Asset Protection: How To Shield Your Wealth From Lawsuits And Creditors

Much of estate planning focuses on transferring your wealth to loved ones in a tax-efficient manner. But for some people, it’s equally important to protect that wealth against frivolous lawsuits or baseless creditors’ claims.

If your business, professional or personal activities expose your assets to attack by litigants or creditors, consider incorporating asset protection strategies into your estate plan.

From the simple to the complex

When it comes to asset protection, there’s a wide variety of techniques to consider. Here are several, from the simple to the complex:

Buy insurance. Insurance is an important line of defense against potential claims that can threaten your assets. Depending on your circumstances, it may include personal or homeowner’s liability insurance, umbrella policies, errors and omissions insurance, or professional liability/malpractice insurance.

Give it away. If you’re willing to part with ownership, a simple yet highly effective way to protect assets is to give them to your spouse, children or other family members, either outright or through an irrevocable trust. After all, litigants or creditors can’t go after assets you don’t own (provided the gift doesn’t run afoul of fraudulent conveyance laws). Choose the recipients carefully, however, to be sure you don’t expose the assets to their potential creditors’ claims.

Retitle assets. Another simple but effective technique is to retitle property. For example, the law in many states allows married couples to hold a residence or certain other property as “tenants by the entirety,” which protects the property against either spouse’s individual creditors. It doesn’t, however, provide any protection from a couple’s joint creditors.

Set up an LLC or FLP. Transferring assets to a limited liability company (LLC) or family limited partnership (FLP) can be a highly effective way to share wealth with your family while retaining control. These entities are particularly valuable for holding business interests, although they can also be used for real estate and other assets.

To take advantage of this strategy, you set up an LLC or FLP, transfer assets to the entity and then transfer membership or limited partnership interests to yourself and other family members. Not only does this facilitate the transfer of wealth, but it also provides significant asset protection to the members or limited partners, whose personal creditors generally can’t reach the entity’s assets. These entities also offer an added level of asset protection: The personal assets of members and limited partners that are held outside the LLC or FLP are shielded against claims by the entity’s creditors.

A word of warning

Keep in mind that asset protection isn’t intended to help you avoid your financial responsibilities or evade legitimate creditors. Federal and state fraudulent conveyance laws prohibit you from transferring assets (to a trust or another person, for example) with the intent to hinder, delay or defraud existing or foreseeable future creditors. And certain types of financial obligations — such as taxes, alimony or child support — may be difficult or impossible to avoid.

To be effective, asset protection strategies should be implemented as early as possible. Their protection extends only to unanticipated future claims. Once a claim exists or is reasonably foreseeable, it may be too late. Contact us for details.