In the U.S. legal system, the slightest misstep can lead to a huge award or a sizable settlement in a lawsuit. Even without missteps, frivolous litigation is a constant risk.
Self-protection steps include:
* Incorporate any business you create, to protect your assets. For rental property, limited liability companies (LLCs) offer the benefits of asset protection along with partnership taxation.
* Buy sufficient insurance. Maximize liability coverage for your home and auto, then add a hefty “umbrella” policy for excess liability protection.
* Maximize retirement plan contributions. Federal law protects qualified retirement plans from creditors while many states make IRAs creditor-proof.
* Title property with care. Shifting property to another person will allow you to keep that property from your creditors–but that person’s creditors may have a chance to seize it. Joint ownership may protect either owner, depending on state law.
* Put money into a residence. In some states, a “homestead” is off-limits to creditors, no matter how valuable it is.
* Invest through insurance. Some states protect insurance policies and annuities from creditors. You can do your mutual fund investing through a variable annuity or a variable life insurance policy.