Let’s look at some basic concepts.
Asset protection is mostly controlled by state law – use one of the few states with strong law!
Let’s reiterate that by noting that asset protection (like estate planning and so much other legal strategy) varies by State. This material is written from our corporate headquarters perspective of Florida, which enjoys pretty strong asset protection laws.
Most States don’t! It is critical that you remember this!
Using strong state asset protection when you live in a state with weak asset protection
While there are important similarities between States, it is best to make sure a proposed plan will be effective in your State. In many cases, non-Floridians using Florida structures can get enhanced protection, so long as it’s done right. We do quite a bit of this work across the country.
At its core, asset protection is the art of making it harder to chase your assets than they’re worth. The objective is to structure matters so that it costs so much time and money to get and collect a judgment that an adversary will give up, or settle for a pittance.
Asset protection layers and splitting
We do this by setting up hoops, splits, levels and layers—instead of a pile of cash on the table, it’s positioned in different places, and secured by safes within safes within safes, figuratively speaking. The million-dollar-bill is cut in many pieces, and the pieces are hidden separately. For most people, effective planning can be very simple, but still have this effect. It is important to note that this planning is usually fairly inexpensive to create, but extremely expensive to defeat.
That’s great leverage.
A few thousand can protect tens or hundreds of millions.
Asset protection planning best before a threat emerges
One final, extremely important point: to work well, such planning needs to be done before you think anyone’s got a reason to come after you.
Do it before you’re sued, and it’s sound planning.
Try it after you know about a threat, and you will probably find your pant legs tied tightly around your ankles. While there are techniques for those already entangled, they are more complicated and uncertain. Be smart, do your planning before any threat appears. Since most techniques go hand in hand with estate planning, it is usually much more effective to combine asset protection planning with an estate planning review.
Using insurance for asset protection
Liability insurance—the kind that pays if you become responsible for damage to someone else—is the essential foundation for asset protection. Unless you engage in high-risk activities, the coverage is usually pretty cheap.
Match liability limits to your exposed net worth
It is important to have adequate insurance levels (liability limits) and make sure that all potential exposures are covered (real estate, vehicles, boats, planes and rocket ships).
You will want at least several hundred thousand in coverage for each risk (a half million is even better) with a high limit payable per individual, not only per incident.
What liability insurance limits mean
“100/300,” for instance, means the policy will pay a maximum of $100K per individual and $300K per incident, meaning the most any person could collect would be $100K—not nearly enough to keep them from coming after your assets if they have a good case.
“300/300” means a single person could collect up to $300K (so long as no one else was hurt in the incident). Also, bear in mind that if ten people are damaged by you—in a car wreck, say, or because there was a fire at a rental property—that $300K would be spread awfully thin, and risk to your assets goes way up. Again, you will want at least several hundred thousand in coverage for each risk, but should note that multimillion dollar awards are fairly routine, so you should consider your limits accordingly. Usually, the maximum available on your home and auto policies is $500,000 (sometimes less).
Business liability insurance and asset protection
The same rationale is true for business: make sure each liability exposure is covered, and the limits are adequate. A good property and casualty agent can be indispensable in this process, but select carefully as there is wide variation in quality, as with any profession, and a careless agent can leave you thinking you’re well protected when you are not. Make sure you understand what you need, and get assurance you have what you need in writing.
Liability insurance gaps analysis
A big concern with this type of insurance is avoiding gaps in coverage, such as where you think your liability coverages are overarching, but some exposures are not covered, leaving a direct and clear path to your assets. Again, a skilled agent can point out concerns like this should they be present.
Using liability umbrellas for asset protection
Umbrellas are policies that sit on top of your basic policies, and extend liability coverage to 1, 3, 10 million, or more. Different umbrellas are required for personal versus business interests. The proper underlying coverage needs to be in place for the umbrellas to actually work, if needed.
Finally, as in all markets, different companies pursue different markets, and have products more approximate for them. Companies like Chubb, Fireman’s Fund, Chartis, Zurich, ACE and others cater to the high net worth market.
Are IRAs and 401ks protected from lawsuits?
IRAs, 401ks, and other types of retirement plans offer excellent asset protection, in most States. Remember, like-life insurance and other types of assets, these accounts pass by the beneficiary, and the asset protection status becomes somewhat murky once a payment is made at death.
Also, like most other asset protection shelters, one should assume the protection only applies so long as value remains in the shelter—once removed for consumption, investment, or other purpose, the risk of it being seized goes up considerably.
While IRA and pension accounts usually offer much more flexibility in investment choices than life insurance and annuities, and typically many more low cost options are available than for insurance products, investment options are still much more limited, in most cases, than is generally true for taxable investments, unless you find enlightened advisors who know how to expand your choices.
Finally, most of these plans are tax-qualified, meaning that any withdrawals trigger income tax, and maybe penalties, in addition to possibly exposing the value to creditor attack.