Asset protection planning is a key component of financial planning that many individuals fail to consider. If done properly, incorporating asset protection strategies into your broader financial plan can help safeguard the health of your finances. Here are a few asset protection planning tools that can help you accomplish this goal.

Person on a computer going through Asset Protection Planning

Invest in Liability Insurance

No one likes to think about a negative legal judgment happening to them but if the worst should occur, including a liability insurance policy in your asset protection planning can offer you some protection. If you find yourself on the losing end of a legal judgement, holding the right liability insurance can ensure that your assets don’t fall prey to the financial risks that can arise from a personal liability case. It’s not uncommon for individuals to hold auto or homeowner insurance policies which typically include some coverage for liability. It can be a good idea to increase the portion of liability coverage you carry beyond the standard amounts offered as part of those policies to give you additional asset protection.

You can also opt for personal liability umbrella insurance as part of your asset protection planning process. This type of insurance can give you even more liability coverage above the limits of your auto and homeowner’s policies and cover you more completely should you be sued for a car accident you caused or have to pay medical bills for injuries sustained by someone on your property.

Familiarize Yourself with Legislative Protections

Some of your asset protection planning may be automatically taken care of through federal or state laws. Certain types of property or assets you hold are exempt from liens exacted by creditors. A few examples of assets that are given this type of statutory protection include: IRAs, 401(k) plans, qualified retirement plans, proceeds from life insurance policies, and Section 529 college savings plans, though if you’ve inherited any of these, the statutory protection rules may not apply.

State law will dictate what’s known as the “homestead exemption” which is the amount of your home equity that’s protected. The amounts of home equity protection can vary widely from state to state and can range from very generous protections to highly limited protections. In fact, a few states offer no protection for home equity at all.
Familiarizing yourself with the protections in your geography by consulting with your tax advisor or attorney can help you with your asset protection planning in this area.

Placing Assets into an Irrevocable Trust

Placing assets into an irrevocable trust can be an effective asset protection planning tool. Once you’ve placed assets into this type of trust, those assets can’t be removed and the terms of the trust are essentially frozen and can’t be changed. This requires careful planning since you can’t place assets in an irrevocable trust in response to the act that created the liability. Because you’re effectively relinquishing control over the assets, you’re also preventing creditors from accessing them.

This is a particularly effective method to help you preserve your assets for future generations. You have the flexibility to structure the trust in a way that allows those generations the benefit of the assets without your having to transfer the ownership to your heirs directly. In this way, you’re protecting the assets put into an irrevocable trust from both your creditors and your heirs’ future creditors, as well.

Though this can be an effective asset protection planning strategy, irrevocable trusts can be subject to higher tax rates and may require you to file additional tax forms They can also be expensive to set up and administer so consulting with your professional services team is advisable.

Using Asset Ownership Structure to Your Advantage

Because ownership of your assets is a key determinant of whether they can be seized by creditors, looking at your asset’s ownership structure can help you protect your assets. In certain situations, for example, transferring ownership of some assets to your spouse could prove a good strategy. Those who are at a higher than average risk of liability, such as business owners, might consider holding onto ownership of assets that bear statutory protection while transferring all other assets to their spouse.

Asset protection planning can be nuanced and challenging. If you need guidance, contact your Untracht Early advisor for a more in-depth discussion of your personal situation.