Asset Protection 101
There’s nothing worse than working hard to accumulate assets for retirement, only to lose them in a lawsuit. Asset protection is an essential but often misunderstood concept.
At its core, asset protection involves safeguarding your personal assets from lawsuits, particularly those arising from negligence.
What can cause negligence lawsuits?
- Cell phones: Texting or browsing the web while driving has become one of the leading causes of car accidents. If you're involved in an accident, lawsuits from negligent driving can put your personal assets at risk.
- Property ownership: Owning a home, vacation property, or rental property means you're responsible for what happens on those premises. Premises liability can expose your assets if someone gets hurt on your property.
- Professional liability: If you're a doctor, lawyer, accountant, or other professional, you may face personal liability that can't always be shielded through your business entity.
What about business owners?
If you own a business, not having proper protection can put both your business and personal assets at risk. Without the right planning, you could lose everything—from the business itself to your home, savings, and other personal property. It's crucial for business owners to have a solid asset protection plan in place to prevent this.
How to protect assets from creditors?
One of the most effective tools for asset protection is a Limited Liability Company (LLC). To use LLCs correctly, it’s important to:
- Set it up as a multi-member entity (not just for you alone).
- Choose the right state to form your LLC, one that offers strong protections and limits creditor remedies to a "charging order".
- Follow all legal formalities when creating your LLC—don’t just set it up yourself online.
What assets should be placed in LLCs?
- Brokerage accounts
- Rental properties
- Vacation homes or condos
- IRAs (depending on the state you live in)
- Any other valuable assets
When using LLCs, always separate liability assets from non-liability assets. For example, don’t mix a brokerage account with property in the same LLC. If there’s a liability related to the property, it could put your brokerage account at risk.
Other risks and protection strategies
- IRS: The IRS is the most consistent creditor you’ll deal with. To learn how to reduce your tax burden, click here.
- Stock market: The risk of losing money in the stock market is higher than the risk of a negligence lawsuit. To learn about safe investment tools that protect your wealth from market downturns, click here.
- Long-term care: Over 50% of people aged 65 and older will need long-term care. Learn how to protect your assets from these potential costs, click here.