How to protect your assets from lawsuit or creditors

If you are not properly protecting your assets, which you have worked long and hard to accumulate, they can be lost very quickly in a lawsuit, bankruptcy, or if the creditors come in for collection. It is important to know the laws that can protect certain types of assets and the steps you can take to protect your savings.

Key points to remember

  • Healthcare professionals and business leaders aren’t the only ones facing lawsuits and having to protect their hard-earned assets.
  • Various investment accounts, such as Individual Retirement Accounts (IRA), have some protection in the interests of justice.
  • Federal laws protect many pension plans, but many states also offer asset protection trusts that protect family properties, annuities, and life insurance.

Why you need lawsuit protection

You might think that doctors, business executives, and other litigation-prone professions are the only ones who have to worry about protecting their assets. Not so. There are many circumstances in which your property can be seized or garnished, including if you file for bankruptcy, divorce or are on the losing side of a civil suit.

Most people don’t consider these circumstances until they happen. If your teenager is the victim of a traffic accident, for example, the injured party could attack your property.

Imagine this scenario: you hear a knock on the door one night. You find an elderly couple looking for the Smiths. Your name is Jones. You inform the couple that the Smiths live next door. The couple thank you and cross your lawn to go to the Smiths. Halfway, the man enters a hole your dog has dug and breaks his hip, the one he just replaced. The next call you get could be from a lawyer trying to determine your financial worth and the type of insurance you are purchasing.

It doesn’t matter whether the couple stayed on the sidewalk or at least took care to avoid such an accident. Ultimately, your house, your dog, and a hole in your yard are all your fault.

Protective caps for IRAs

Contributions and earnings in your traditional and Roth individual retirement accounts (IRAs) have an inflation-adjusted protection limit of $ 1 million against bankruptcy proceedings. The bankruptcy court has the discretion to increase this limit in the interests of justice.

In addition, the amounts carried forward from qualified plans, such as 403 (b) and 457 packages, enjoy unlimited protection. However, this protection only applies to bankruptcy, and not to judgments rendered by other courts. In such cases, state law should be consulted to determine whether there is protection and to what extent.

Many US laws protect assets in the event of lawsuits, bankruptcies, and actions by collection agencies. Buying asset protection is often less expensive than exposing yourself to a worst-case scenario.

Eligible pension plans

The assets of employer-sponsored plans enjoy unlimited bankruptcy protection, whether or not the plan is subject to bankruptcy. Employees Retirement Income Security Act (ERISA). This includes Sep IRA, EASY IRAs, defined benefit and defined contribution plans, 403 (b) and 457 plans, and government or religious plans under the Section 414 of the Internal Revenue Service (IRS) Code. The amounts in your SEP IRA from regular IRA contributions are subject to a limit of $ 1 million.

ERISA plans are also protected in all other cases, except under qualified family relationship orders (QDRO) – where assets can be attributed to your ex-spouse or other alternative beneficiaries – and IRS tax deductions. For this purpose, a qualified plan is not considered an ERISA plan if it only covers the business owner. Protection for homeowner plans is determined by state law.


The amount of protection you get for your home varies widely from state to state. Some states offer unlimited protection, others offer limited protection, and a few states offer no protection. Make sure you know the protections in your state.

Annuities and life insurance

Like the protection of family property, the level of protection applied to annuities and life insurance is determined by state law. Some protect the cash values life insurance policies and income from annuity contracts from foreclosure, garnishment or legal proceedings in favor of creditors. Others protect the interest of the beneficiary only to the extent reasonably necessary for the maintenance. There are also states that offer no protection.

How to protect your assets

Even if asset protection may have had a blemished past, legitimate strategies are available. Creating as many roadblocks as possible for potential creditors to get through before they can gain access to your property could spur them on to favorable settlements instead of getting involved in lengthy and costly litigation.

Asset protection trusts

For years, high net worth individuals have used offshore trusts in places like the Cook Islands and Nevis to protect their assets from creditors. But these trusts can be costly to establish and maintain. Today, a number of states, including Alaska, Delaware, Rhode Island, Nevada, and South Dakota, allow asset protection trusts (APT), and you don’t even have to be a state resident to buy one.

Asset protection trusts provide a way to transfer some of your assets to an independently managed trust curator. The assets of the trust will be beyond the reach of most creditors and you may receive occasional distributions. These trusts can even allow you to protect your children’s assets.

The requirements for an asset protection trust are as follows:

  • This must be irrevocable.
  • The trustee must be a natural person located in the State, or a bank or trust company licensed in this state.
  • It should only authorize distributions at the discretion of the Trustee.
  • There must be a expense clause.
  • Some or all of the assets of the trust must be located in the state of the trust.
  • The documents and administration of the trust must be as is.

If you are considering an APT, be sure to work with an attorney who is experienced in this area. Many individuals broke tax laws because their trusts did not meet regulatory requirements.

Financing of accounts receivable

If you are a business owner, you could borrow against his claims and put the money in a non-professional account. This would make the burdened with debts asset less attractive to your creditors and make otherwise accessible assets inaccessible.

Equity withdrawn

One option to protect your assets is to remove the equity out of them and put that money in assets that your state protects. Suppose, for example, that you own a building and are concerned about possible lawsuits. If you have taken out a loan against the equity in the building, you can put the funds in a protected asset, such as an annuity (if the annuities are safe from judgments in your state).

Family limited partnerships

Assets transferred to a family limited partnership (FLP) are exchanged for shares of the partnership. Since the FLP owns the assets, they are protected from creditors under the Uniform Partnership Law (UPA). However, you control the FLP and therefore the assets. There is no market for the stocks you receive, so their value is significantly less than the value of the asset being traded.

Other ways to protect your assets

There are simple, inexpensive ways to protect assets that anyone can implement:

  • Transfer assets to your spouse’s name. However, if you divorce, the end results might be different from what you want.
  • Put more money in your employer sponsored retirement plan because it could have unlimited protection.
  • Buy a umbrella insurance policy that protects you against bodily injury claims that exceed the standard coverage offered by your home and auto policies.
  • Make the most of your state’s laws regarding family property, annuities, and life insurance. Refund your mortgage, for example, could protect otherwise vulnerable species.
  • Do not mix company assets with personal property. So if your business has a problem, your personal assets may not be at risk and vice versa.

The bottom line

You may have seen self-proclaimed asset protection experts advertise their easy-to-use seminars or kits on TV or the Internet. Do thorough research, including checking Better Business Bureau (BBB) ​​before deciding to use any of these services.

And before you take any of the steps in this article, meet with an attorney who is familiar with the laws in your state and who is an expert in the area of ​​asset protection. Most importantly, don’t wait until there is a judgment against you. By then, it may be too late and the courts could declare that you made a “fraudulent transfer” to avoid your obligations.

About Roberto Frank

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