Most people have a very understandable interest in their financial well-being. After all, we need money to pay for the necessities of life. Furthermore, more money tends to mean more comfort, which matters because good living is so much more than mere survival.
People might not be expecting any lawsuits to come their way. Unfortunately, the unthinkable can always come to pass. As a result, it is a good idea for people to put a reasonable amount of effort into protecting their assets from lawsuits and similar occurrences.
Here are some recommendations people can use to protect their assets from lawsuits:
People often choose different ways to protect their assets from lawsuits based on different circumstances. That is important because not every option will work in every situation. As a result, interested individuals always need to keep their exact circumstances in mind when choosing between their options. Otherwise, they could waste a lot of effort on something that won’t help them at all.
Conveniently, interested individuals can get insurance for just about everything. Confusingly, interested individuals can get insurance for just about everything. Fundamentally, insurance won’t prevent people from being sued. Still, insurance is useful because it can cover the relevant costs.
The issue is buying the right kinds of coverage plus the right amounts of coverage. Interested individuals cannot just buy insurance covering them for absolutely everything. If nothing else, their premiums would be ludicrously expensive because insurance companies operate for profit rather than charitable purposes.
Some forms of insurance have very broad applicability when it comes to protecting assets. For example, people who drive should have auto insurance in case they get into an accident. Similarly, most people will find either homeowners insurance or renters insurance very useful, not least because they tend to come with personal liability coverage packed into them.
In contrast, other forms of insurance are useful for some people but not for others. An excellent example would be professional liability insurance, which is extremely important for doctors, lawyers, and other professionals but not so much for non-professionals.
How to Choose the Right Insurance Coverage
In any case, the challenging part is getting sufficient coverage without breaking the budget in the process. Unfortunately, there isn’t a simple formula that can produce the right numbers once interested individuals provide the relevant information. Instead, they are going to get very general advice from Forbes advisor and similar sources. For instance, interested individuals should start by figuring out what they want. If they want to protect their assets, they are going to need to choose a maximum coverage that can achieve that goal in the event of a problem coming up.
To ensure this, interested individuals need to examine the terms and conditions with extreme care. Having a lot of coverage means nothing if their situation doesn’t fall under the necessary conditions for that coverage to kick in. This part is particularly important because insurance companies will interpret things in their favor, meaning people need certainty.
Ultimately, interested individuals can do a lot of helpful research on their own. Even so, if they need professional advice, they shouldn’t hesitate to seek it out. Insurance advisors can help them translate their goals into concrete numbers, find insurance policies to meet those numbers, and introduce them to possibilities they didn’t know existed. Yes, insurance advisors have independent motives. Still, that can be mitigated by checking to confirm their claims, speaking with multiple insurance advisors, and other precautionary measures.
Retirement accounts are a useful way for interested individuals to protect their assets. That is because there are various protections for various retirement accounts. ERISA-qualified retirement plans are supposed to enjoy unlimited protection in the event of bankruptcy in the United States.
Similarly, IRAs are supposed to enjoy up to $1 million’s worth of protection in the event of the same. With that said, these protections come from federal law. Some U.S. states have even more generous protections, which is good news for people looking to protect their assets. Alas, some U.S. states have chosen to opt out of these federal bankruptcy protections, meaning they offer reduced protections.
Once again, interested individuals need to consult a professional about these matters for the best results. Making mistakes in these matters can be costly. The best way to prevent that is to become informed with the assistance of someone who knows what they are talking about when it comes to the rules of the relevant jurisdiction.
Creditors can’t take assets that people don’t own. As a result, one way for interested individuals to protect their assets would be to transfer them to someone else.
People may or may not see this as protecting their assets. After all, they won’t own the transferred assets anymore, though they might be fine with that so long as the recipient can enjoy those assets. Regardless, interested individuals should treat transferred assets as assets lost to them from the start.
Plenty of people go to great lengths for those close to them. Simultaneously, plenty of people get into serious disputes with those who should be close to them over matters of love, money, and even petty things. Ideally, interested individuals can count on the recipients to take care of them if necessary. Sadly, that isn’t guaranteed to be the case.
A homestead exemption means that a certain amount of home equity is protected in the event of bankruptcy. This is one of those things that can be extremely different from state to state. Asset Protection Planners say some states such as Arkansas, Florida, and Texas have unlimited homestead exemptions.
Simultaneously, they mention how other states have small homestead exemptions. New Jersey and Pennsylvania don’t have any homestead exemptions at all. Interested individuals might want to change the pace at which they make their mortgage payments based on this information.
