13th Nov 2018
If you are like most Americans, you have worked hard your entire life to build up your life savings and acquire assets. So of course, you don’t want to lose everything in the unfortunate event of a lawsuit. Sadly, in today’s power-driven world, lawsuits are a common occurrence. A single court decision could alter the course of your financial status and even leave you penniless.
It is wise to think ahead of ways to protect your assets should financial tragedies such as lawsuits or liens occur. The following article shall provide you with some insight as to how to protect your financial assets.
Set Up Retirement Accounts
Most people do not think of setting up retirement accounts as soon as they start working or start to build substantial assets. However, it is wise to set up a retirement plan as soon as possible. The earlier you start your retirement plan, the more you will be able to save.
A qualified retirement plan is not just a good way to save money for your retirement; it is also a means of protecting your assets from creditors and legal claims. Assets that are held in 401(k) s, IRAs and other qualified retirement plans are protected against any legal actions. This includes filing for bankruptcy. However, these laws vary depending on where you reside so always check to see what laws apply in your state. Generally speaking, most courts will hold that retirement plans are untouchable from legal claims by creditors and other legal disputes.
Form a Trust
Trusts are often overlooked as a form of asset protection. When you are setting up your estate planning, setting up a trust is one of the first things you should do. Trusts are hands down the best way to protect your financial assets. This is especially true if you have accumulated a great deal of wealth. Since you cannot put all of your assets into insurance or retirement plans, a trust fund is the ideal way to protect your assets.
An irrevocable trust is designed to protect your assets from both creditors and legal disputes. This type of trust creates an entirely distinct and separate legal entity that moves control and full possession from you and places them within control of the trust itself. In doing so, all assets held in irrevocable trust are exempt from legal claims or disputes.
Also referred to as inter vivos or living trusts, irrevocable trusts adhere to the following three provisions:
- There must be a separate trustee, who is in no way controlled by you.
- It must be filed on a separate tax return.
- A living trust can not be cancelled or amended by you in any way.
You could set up a revocable trust. However, this does not give you the same level of protection as does an irrevocable trust. A revocable trust allows you to keep control over your assets and you can make changes at any time. However, since you still have this control, the court tends to view those assets held in the truest as part of your personal wealth. Thus, any assets in revocable trust are able to be included a lawsuit, legal dispute or claim.
Acquire Adequate Insurance
Adequate insurance is the best way to protect your assets from legal matters. Protection against lawsuits, liens and other such legal claims are the primary purpose of an insurance plan. You should ensure that you have sufficient coverage pertaining to health, life, homeowners, and auto and business insurance policies. When we say adequate, we mean that you need to go above and beyond the minimum amount of insurance that is required by government standards. It is wise to consider the reality of a lawsuit when you are setting up your insurance plans.
Most estate planning attorneys will advise you to consider umbrella coverage. This will allow for additional coverage should one or more of your regular insurance policies fail to be sufficient in the time of a legal dispute. Umbrella insurance policies are fairly inexpensive and can have value as high as five million dollars. If the legal claims exceed the maximum of your insurance coverage, it will be covered by this policy.
Incorporate Your Business Into Your Plan
Those who are self-employed should consider the idea of forming their business into a distinct legal entity. This will protect your assets in the event of a lawsuit or other legal action. Your assets will be protected under a corporation from legal actions, whereas they would not if your business were not a separate entity.
Another way to protect your business is to set it up as a LLC, or limited liability company. Similar to a corporation, an LLC will protect your assets from legal claims and actions. As well, it has fewer restrictions than do corporations when it comes to legal matters. Thus, it is an excellent line of defense in the unfortunate event of a lawsuit or other legal action.