When many people hear the words “asset protection,” they think of billionaires with Swiss bank accounts and offshore tax havens. But in reality, asset protection is for everyone. It’s simply a series of basic techniques you can use to help ensure that the wealth you’ve accumulated stays with you and your heirs, and not someone else.
Hard-earned wealth can quickly disappear as a result of a lawsuit, a business going under, or a similar event. Asset protection techniques exist to protect you from these possibilities. You can also use them to help protect your children or other heirs from the consequences of a divorce, lawsuit, business failure, and so on.
It’s actually more important for people of moderate wealth to engage in asset protection than it is for billionaires. After all, billionaires can afford to lose a lot of money, whereas the rest of us cannot.
In fact, now that the federal estate tax affects far fewer people than it used to – the tax doesn’t even kick in unless an estate is worth over $5 million, or over $10 million for a married couple – the focus of estate planning is increasingly shifting from protecting assets from taxes to protecting assets from creditors.
So what sorts of things can you do to protect yourself?
One of the more basic forms of asset protection is insurance. If you have an auto or homeowner’s insurance policy, you’re already engaging in asset protection. The policies will protect you in many cases if a lawsuit is filed against you.
A good first step is to thoroughly review your insurance coverage every few years, and make sure you have enough. You might want to buy an umbrella liability insurance policy, which 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 to go after your home or other assets.
Life insurance can be another way to protect your heirs, because in many states a creditor cannot claim either the proceeds or the cash value of a life insurance policy. In some states, the same is true if you’re the beneficiary of a fixed annuity.
Retirement plans are another type of asset protection. Assets in a retirement plan are often exempt from creditors. However, you should be aware that the rules can vary a great deal depending on the type of plan, the type of creditor, and the state where you live.
In the next installment we will outline additional methods of asset protection.
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