Myth 1: Asset protection planning is only for the wealthy or those with high-risk jobs, such as doctors or lawyers.
Fact: Asset protection planning is for everyone. If you engage in any activity that could give rise to a lawsuit (drive a car, employ someone, allow people into your home, etc.), you are vulnerable to a lawsuit that could take everything you have.
Myth 2: Asset protection planning is about hiding money and property from creditors.
Fact: Asset protection planning is not about hiding money and property, keeping secrets, or defrauding anyone by transferring your money and property to someone else. Asset protection planning is about positioning what you own in a way that discourages lawsuits or prompts a mutually beneficial settlement. However, once you become aware of a creditor or a pending claim, transferring money and property to avoid paying that debt can be considered a fraudulent transfer, which may have legal consequences.
Question 1: My spouse just filed for divorce. Can I do asset protection planning now?
No. Asset protection planning can be done only before a lawsuit or threat of a lawsuit is known. Asset protection is about planning ahead, not transferring accounts and property only when at risk. Attempting to transfer your accounts and property after you become aware of a lawsuit or creditor would be considered fraudulent, and you could be penalized.
Question 2: What simple things can I do to protect my accounts and property before transferring them into a trust or limited liability company?
Though it is always better to seek an estate planning attorney’s help, you can use some basic strategies to protect your assets on your own. First, always ensure that you have proper insurance. Your homeowner’s or renter’s insurance should be up-to-date and accurately reflect the current value of your home and belongings. If you own a business, make sure you have business insurance to cover any liability or losses that may arise so that your personal money and property face less risk.
Second, if you are married (and your state law allows it), you and your spouse may own your home as tenants by the entirety. This type of ownership means that one spouse’s creditor cannot take your home. Depending on your state’s law, you may be able to co-own other property the same way with your spouse. In addition, your state’s laws may protect a primary residence from lawsuits or creditors.
Last, consider making the maximum contribution to your 401(k) or individual retirement account (IRA). These accounts are protected from bankruptcy proceedings for you and your spouse (with certain limitations in some states). However, in most states, this same protection does not extend to an inherited IRA.
