Asset protection is an essential component of financial planning, aiming to safeguard one’s assets from potential risks and creditors. It is a continuous process that should ideally begin before any legal issues arise. However, there are strategies that can still be implemented after a lawsuit has been filed. We will explore various aspects of asset protection, including entity planning, insurance coverage, liability review, asset ownership, estate planning, and legal jurisdictions.
Key Components of Asset Protection
- Entity Planning: Entity planning involves structuring your assets in a way that provides legal protection. Common entities used include Limited Liability Companies (LLCs) and corporations. These structures can protect personal assets from business liabilities. For instance, if you own a business, your personal assets are generally shielded from business debts or damages, although exceptions can occur in cases of personal wrongdoing.
- Insurance Coverage: Insurance is a critical component of asset protection. An umbrella insurance policy provides additional liability coverage beyond your base property and insurance policy. However, it’s important to note that umbrella insurance typically does not cover breaches of contract or individual business liabilities.
- Reviewing Liabilities and Assets: Regularly reviewing liabilities and assets is crucial. This includes understanding the classification of creditors and how different types of assets are treated. For example, in California, insurance death benefit proceeds are exempt from creditors to the extent reasonably necessary for support of debtor spouse and dependents. Additionally, homestead protection up to $600K in California may apply.
- Asset Titling and Ownership: Properly titling and owning assets can provide significant protection. Assets held in certain types of trusts, like irrevocable trusts, can be shielded from creditors. However, transferring assets to these trusts after a creditor has already made a claim could be seen as a fraudulent transfer, so it is essential to consult with an attorney before making changes.
- Estate Planning: Estate planning is integral to asset protection, ensuring that your assets are distributed according to your wishes while minimizing tax liabilities and protecting assets from creditors. Strategies include creating living revocable trusts for elder planning and placing inheritances in long-term trusts.
- Legal Jurisdiction: The jurisdiction in which you hold your assets can affect the level of protection. Some states and countries offer more favorable laws for asset protection.
Legal and Professional Guidance
It’s crucial to work with an experienced asset protection attorney who can provide tailored advice and strategies based on your specific situation. They can help evaluate the enforceability of non-compete agreements, negotiate with employers, and ensure that asset protection measures are legally sound and effective.
An asset protection attorney may recommend some of the following, as examples:
- Irrevocable Trusts: Irrevocable trusts, such as Domestic Asset Protection Trusts, Foreign Asset Protection Trusts, Irrevocable Life Insurance Trusts, and Spousal Lifetime Access Trusts, are powerful trusts for protecting assets. These trusts remove assets from your estate, making them inaccessible to creditors under certain conditions.
- Converting IRA to Roth IRAs: Converting traditional IRAs to Roth IRAs and paying the associated income tax with unprotected assets can provide tax benefits and protection from creditors.
- Changing Residence: Relocating to a state with more favorable asset protection laws can be a viable strategy. Some states offer better protection for certain types of assets, such as homesteads or retirement accounts.
- Placing Inheritances in lifetime Trusts: Placing inheritances into lifetime trusts may help protect these assets from creditors.
Asset protection is a multifaceted and ongoing process that requires careful planning and professional guidance. By employing strategies such as entity planning, insurance coverage, proper asset titling, and the use of trusts, individuals can safeguard their assets from potential risks and creditors. Regular reviews and updates to asset protection plans are essential to adapt to changing laws and personal circumstances.
Disclaimer:
The information provided is for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Callan Capital’s views as of the date of distribution. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. Callan Capital does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Callan Capital is not responsible for the consequences of any decisions or actions taken as a result of the information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of Callan Capital. For detailed information about our services and fees, please read our Form ADV Part 2A, and our Form CRS, which can be found at https://www.advisorinfo.sec.gov, or you can call us and request a copy at (866) 912-4888.