When many people hear the words “asset protection,” they think of billionaires with Swiss bank accounts and offshore tax havens. But in reality, asset protection is for everyone. Using a series of basic techniques you can increase the odds that the wealth you’ve accumulated stays with you and your heirs, and not someone else.
Hard-earned wealth can quickly disappear as a result of a lawsuit, a business going under, or a similar event. When taken in advance of any problem arising, asset protection techniques can protect you from these possibilities. You can also use them to help protect your children or other heirs from the consequences of a divorce, lawsuit, business failure, and so on.
It’s actually more important for people of moderate wealth to engage in asset protection than it is for billionaires. After all, billionaires can afford to lose a lot of money, whereas the rest of us cannot.
In fact, now that the federal estate tax affects far fewer people than it used to – the federal estate tax doesn’t even kick in unless an estate is worth over $5.45 million, or over $10.9 million in 2016 for a married couple with proper planning (and the Illinois estate tax starts at $4 million for an individual decedent and $8 million for a couple who have signed updated estate planning documents) – the focus of estate planning is increasingly shifting from protecting assets from estate taxes to protecting assets from creditors.
So what sorts of things can you do to protect yourself?
One of the more basic forms of asset protection is insurance. If you have an auto or homeowner’s insurance policy, you’re already engaging in asset protection.
The policies will protect you in many cases if certain types of lawsuits are filed against you.
A good first step is to thoroughly review your insurance coverage every few years, and make sure you have enough. You might want to buy an umbrella liability insurance policy, which kicks in after your other policies’ coverage limits are reached. The goal should be to have enough insurance (and protect your other assets well enough) that a person who brings a lawsuit against you will simply settle with your insurance company under your policy limits, and not try to go after your home or other assets.
Life insurance can be another way to protect your heirs, because in many states a creditor cannot claim either the proceeds or the cash value of a life insurance policy. In some states, the same is true if you’re the beneficiary of a fixed annuity.
Retirement plans are another type of asset protection. Assets in a retirement plan are often exempt from creditors. However, you should be aware that the rules can vary a great deal depending on the type of plan, the type of creditor, and the state where you live.
A federal law called ERISA says that 401(k) plans are generally exempt from creditors, although there are some exceptions, such as claims for child support.
However, ERISA doesn’t apply to IRAs, SEP plans, SIMPLE plans, Keogh plans, or government plans. For these plans, the level of asset protection typically depends on state law.
Further, there are completely different rules if a person has a setback and files for bankruptcy. And as a result of a U.S. Supreme Court decision in 2014, an IRA that you inherited from someone else might not be protected at all.
What this means, among other things, is that you should never just casually consolidate different types of retirement accounts. While this might make things easier in terms of record keeping, it could destroy or weaken your protection from creditors.
If you’re concerned about your heirs, a good way to protect them is to put assets into a trust for their benefit, rather than giving money to them directly or leaving assets to them in your will.
Many people use trusts to make sure a beneficiary who is young or financially inexperienced won’t make mistakes and quickly exhaust an inheritance. But such trusts can actually make sense for other types of heirs as well. That’s because assets in a trust might be kept out of reach of a business or lawsuit creditor or a divorcing spouse.
If you’re concerned about protecting your wealth, it’s a good idea to talk with a lawyer to review your potential exposure and your options. And it’s wise to do it sooner rather than later, because asset protection planning only works against future problems. In general, once you have reason to suspect a claim will arise or a claim against you has already arisen, it maybe too late to engage in asset protection techniques.