If they live in a state with a high homestead exemption, they can pay at a faster rate knowing that home equity will receive protection. In contrast, if they live in a state with less protection, they might want to make their payments at a slower rate.
Asset Protection Trusts
The American Bar Association says some U.S. states such as Hawaii, Ohio, and Utah allow asset protection assets. They aren’t worth it for the non-rich because they are often expensive to set up and maintain. Still, asset protection trusts are one way for interested individuals to protect their assets from most creditors.
Be warned these trusts need to meet a host of conditions. One example would be how they have to be irrevocable trusts. Another example would be how an independent trustee must make any distributions. If people choose to use an asset protection trust, they need the services of an experienced attorney because they don’t want to get it wrong.
Everyone should be familiar with the idea of prenuptial agreements. After all, they come up so much in celebrity news and the like that everyone should have at least some awareness through cultural osmosis if nothing else. Essentially, Nolo states prenuptial agreements describe both parties’ assets before their marriage plus both parties’ property rights in case the marriage ends. As such, these contracts have very specific applicability but are very useful when that applicability comes into play.
Making Assets Less Attractive
Investopedia brings up the option of making assets less attractive to creditors. In short, people should consider stripping the equity out of their assets before dumping that money into assets protected from lawsuits. Borrowing against an asset is the classic option for stripping its equity.
This approach can work because creditors want payment. If they can’t get much money even if they win the lawsuit, they might be less interested in suing because they risk losing out even in the event of a victory.
Understanding Different Kinds of Businesses
Choosing the right kind of business is extremely important for business owners. It might sound irrelevant to everyone else. However, interested individuals should remember that the definition of a business owner is quite broad, meaning it doesn’t necessarily match the image embedded in popular consciousness.
For that matter, being familiar with different kinds of businesses is just general knowledge that is good to have. That is particularly if interested individuals have ever thought about starting businesses of their own.
Accountingverse says there are three basic kinds of businesses. First, there are sole proprietorships, which have single owners. Second, there are partnerships, which came into existence through the resources of two or more individuals. Third, there are corporations, which are separate entities from their stockholders in the eyes of the law.
Choosing the Right Kind of Business
Of course, some of these options are better for protecting assets than others. They should never choose sole proprietorships because there is no separation between them and their businesses under those circumstances.
That is good if interested individuals are more concerned about double taxation; that is less good if interested individuals are more concerned about protecting their assets because they are fully liable for everything. Instead, the choice is between a limited partnership and a corporation.
People tend to think of general partners when they think of partnerships. General partners have a say in how the businesses are run but are fully liable for everything if something goes wrong. In contrast, limited partners have no say in the businesses’ running even though they provide investment.
In exchange, they can’t lose anything beyond their investment, which is extremely important because creditors are by no means obligated to go after general partners with the same enthusiasm. If one general partner can pay but the other can’t, the creditors will focus on the former rather than the latter for obvious reasons.
Corporations are unusual because they have legal existences of their own. Under normal circumstances, the creditors won’t go after the stockholders because that provides the stockholders with limited liability. Unfortunately, there are some serious downsides to running businesses as corporations.
For example, they are much more complicated to set up. Similarly, they get double-taxed because the corporation gets taxed once and the stockholders get taxed once. Still, corporations are quite good if people want to prioritize protecting their assets.
Looking Into Other Kinds of Businesses
Please note that these are the three basic kinds of businesses. Different places can have others, so interested individuals need to look into them. For instance, the IRS also mentions S corporations and limited liability companies. S corporations are popular because they avoid double taxation while offering limited liability.
The issue is that they come with stricter rules and requirements. Limited liability corporations also avoid double taxation while offering limited liability. That makes them sound like S corporations, but the two are still different because S corporations are more a kind of tax classification than anything else. On top of this, they have very different rules and requirements, meaning a good understanding of the details is critical.
Get Started Sooner Rather Than Later
Interested individuals should know that they should prepare to protect their assets well in advance. If they wait until lawsuits are imminent, chances are good that they will be too late. The legal system doesn’t look kindly upon blatant attempts at dodging liability at the last moment.
As a result, chances are good it will block any such attempts, thus leaving the relevant assets exposed to creditors. Indeed, Kiplinger states asset protection trusts don’t work in some jurisdictions unless they have been established for at least one or two years. Due to this, people worried about their assets should get started on their asset protection preparations as soon as possible because the consequences of waiting can be severe.
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