FEDweek

Protection Is Prudent

There is no one “magic bullet” that will provide all-purpose asset protection. However, there some things that you should do in order to safeguard your net worth:

Maximize liability insurance. Your home and cars should carry the most liability coverage that’s available. Often, serious claims will result from an auto accident or from an injury sustained by a household guest. Moreover, maximum home and auto insurance coverage may be required in order to obtain excess liability (“umbrella”) insurance. Such coverage will become effective after the limits of home or auto liability have been reached.

For example, if you’re a driver in a highway accident that results in a $1 million award and your auto insurance liability coverage only goes up to $300,000, the other $700,000 can be picked up by umbrella coverage. Without umbrella coverage, you might be personally liable for the $700,000 overage.

Play title games. Go over property ownership. Depending on how your assets are held, creditor protection may be increased.

For example, if your spouse is in a business or profession where exposure to creditors is considerable, a majority of the family’s assets might be transferred to your name. A particular form of joint ownership, “tenants by entireties,” protects assets held by a married couple, in some states.

Put your trust in trusts. Many people move personal assets into revocable living trusts, for probate avoidance and incapacity planning. Such trusts, though, do not provide any creditor protection because assets held in the trust are treated as your personal assets.

On the other hand, irrevocable trusts provide proven defense against creditors even as they serve other purposes, such as tax reduction and financial support for your loved ones. As the name suggests, assets transferred to an irrevocable trust are out of your hands and thus beyond the reach of your creditors, provided that you did not create the trust primarily to thwart current creditors.

In particular, investment property should not be held in a revocable trust; a limited liability company (LLC) generally will be a better choice for holding such real estate. Claims generated on property held in an LLC will not spill over onto the owners’ personal assets.

Investors who hold multiple real estate investment properties might consider creating a separate LLC for each property, rather than holding all properties in one LLC. With multiple LLCs, a tenant who suffers an injury in one rental house, for example, would not have access to the assets of another rental house, even if both properties are held by the same individual.