Q. Could you give an overview of what might be done legally to protect my assets from lawsuits? I feel vulnerable not only to losing what I have accumulated, but I am afraid to have a lien against assets not yet earned.
John J. Grande, CFP®
A. If you haven't done any asset protection planning, you are right that your wealth is vulnerable to potential future creditors and, should the worst happen, you could lose everything. You don't have to be in the wrong to be sued or to lose a lawsuit. Lawsuits, taxes, accidents, and other financial risks are facts of everyday life. And though you would like to believe that you are safe, misfortune can befall even the most careful person.
Traudy F. Grande, CFP®
What can you do? First, identify your potential loss exposure, and then implement strategies that are designed to help reduce that exposure without compromising your other estate and financial planning objectives.
John S. Grande, CFP®
Part of your overall asset protection plan might include repositioning assets to make it legally difficult for potential future creditors to reach them. This, however, does not extend to actions that hide assets or defraud creditors. If a court finds that your asset protection plans were made with the intent to defraud, it will disregard those plans and make the assets available to creditors.
How can you avoid running afoul of the fraudulent transfer laws?
- Make sure your plans are made for legitimate business purposes or to accomplish legitimate estate planning objectives.
- Carefully document the legitimate business and estate planning purposes of any arrangements you make.
- Put your plans into effect before you have any problems with creditors.
- Do not implement a plan when a lawsuit is imminent or pending or when you have an outstanding debt that you believe you may be unable to pay.
Where the dangers lie
Unexpected liability can come from just about anywhere:
- The IRS and other tax authorities.
- Accident victims, including victims whose injuries were caused by the actions of minor children or employees.
- Doctors, hospitals, nursing homes, and other health-care providers.
- Credit-card companies.
- Business creditors, including employees and former employees, governmental agencies, suppliers, customers, partners, shareholders, and the general public.
- Creditors of other individuals, where you have cosigned or guaranteed obligations for those individuals.
- Marital or other live-in partners.
There are three basic asset protection techniques: insurance, statutory protection, and asset placement. None of these techniques is a complete solution by itself, but may make sense as one limited component of an asset protection plan.
The simplest way to cope with risk is to shift the risk to an insurance company. This should be your first line of defense. Before you do anything else, review your existing coverage. Then consider purchasing or increasing coverage on your insurance policies as appropriate. You should be adequately insured against:
- Death and disability.
- Medical risk, including long-term care.
- Liability and property loss (both personal and business).
- Other business losses.