Asset Protection: How Can You Make Sure That Your Assets Are Really Protected?
Are your assets protected? Are you sure? If you're like a lot of people, you may think your assets are safe, but the reality is very different. What is asset protection? Well, it is creating barriers between your assets and anyone who is attacking them. This includes lawsuits and taxes among others. Just know that if you own any assets in your own name they are generally NOT protected. As physical therapists the following example should hit home. Let's take the subject of lawsuits. Did you know that in the US alone there are more than 50,000 lawsuits filed each day? When is your turn? How do you structure your affairs so that you have your assets protected from creditors? The tools are relatively straight forward: state and federal statutes, business structures and trusts, and the intelligent use of debt. When I first introduce the topic of asset protection to my new clients, the answer often goes like this: "No thank you. I already have a trust (or a corporation). My attorney set that up for me." But what kind of trust is it? As it turns out, the vast majority have what is called a revocable trust or marital trust as opposed to an irrevocable trust. A revocable trust means that it can be revoked and you can get at your money-just as if you held the title of the assets in your own name. But there's a nasty surprise: If you can get your hands on your money, so can your creditors. And what about that corporation? If you have a C or S corporation, you have more exposure than you may think. Should ever find yourself at the losing end of a lawsuit, those assets will be at risk of loss. So what should you do to really protect your assets? First of all, you should probably speak with someone who has experience with asset protection, such as a financial advisor and a skilled attorney. They will be able to help you. The reason why you may not want to go it alone is that every state is different, and every situation is different. State statutes differ in terms of what assets are protected and to what degree. In some states, only a small amount of equity in your primary residence is protected, for example, whereas in some other states substantially all of the equity is protected. Second, you can make them undesirable by borrowing against them. Creditors are not interested in assets that are mortgaged to the hilt. This is otherwise known as a "debt shield". And third, you make them difficult to reach altogether by putting them into a proper trust. If you use a trust then it has to be an irrevocable trust, i.e. a trust that is NOT revocable. This means that you will not ever be able to get your money back. But your creditors can't get it either. That's why it works-you essentially give the assets away to a purpose that is important to you. Another way to make assets difficult to reach is through legal entities such as LLCs or Limited Partnerships. However, you need to make sure it's set up correctly in a desirable jurisdiction with excellent statutes for this purpose. The subject of asset protection is widely overlooked by business owners and many financial advisors. But what good does it do to work hard to accumulate an asset only to have it open to lawsuits and potential losses? That just doesn't make sense. So if you think you have asset protection, think again. Almost all of the business owners for whom we write financial plans have at least 50% of their assets unnecessarily open to creditors and at risk.
