Asset protection typically involves employing legal tools like partnerships, limited liability companies, and trusts to safeguard assets from creditors and lawsuit plaintiffs. For optimal results, asset protection should be undertaken early, before any significant crises arise. Investors, professionals, and business owners are particularly vulnerable. But even those without businesses should take steps to safeguard their wealth.
1. Insurance
Insurance plays an essential part in asset protection plans. While most people carry homeowners and auto policies, an umbrella policy may provide greater liability coverage in certain instances. Furthermore, business risks and intellectual property policies are available separately, while there are even policies designed specifically to cover savings accounts from creditors—though certain liabilities still aren’t covered (e.g., intentional harm or fraud).
Legal structures such as trusts can offer crucial protection against creditors and litigants, thereby providing a significant sense of peace. These structures are usually created as part of an investment strategy and are ideal for professionals that may face greater legal risk, such as doctors and real estate developers. Retitling may be an effective solution for those willing to relinquish some ownership over their assets. Gifting property allows you to remove it from your personal estate and shield it from creditors or litigants (provided the gift doesn’t violate fraudulent conveyance laws). Furthermore, an entity can be created, and then the assets can be transferred directly to it for safekeeping.
2. Partnerships
When it comes to protecting assets from creditors, lawsuits, and other risks, taking proactive measures is often best. Establishing partnerships, trusts, or other legal entities as safeguards can provide ample protection from certain threats or liabilities that threaten wealth accumulation. Family limited partnerships (FLPs) provide significant asset protection benefits, thanks to their limited liability protection for general partners. As such, personal assets like homes or savings don’t become subject to partnership debts that would threaten them.
FLPs may be expensive and complex to manage, with only limited protection against creditor claims as a result of state laws. Other strategies tend to be more effective, such as retitling assets to take advantage of homestead exemptions or setting up revocable trusts and Domestic Asset Protection Trusts (DAPTs) that provide more solid protection in select states—for instance, retitling property as “tenants by the entirety” may help protect against joint creditor claims, while transferring voting stock via direct gifts could provide significant tax benefits while providing asset protection against joint creditor claims as well.
3. Trusts
Utilizing legal structures to protect their assets is crucial for high-net-worth individuals and businesses, particularly when litigation, unanticipated debts, or liabilities threaten wealth. Asset protection strategies not only reduce exposure to potential claims but can also serve to preserve them for future generations.
One popular strategy is using trust to hold and manage assets. Trusts are effective tools for safeguarding assets because they allow you to transfer them out of your personal control into an entity separate from you—which makes it more difficult for creditors to reach these assets inside. However, trusts do not completely prevent claims from occurring.
Homestead protection can also help safeguard assets; it shields a certain portion of home equity from creditors and lawsuits, providing some level of asset protection. But this strategy may not suit every person and shouldn’t be relied upon solely, as laws vary significantly across states. Another viable strategy is the establishment of domestic or foreign asset protection trusts (DAPT). Although such trusts require complex planning and can be expensive, they may provide greater protection than homestead exemptions or other strategies.
4. Homestead Protections
Homestead exemption laws help safeguard a portion of your home equity from creditors during bankruptcy proceedings. A homestead is typically defined as any single-family home, condo, farm home, or mobile home that serves as your primary residence; vacation properties and properties used only temporarily may not qualify as homesteads. Homestead protection varies by state and county, depending on factors including equity in your home (less any liens or encumbrances) and maximum allowable exemption limits. Furthermore, married couples can double their exemption limits.
Homestead protection provides some level of defense from creditor judgments; however, it doesn’t protect other personal assets, and the exemption limits may not cover rising property values and growing equity. A New York City estate planning attorney can assist in devising a strategy to decrease debt risk while increasing asset protection; reach out for a consultation today!
5. Gifting
Gifting assets to family members is an effective way of protecting your hard-earned wealth from creditors and lawsuits, yet it must be undertaken with caution to avoid breaking fraudulent transfer laws. Proving genuine intent by using trusts where applicable and preserving comprehensive documentation are vital safeguards against this scenario.
Transferring property into a trust before filing for divorce may protect it from being used against you by potential creditors of either spouse and can help minimize federal estate taxes. Reassessing your asset protection plan regularly to make sure it reflects current estate and family circumstances is crucial to keeping up with life changes, like an adjustment in homestead exemption or trust structure. A skilled attorney can help guide the decision process—contact us now to set up an appointment!
