When it comes to you and your family, anything financial is personal. “Personal Asset Protection” might be a term with which you’re not familiar, but it’s incredibly important. You’ve worked hard for your assets—your home, business, personal items, vehicle, and more—and the idea that these prized possessions could become fodder for a lawsuit is appalling.
In this article, we’ll give you an overview of Personal Asset Protection. As always, you’ll want to talk to a lawyer for more information if this sounds like something that interests you.
Why Do I Need This?
You might be wondering why you need Personal Asset Protection. You might feel like you’re not at risk for a lawsuit. Unfortunately, that’s not exactly true, as America is a very litigious society, and over forty million lawsuits are filed a year. Even simple things like fender benders or someone falling on your property can lead to a court case. And, if you’re slapped with a bill, you will want to make sure that your personal assets cannot be taken by creditors.
Though Personal Asset Protection has sometimes had a shady past (think of billionaires hiding their fortunes in offshore tax havens), there are legitimate, legal ways to keep your assets safe. Listed below are some of these means of protection.
Asset Protection Trusts
Several states allow Asset Protection Trusts, and they don’t require you to be a member of the state to buy one. These APTs are irrevocable, which means that, when you transfer assets into the trust, this transfer is permanent. The trust owns the assets and the trustee manages them. You won’t be able to take them out when the storm blows over, but the APT will protect your assets. APTs offer some of the strongest protection against lawsuits and creditors, as well as any other judgment against your estate.
Accounts Receivable Financing
Business owners might find that accounts receivable financing (ARF) comes in handy in warding off lawsuit damage. ARF helps avoid cash flow issues (such as those caused by a lawsuit). This financing is a type of arrangement in which a business receives financial capital related to its accounts receivable. Usually, this looks like a company receiving a loan on its outstanding invoices, but these ARF agreements can be structured as asset sales as well. ARF is a powerful tool for not only asset protection, but also growth.
Note that ARFs do have their downsides. They can be more expensive than traditional lenders’ funding, especially if your business’s credit rating is less than ideal. You might even end up losing money if your ARF is structured as an asset sale.
Family Limited Partnerships
Family limited partnerships (FLPs) are used for moving wealth between generations. Assets that you transfer into the FLP are transferred in exchange for shares in the FLP. The partnership owns the assets, so they are protected from lawsuits. But, you control the assets through the FLP. There won’t be a market for the partnership shares you receive, which means that their value will be less than that of the asset you exchanged for the shares.
A possible way you can protect your assets is by stripping their equity. Pull the equity from unprotectable assets and put them into assets that your state will protect. Real estate serves as a good example for this. Let’s say you own an apartment building, and you’re concerned about a lawsuit. If you take out a loan against the apartment building’s equity, you could put those funds into a protected asset like an annuity.
Possible Other Means of Protection
Below are a few other suggestions for Personal Asset Protection, including:
- Retirement Plans. You might be able to put more money into your retirement plan (assuming it’s employer-sponsored). That could provide protection from creditors.
- Spousal Transfer. You also can transfer important assets to your spouse’s name, but, obviously, this will go south if the two of your divorce.
- Insurance. Purchasing an umbrella insurance policy will grant you protection from personal injury claims above the usual coverage that your auto/home policies offer.
- Don’t Mix Assets. Avoid mixing personal and business assets. If your company is sued, separate assets could help avoid risk of personal loss and vice versa.
There is a lot to cover when it comes to Personal Asset Protection. Contact a lawyer for more details on how to keep your hard-earned assets safe in the event of a lawsuit.
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