Asset protection is becoming an increasingly important issue in our litigious society. All of us have exposure to potential creditors. You may have exposure due to the assets you own. Perhaps you cannot shovel the sidewalk in front of your home and your neighbor slips and breaks a hip. Perhaps you own a rental property and the roof collapses.
You may have exposure due to your employment. Perhaps you are a physician whose patient has a bad outcome and whose family believes you to be responsible. Perhaps you are an accountant who signed off on Enron’s books.
You may have exposure from ordinary everyday acts. Perhaps you do not see that the traffic light has turned red and cause an accident. Perhaps you let go of your shopping cart to answer your cell phone and the cart rolls down the hill hitting a baby stroller.
There are countless unimaginable risks. But, there are ways to manage and minimize these risks. A corporation or other entity can protect you from liability arising from rental property or other assets. Further, you can get insurance to protect against the most significant risks. Auto and homeowner’s liability insurance can provide insurance up to a certain dollar limit for automobile accidents and home injuries, respectively. An umbrella policy can provide additional coverage for multiple risks, such as home, auto, and other risks. Malpractice insurance can provide protection from workplace related exposure.
However, insurance policies have limits, which may be exceeded by a serious claim. It is important to structure your assets to minimize exposure in the event the policy limits are exceeded or in case you are not insured for the particular risk. Each state has a list of assets that an individual can protect in the event of bankruptcy. First, in many states, creditors may not attach retirement plans such as pensions, 401k accounts, and IRAs. Life insurance policies may also be exempt, depending on the state. In such states, it makes sense to fund these accounts as much as possible. States also typically provide protection for the family home. In some states, such as Florida and Texas, the value of the entire home is protected. In other states, only a small amount of equity is protected.
Gifting assets to trusts for children or others may provide some creditor protection. Gifts made far enough in advance of a creditor claim arising are safe from attachment. Typically the gift must be before there is a known or foreseeable creditor, but the exact period varies significantly from state to state.
Providing asset protection for your children or others is much simpler than protecting assets for yourself. You can leave the assets in a trust for them and have an independent trustee with the power to make discretionary distributions. Except in rare circumstances, your children’s creditors would not be able to touch the assets in the trust.
There are many ways to provide layers of protection for your hard earned assets, from the simple to the complex. An estate planning attorney can help you protect your assets from the many risks in today’s world.
Compliments of the McGee Law Firm, Attorney Brandon McGee
Written By: The American Academy of Estate Planning Attorneys