01 Dec 2013

Four ways to shield and protect your assets

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If you have substantial assets, come into sudden wealth, or are in a risk prone business you really should consider protecting your assets against possible lawsuits. And there are several ways you can keep your financial holdings secure.

First, make sure you have liability insurance. Your first line of defense against any type of litigation is to have insurance that covers claims. They we recommend that you have a personal umbrella liability policy in the amount equal to your net worth. This may provide another big layer of protection if your primary coverage is not enough. If you own a business, the business should also carry adequate liability insurance to protect those assets.

Review all jointly held accounts. Any money you deposit in a joint account with children, elderly parents, roomates, business partners or spouse can be at risk. In short, if the joint owners of any of your accounts file for divorce, incur tax liens are involved in a lawsuit, your account is vulnerable. Depending on your family or martial situation, you might want to keep your assets separate from your spouse. In many states, a joint account becomes joint property. If you wish to ensure that only your children from a previous marriage inherit, then a separate account is in order. In the case of a divorce, you could lose a substantial portion of those assets should the money be comingled.

Protect and formalize your informal partnerships. You are responsible for the actions of your business partners, so be sure a lawsuit against a partner can’t put all of your assets at risk. You’ll need to create business entities that shield assets. It is also not a bad idea to compartmentalize your assets. We call this the “silo” technique. For example, an owner of rental properties (rental properties generally carry a high risk of liability) can place each separate leased property in a separate LLC or corporation. If one rental results in liability, a creditor will be forced to pursue liability against only one entity, and will not be reach either the owner or her other properties. Keep in mind though that this technique will not shield you from your own personal liability, which is another reason why you need insurance.

Finally, every state shields certain classes of assets through property exemption laws. The property exemption laws serve a dual purpose. First, they denote types and amounts of property that are unreachable by creditors. Second, these statutes also denote types and amounts of holdings that cannot be lost by a debtor in bankruptcy. Learn the laws in Arizona and shield as much as you can. Before thinking about “off shore” trusts and other such exotic ideas, you should be funding retirement plans and life insurance policies as a first stage in shielding assets.

CAUTION. Taking care of protecting your asset now is critical. Too often attorneys get a call from a client or potential client who has been sued or is about to be sued. It is often too late as any transfers at that point are subject to being set aside as a “fraudulent conveyance” Unless you receive good value for a transfer, if you do it to avoid having to pay a judgment, it is unlikely to stand up in court.

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