Much of estate planning focuses on transferring your wealth to loved ones in a tax-efficient manner. But for many people, it's equally important to protect that wealth against frivolous lawsuits or baseless creditors' claims.
If your business, professional or personal activities expose your assets to attack by unscrupulous litigants or creditors, consider incorporating asset protection strategies into your estate plan.
From the Simple to the Complex
When it comes to asset protection, there's a wide variety of techniques to consider. Here are five, from the simple to the complex:
Buy insurance. Insurance is an important line of defense against potential claims that can threaten your assets. Depending on your circumstances, it may include personal or homeowner's liability insurance, umbrella policies, errors and omissions insurance, or professional liability/malpractice insurance.
Give it away. If you're willing to part with ownership, a simple yet highly effective way to protect assets is to give them to your spouse, children or other family members, either outright or through an irrevocable trust. After all, litigants or creditors can't go after assets you don't own (provided the gift doesn't run afoul of fraudulent conveyance laws). Choose the recipients carefully, however, to be sure you don't expose the assets to their creditors' claims.
Retitle assets. Another simple but effective technique is to retitle property. For example, the law in many states allows married couples to hold a residence or certain other property as "tenants by the entirety," which protects the property against either spouse's individual creditors. It doesn't, however, provide any protection from a couple's joint creditors.
Contribute to a retirement plan. You may be surprised to learn that maxing out your contributions to 401(k) plans and other qualified retirement plans doesn't just set aside wealth for retirement, it also protects those assets from most creditors' claims. IRAs also offer limited protection: In the event of bankruptcy, they're protected against creditors' claims up to a specified amount. Outside bankruptcy, the level of creditor protection depends on state law, which varies from state to state.
Set up an LLC or FLP. Transferring assets to a limited liability company (LLC) or family limited partnership (FLP) can be an effective way to share wealth with your family while retaining control. These entities are particularly valuable for holding business interests, although they can also be used for real estate and other assets.
A Word of Warning
Keep in mind that asset protection isn't intended to help you avoid your financial responsibilities or evade legitimate creditors. Federal and state fraudulent conveyance laws prohibit you from transferring assets (to a trust or another person, for example) with the intent to hinder, delay or defraud existing or foreseeable future creditors. And certain types of financial obligations — such as taxes, alimony or child support — may be difficult or impossible to avoid.
Start Planning Now
To be effective, asset protection strategies should be implemented as early as possible. Their protection extends only to unanticipated future claims. Once a claim exists or is reasonably foreseeable, it may be too late.
