well as other assets.

Umbrella Policy

An umbrella policy is a supplement to the liability insurance you already have with homeowners insurance as well as an auto policy or another kind of policy. It can act as a superb safeguard.

Let’s say you’re hit by the sum of $1 million in a judgment due to an accident in your vehicle. Your insurance policy includes limitations on liability that limit the amount of insurance you pay. As an example, you may have a maximum of $300,000 to cover injuries to other people, or $100,000 in property loss. If the limits are capped over, an umbrella insurance policy can cover the remaining $600,000.

Malpractice Policy

Medical malpractice insurance may protect the assets held by a physician or another health care provider who suffers the loss of a lawsuit for medical malpractice.

4. Life Insurance Policy

Certain life insurance plans are protected from confiscation by creditors who’ve received a court judgment against you. The extent to which cash values and the proceeds of death are completely or in part protected differs according to the state. Annuities, a form of insurance contracts, have similar security.

5. Alternate Dispute Resolution

Alternative dispute resolutions like mediation or arbitration can help you avoid a court proceeding and help to protect your assets.

A company, for instance, could benefit from alternative dispute resolution. In the course of employment, an employer may require employees to settle disputes by mandatory arbitration instead of the courtroom. Harris states that this is “an effective way to reduce your chance to be sued.”

6. Prenuptial Agreements

Prenuptial agreements are a good safeguard. They are signed prior to marriage, may secure certain current and future assets owned by the spouse instead of being owned jointly by the couple if they go through a divorce.

7. Retirement Plans are a Super Safeguard

In many cases, the creditor isn’t able to access your retirement account. This includes the IRA and an employer-sponsored 401(k). However, a creditor might be able to access your retirement savings account if you, for example, have outstanding taxes or payment of alimony.

8. Homestead Exemptions

In some states, as a safeguard, a homestead exemption shields at least a portion of the value of your home from creditors in the majority of cases. Certain states make the exemption unlimited, while others restrict the amount you can receive. In Massachusetts for instance, the exemption amount is $300,000.

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Editor in Chief of Under30CEO. I have a passion for helping educate the next generation of leaders.

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