Protecting assets from potential creditors should be something everyone thinks about. People work hard their entire lives to save up a nest egg. There are many different sources of liability people face that could threaten that nest egg. In today’s world, Asset Protection Planning is not just for the “wealthy” – Asset Protection Planning is for everyone. This article is the first in a 3-part series on Asset Protection Planning. This article will discuss what Asset Protection Planning is; what potential liabilities everyone faces; and some basic level Asset Protection Planning Tools.
What is Asset Protection Planning?
Asset Protection Planning is structuring your assets in a way to protect them from potential creditors. Asset Protection tools can range from the very simple - such as having an umbrella policy of insurance - to complex – such as offshore trusts. Think of Asset Protection Planning as a continuum with many shades of grey – on one end of that continuum, your assets are organized in a way that creditors could relatively easily steal your nest egg – on the other end of the continuum -- your assets are organized in a way where it would be very difficult for a creditor to steal your nest egg.
Potential Liabilities Everyone Faces
There are many different sources of liability people encounter today. Just realizing what those liabilities are is the first step of Asset Protection Planning. Here is a laundry list of some of the most common sources of liability that could threaten your nest egg:
1. General Negligence and Court Claims: Things like car accidents, slip and fall cases, etc. Over the last few decades various new threats against personal wealth have developed. The sheer number of lawsuits have skyrocketed. Trial lawyers have developed new theories of liability through the courts. Jury awards have escalated. Paying for your own defense in litigation is very costly and could deplete your nest egg itself. If a judgement is entered against you for the amount of the jury award then the successful plaintiff will look for your assets to satisfy their judgment.
2. Contract Liability: Consumer debt, breach of contract claims, loan obligations. Business owners are very susceptible to these types of claims especially if they personally guaranty business loans and other business obligations or they do business as a “sole proprietor” or “general partnership”.
3. Employer Liability: Employers face liabilities from lawsuits stemming from wrongful termination; sexual harassment; discrimination, or not complying with the Americans with Disabilities Act.
4. Marriage: Everyone should consider ways a surviving spouse can avoid being liable to creditors of the deceased spouse’s business debts or medical expenses. Wealthy individuals also need to consider the possibility of divorce for themselves, their children or their grandchildren.
5. Family Considerations: Your heirs may have substance abuse problems, gambling addictions, and creditor problems of their own. The moment they receive access to their inheritance, creditors can attach liens to those assets. Also if your heirs are spendthrifts, the moment they receive their inheritance outright – they are free to spend the money as they wish.
Basic Asset Protection Planning Tools:
Here is an overview of some of the most basic ways you can protect your assets.
1. Liability Insurance: Purchasing Insurance is your first line of defense in protecting your assets. Health insurance, auto insurance and home owner’s insurance is a must. Everyone should also consider Umbrella Insurance. Umbrella Insurance protects you from major claims by providing additional liability coverage above the limits of your homeowners, auto and other policies and it provides coverage for claims that may be excluded from those policies such as libel, and slander, etc. The most important thing about having insurance is that if your insurance company covers your claim, they will have a duty to defend you in court and pay for your attorney fees. The downside of insurance is that the liability event may exceed your insurance policy coverage or your claim may get denied by your insurance provider. In those events it is important that you have other Asset Protection Planning in place.
2. Exempt Assets: There are federal and state laws that protect certain types of assets you own from creditors. These assets are considered “Exempt Assets”. Here are a few examples of Exempt Assets that are protected by law.
a. Qualified Retirement Plans and IRA’s: Federal Law protects any retirement plan covered by ERISA – such as 401K’s – from being an asset that creditors can take from you. IRA’s are not covered by federal ERISA laws, but Illinois law classifies IRA’s as an exempt asset. So if you are an Illinois resident your IRA’s are exempt assets as well.
b. Public Benefits: Per Illinois Law, social security benefits, disability payments, unemployment benefits, and public assistance benefits are all exempt assets.
c. Life Insurance: Per Illinois Law, life insurance proceeds payable by reason of death of the insured to a spouse, parent, child or dependent is exempt from creditor claims.
d. Homestead Exemption: Illinois law protects up to $15,000 of your personal residence, including farm, lot and building, co-op, or mobile home. This means that if a creditor forced the sale of your home you can keep $15,000 of the proceeds. (Note: This is a relatively small exemption amount. Other states have much larger Homestead Exemptions – for example – Florida’s Homestead exemption is for an unlimited amount.)
3. Tenants By the Entirety: Married couples can hold title to their home as “Tenants By the Entirety”. By holding title this way a creditor cannot force the sale of a home for a debt incurred by one of the spouses. For example, if the husband took out a loan in just his name and then defaulted on the loan, the bank cannot force the sale of the home because of the husband’s debt. If the debt was a joint debt between the husband and wife then the bank could force the sale of the home.
4. Business Organizations: Owning a business can have its rewards, but it also carries risks as well. If you run your business as a “sole proprietor’ or as a “general partnership” then you (and your partners) are personally liable for all business debt and liabilities. Generally it is recommended to limit your liability by creating a corporation or limited liability company for your business. This way your personal assets or completely separate from your business liabilities.
This is an introduction to Asset Protection Planning. As you can see from the discussion above, there are simple ways you can protect your assets without using trusts. This is the basic level of Asset Protection Planning. In part 2 of this Asset Protection Planning Series, we will talk about how Trusts can be used as Asset Protection Planning Tools. It is important to talk to your attorney, financial advisor, accountant or other professional to make sure your asset protection strategies also fit with other long term estate planning and tax planning goals as well.
This article is a service of Attorney Chad A. Ritchie and the Ritchie Law Office, Ltd.
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