Why You Need Asset Protection and Your Best Asset Protection Tools
Asset Protection: Why and How
Why: We live in a very litigious society. Another lawsuit is filed every three seconds. Some of these suits are based on frivolous claims and are brought only to harass and intimidate. Knowing this, it is prudent to protect your assets right now, while the seas are calm. Once you have been sued, the courts can unwind your later moves to protect your assets.
How: Asset protection is a comprehensive strategy to limit the risk of losing your assets to creditors and predators. A sole proprietorship and general partnership offer no such protection. Asset protection involves utilizing limited liability entities, such as corporations (both S corporations and C corporations), LLCs and LPs, as well as certain trusts to minimize your personal exposure. As John D. Rockefeller said: “Own nothing and control everything.” When a plaintiff’s service is looking for people to sue, you want your profile to be low. If during an asset search your name does not show up as an owner, but you control your assets through a mix of limited liability entities and trusts with privacy protections, you will gain protection.
The Right (and Wrong) Way to Protect Assets: There is a misperception that asset protection is only for the very rich. This is not true. Almost all asset protection strategies are very affordable to implement, especially when compared with the potential loss of a lifetime’s worth of wealth building. The problem arises when you implement a “poor man’s asset protection” strategy. Simply transferring assets to your brother, sister or friend in advance of a judgment in order to “look poor” is a bad idea for three reasons. First, the courts can look right through such late in the game transfers, and can find you in contempt for making them. Second, there are serious gift tax consequences when you give away assets that may bring the IRS to your door. Third, there are many cases when the “friend” refused to transfer the asset back. It is hard to sue to get your property back when it was fraudulently transferred in the first place.
The best way to approach asset protection is to do it early (before you are aware of a lawsuit or get involved in any business or investing activity) and do it right. Using the right structures properly prepared and implemented will provide a lifetime of protection. To learn more about our asset protection consultations, please contact us.
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Basic Asset Protection Tools Explained By an Asset Protection service
Liability Insurance: Insurance is your first line of defense. You will want coverage on your automobile, house, business and rental real estate assets. You may want to consider purchasing “umbrella” coverage on your homeowner’s policy to provide additional coverage. Although insurance is the first line of defense, you must never forget that insurance companies have a strong economic incentive to not cover every claim. There is an entire area of the law known as Bad Faith Litigation, which deals with insurance companies collecting premiums and then acting in bad faith when it comes time to pay on a claim.This is why you need the second line of defense, which is asset protection planning.
Homestead Exemptions: A homestead protects a certain dollar amount of equity in an individual or married couple’s primary residence. In Texas and Florida this is an unlimited dollar amount. In California,the homestead amount is $100,000 for a married couple. Pennsylvania doesn’t provide a homestead. Each state is different. In Nevada, $550,000 in equity is protected from creditor claims. So, for example, if a Nevada couple has a primary residence worth $1 million and a first deed of trust securing a bank loan of $450,000, there is $550,000 in equity exposed. A creditor could go after that equity and force a sale of the house. In Nevada, the simple filing of a homestead exemption protects the $550,000 in equity for the benefit of the couple against later creditors.
You can only homestead one property, your primary residence. In all states, the homestead does not protect against debts secured by the property such as bank loans or IRS liens. While a basic and easy protection, many people fail to take the important step of homesteading the primary residence. (For a list of state exemptions visit.)
Corporations (both S corporations and C corporations), limited liability companies (LLCs) and limited partnerships (LPs) are business entities that were created for asset protection purposes. There are four major advantages to using these very affordable structures:
- Shield Personal Assets From Business Risks By using one or more entities you can conduct business and shield your personal assets such as your home and bank account from claims against the business. This is a far superior way of doing business versus using a sole proprietorship or general partnership, which offer no asset protection. One claim against your unprotected business and all of your personal assets are exposed.
- Shield Business and Real Estate Assets from Personal Judgments With the proper asset protection planning you can shield your valuable business, real estate and investment assets from claims brought against you as an individual. Suppose you get in a car wreck and your insurance doesn’t cover you. A creditor may have a difficult time reaching your business and investment assets if they are held in the right Nevada and Wyoming entities, which offer charging order protection. A charging order is a lien against future distributions. You may not make any distributions, leaving the creditor waiting. Importantly, the creditor can’t force a sale of the assets if we use the right states’ entities. If we use a weak state’s law, such as California, New York and Georgia, the creditor can force a sale of the assets. Choice of state is important. A complete discussion of charging orders is found in Garrett’s book, Loopholes of Real Estate.
- Using Several Business Entities for Asset Protection If you own five rental real estate properties in one LLC, a tenant could fall at one property and, because the claim is against the LLC and the LLC owns five rentals, the tenant could reach all five properties. A better strategy is to segregate the assets into five separate LLCs, or at least into several entities. It is a key asset protection strategy to separate assets from each other in order to lower each asset’s exposure to claims.
- Choice and Use of Entities Using the right mix of entities is an important asset protection tool. In some cases a combination of both Nevada and Wyoming entities (LLCs, LPs and Corporations) can be used to implement an effective asset protection strategy. An asset protection service consultation can be very informative.
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