Asset Protection: Shielding your individual wealth today

Like many affluent individuals, you’ve probably worked hard for years to accumulate assets and create wealth. But have you taken steps to protect your hard-earned assets?

Asset preservation is as important as asset accumulation in today’s increasingly litigious society. Depending on how your wealth is structured and how your assets are invested, a single personal injury lawsuit could wipe out everything you’ve accumulated over your lifetime. Consider the following issues as you initiate actions to protect your individual assets.

What’s your loss exposure?

The first step in safeguarding what you own is determining your potential loss exposure. In other words, how much do you possess that could be claimed and seized by creditors in a legal judgment? Based on that information, you can devise strategies to reduce your loss exposure. Most strategies to lessen your exposure fall into one of these categories:

Liability insurance. This is one of the first levels of asset protection for individuals. Liability insurance policies help protect your assets from the financial risks associated with personal liability resulting from an adverse legal judgment.

Auto and homeowner’s policies, for example, usually include some liability coverage. Upping your liability coverage beyond the standard amounts (typically from $10,000 to $25,000) will provide additional asset protection.

Personal liability umbrella insurance will provide even more liability coverage above the limits of your auto and homeowner’s policies. For instance, if you were sued for causing a car accident or found liable for injuries suffered by a visitor to your home, umbrella insurance would provide coverage up to the policy limits (such as $1 million).

Statutory asset protection from creditors. Federal or state law exempts certain kinds of property and assets from creditor liens. Thus, some assets you own will automatically be protected due to statutory guidelines. Qualified retirement plans are this type of asset, as are IRAs and 401(k) plans, life insurance proceeds and Section 529 college savings plans. But keep in mind that inherited assets may not have the same degree of protection.

The amount of home equity that is protected (generally called the “homestead exemption”) depends on state law. In some states it’s very generous, but in others it’s extremely limited, given the value of homes today. Consult with your attorney about your particular situation in your particular state.

Asset ownership structure. Ownership of your assets will play an important role in whether or not they can be seized by creditors. Thus, it might be wise in some situations to transfer ownership of certain assets to your spouse. If you’re at a high risk of liability — for example, you’re a business owner — one strategy might be to retain ownership of assets with statutory protection, as mentioned above, and transfer ownership of all other assets to your spouse.

Trusts. Irrevocable trusts also can be used as an asset protection tool. Assets placed in an irrevocable trust can’t be removed. Nor can the trust terms be changed. With this step, you’ve effectively relinquished control over the assets, thus putting them out of reach of your creditors. The asset transfer must be done in advance of the act that created the liability, or the transfer could be nullified. In other words, the time to think about setting up such a trust is before you need to take advantage of it.

An irrevocable trust also can help you protect assets for your children and grandchildren. Consider structuring the trust in a way that effectively gives future generations the benefit of the assets without transferring ownership of them to your heirs. This can shield those assets from your descendants’ future creditors.

If you decide to use trusts as part of your asset protection strategy, remember that they may be subject to higher tax rates and additional tax filing requirements. Trusts also may be costly to set up and require expert legal counsel to administer and maintain.

Obtain expert assistance

The details involved in implementing asset protection strategies can be complex. Talk with your attorney and financial advisor to obtain guidance in your particular case.