You’ve probably got a story to tell. The one about how you got to where you are today. It probably involves lots of hard work and sacrifice. And money.
Last I checked, people weren’t giving away their homes and cars. And I bet that you put locks on that house and car… and firewalls and passwords on your investment accounts.
Why? Because we protect what’s valuable to us.
Protecting personal assets is key to a comprehensive financial plan. Creditors can come after you for reasons you never foresee: accidents, divorce, errors on the job from faulty workmanship, accusations of discrimination or harassment… and on and on.
The point is not to focus on the what-ifs, but to think proactively about how to protect what you’ve worked so hard to get.
Here’s what to do about it ahead of time.
Emelia Mensa CPA’s Tips for Protecting Personal Assets
“Everyone has a plan ’till they get punched in the mouth.” – Mike Tyson
You don’t have to be cagey about protecting personal assets (though not flaunting wealth is an excellent first step — it makes you less of a target). But you do have to pinpoint what of yours is at risk. What kind of assets do you have?
Insurance usually shields such physical assets as homes or cars. Retitling can offer further protection. Qualified retirement plans and (sometimes) life insurance can come under the protection of state and federal law.
(By the way, how much is in your name that doesn’t have to be?)
In some ways, protecting personal assets can also be straightforward. Bankruptcy, for instance, may be the simplest and best move if you have relatively few assets. This protection is often just a matter of the right papers filed in the right order. In some states — not all — declaring bankruptcy ignites a homestead exemption, which basically means courts can’t award your home equity to creditors.
If your assets are greater and more complicated, though, your plan for protecting personal assets should be, too.
More than one basket
You know what often keeps a ship afloat if an accident puts a hole in its hull? Compartmentalization. The ship has many airtight areas that can be sealed off if water gets in. The ship may lose a few compartments, but not all.
Protect yourself so that you might only lose parts of your wealth rather than the whole thing. And it’s just like wealth building in general… diversify.
When most Connecticut residents think of protection and money, they think of insurance. And that is a good first building block for your asset protection plan. You’re concerned here with insurance to protect against professional and personal liability.
Certain professions require professionals to carry malpractice or errors and omissions insurance. These policies shield you against clients who may sue you for a mistake involving your work. Personal liability insurance commonly safeguards you from lawsuits from accidents involving your car or home.
Consider umbrella or excess coverage. Umbrella policies usually provide broader coverage terms than primary policies. Excess policies cover essentially the same conditions as the primary policy, but coverage limits are higher.
Together or separate
Some assets involve another person. Here’s where protecting personal assets takes more work.
For example, some states allow protecting your personal residence with nuanced titling. If you or your spouse are named separately in a lawsuit, titling can be effective against creditors by establishing your indivisible interest in the home.
Speaking of spouses, divorce can be one of life’s biggest threats to your assets. Retirement plans and even partial ownership in a spouse’s business can be fair game. Many depend on a prenuptial agreement. But prenups have to be carefully worded as courts often eye them closely.
Practice your letters
Lastly, let’s talk about business protection and trusts that can protect those assets.
A popular protective business structure is the limited liability company or LLC. Without what’s called a charging order, creditors can’t touch the company or assets in an LLC.
Such an order does allow a creditor to take distributions paid out of the LLC (usually) but as the company owner you don’t have to make such distributions — and even if you do and the creditor takes them, the creditor has to pay the taxes on the money. Consider putting each piece of your investment real estate into an LLC.
And there are options for trusts to consider as well:
- An asset protection trust (APT) is an offshore vehicle to shield mostly liquid assets from domestic courts and creditors (though they can cause the IRS to notice you).
- A lifetime qualified terminable interest property (QTIP) trust for a less-wealthy spouse leverages the gift tax marital deduction, protecting assets and potentially whittling estate taxes.
- A spousal limited access trust (SLAT) is an irrevocable trust where one spouse makes a gift to benefit the other spouse while removing the assets from their combined estates.
These are just a few tips for protecting your personal assets.
And we’re happy to tell you more, but don’t wait too long. By the time the creditors come, it might be too late.
We’re here for you,
Emelia Mensa EA, CPA,