Safeguarding Your Wealth: Essential Asset Protection Strategies in Estate Planning
The more wealth you accumulate, the more you may worry about protecting it from future creditors. Whether your concern involves personal assets or a business, several asset protection tools can help keep your property safe from tax collectors, plaintiffs and their attorneys, healthcare providers, credit card issuers, business creditors, and other creditors.
To insulate your property from these claims, evaluate each tool against your own situation. You may decide that insurance and a Declaration of Homestead sufficiently protect your home because your exposure to a claim is low. Keep in mind that no asset protection tool guarantees results, and you may need to adjust your strategy as your situation, your assets, or the laws change.
Liability Insurance Is Your First Line of Defense
Liability insurance sits at the top of any asset protection plan. Consider purchasing or increasing umbrella coverage on your homeowners policy, a step we regularly discuss with clients as part of comprehensive wealth management. For business-related liability, purchase or increase your liability coverage under your business insurance policy. Generally, you’ll pay far less in premiums for this coverage than you would if a court ordered you to pay a judgment after a lawsuit.
A Declaration of Homestead Protects the Family Residence
Your primary residence may be your most significant asset. State law determines how much creditor and judgment protection a Declaration of Homestead gives your residence, and that protection varies greatly from state to state. For example, a state may provide a complete exemption for a residence (its entire value), a limited exemption (up to $1,000,000 in Massachusetts), or an exemption that applies only under certain circumstances, such as a judgment for medical bills.
Homeowners can typically file a Declaration of Homestead themselves through a straightforward, inexpensive process. It involves filling out the appropriate form and recording it at the appropriate register in the county or district where the property is located. If you need help completing the form or have questions about it, our advisors can point you in the right direction.
Dividing Assets Between Spouses Can Limit Exposure to Potential Liability
Perhaps you work in an occupation or business that exposes you to greater potential liability than your spouse’s job does. If so, consider dividing assets so you keep only the income and assets from your job while your spouse takes sole ownership of your investments and other valuable assets. In many cases, creditors may be limited in their ability to reach assets titled solely in a spouse’s name, although creditor rights vary based on applicable law and the specific facts involved.
Business Entities Can Shield Personal Assets from Business Creditors and Business Assets from Personal Creditors
Consider using a corporation, limited partnership, or limited liability company (LLC) to operate your business. These entities shield the personal assets of shareholders, limited partners, or LLC members from liabilities that arise from the business. Owners’ liability is generally limited to their investment in the business.
These same entities also provide some protection from the personal creditors of a shareholder, limited partner, or member. In a corporation, a creditor of an individual owner can place a lien on, and eventually acquire, the shares of the debtor-shareholder, but that creditor gains no more rights than the shares themselves grant. In limited partnerships and LLCs, most state laws allow a creditor of a partner or member to obtain only a charging order against that partner’s or member’s interest. The charging order gives the creditor the right to receive any distributions tied to the interest. In every respect, the law treats the creditor as a mere assignee who cannot exercise voting rights or any other rights the partner or member held.
Certain Trusts Can Preserve Trust Assets from Claims
People have used trusts to protect their assets for generations. The key to using a trust as an asset protection tool is that the trust must be irrevocable and must hold the property. Once assets are transferred to a properly structured irrevocable trust, they may receive protection from certain creditor claims. To properly establish an asset protection trust, you must give up any interest in the trust assets and any control over the trust.
Trusts can also protect trust assets from potential creditors of the trust’s beneficiaries. How much of a beneficiary’s trust property their creditors can reach depends on how much access the beneficiary has to that property: the more access the beneficiary has, the more access their creditors will have.
Beneficiaries typically get the strongest creditor protection when an independent trustee holds complete discretion over trust assets. Finding a trusted, independent trustee can be difficult, which is why we created Savant Private Trust: it gives select Savant clients access to an independent corporate trustee for exactly this purpose.
A Word About Fraudulent Transfers
Courts will ignore transfers to an asset protection trust if:
- A creditor’s claim arose before you made the transfer
- You made the transfer with the intent to defraud a creditor
- You incurred debts without a reasonable expectation of paying them
Through our comprehensive wealth management planning process, we may review liability, insurance, and estate planning considerations that clients may wish to evaluate further. Here are a few real-life oversights we’ve corrected or improvements we’ve made:
- Removing mortgagee endorsements left on policies for mortgages that no longer exist
- Updating outdated appraisal values for separately scheduled items that have appreciated substantially
- Flagging exorbitant premiums and referring clients to more competitive pricing
Liability analysis, insurance coverage review, and estate planning guidance are all part of our comprehensive wealth management services and can help clients evaluate asset protection considerations as part of their broader financial plan. If you want to review your own asset protection strategy, reach out to a Savant advisor today.
This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your investment professional regarding your unique situation.
Christopher A. Ruta
Financial Advisor
CFP®, CPA