When people hear the words “asset protection,” they think of rich individuals with offshore accounts and tax havens. However, in reality, asset protection is for everyone. Using a series of basic techniques, individuals can increase the odds that the wealth they’ve accumulated stays with them and their heirs and not someone else.
Individual’s assets can quickly disappear as a result of a lawsuit, a failed business venture or a similar event. Asset protection techniques can protect you from these possibilities when done in advance of any problem occurring. An individual can also use them to help protect their children or other heirs from the consequences of a divorce, lawsuit or business failure, and so on.
Arguably, it may be more important for people of moderate wealth to engage in asset protection than it is for billionaires. After all, billionaires might be able to afford to lose a lot of money whereas the rest of us cannot.
Now that 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 more than $5.45 million (or more than $10.9 million for married couples). With proper planning, the focus of estate planning is increasingly shifting from protecting assets from estate taxes to protecting assets from creditors.
As a result, what sorts of things can you do to protect yourself?
The more basic forms of asset protection involve insurance. If you have an automobile or homeowner’s insurance policy, you are already engaging in asset protection. These policies will protect you in many cases if certain types of lawsuits are filed against you.
I always advise clients that a good first step is to thoroughly review their insurance coverage every few years and make sure that they have enough insurance and that they thoroughly understand any exceptions or events that are not covered under the terms of the policy. Many times, insurance companies will exempt certain kinds of occurrences from coverage, and the individual insured does not even realize the event was excluded until after something happens and the insurance company denies coverage.
In addition, you may want to consider buying an umbrella liability insurance policy that 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 and go after your home or other assets. That is why understanding what your policy actually covers and what it might not cover is very important. Oftentimes, you can negotiate with your insurance carrier to provide coverage for excluded occurrences in exchange for additional premium dollars.
Life insurance can be another way to protect your heirs, because in many states a creditor cannot claim either of the proceeds or the cash value of a life insurance policy. Some states, the same is true of the beneficiary of a fixed income annuity. While Michigan is not included in the states that exclude these assets from a creditor’s reach, you may be able to engage in certain planning utilizing irrevocable insurance trusts that protect these assets and provide ways to for your beneficiaries to have access, and not your creditors.
Retirement plans are another type of asset protection. Assets in a retirement plan are often exempt from creditors. However, you should be aware that rules can vary a great deal depending on the type of plan, the type of creditor and the state where you live.
The Employee Retirement Income Security Act of 1974 (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 the U.S. Supreme Court decision in 2014, an IRA that you inherited from someone else might not be protected from creditors 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 by integrating funds from an account that may be otherwise protected with a retirement account that is not protected from creditors.
If you are considered 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. You can include spendthrift provisions in the trust that protect an individual beneficiary from his/her creditor reaching the assets that are being held for his/her benefit. Many people use trusts to make sure that beneficiaries who are 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 is because assets in trust might be kept out of reach of a business or lawsuit creditor or a divorcing spouse.
If you are concerned about protecting your wealth, it is a good idea to consult with a lawyer to review your potential exposure as well as your options. And it is wise to do it sooner rather than later because asset protection planning only works against “future” problems. In general, once you have a reason to suspect a claim will arise or a claim against you is already arisen, that may be too late to engage in asset protection techniques.