Step 3: Asset Protection

WHAT DO WE MEAN BY “asset protection”? It’s about fending off creditors who have a legal claim on your assets. That claim might arise because you took on too much debt or because you ended up on the wrong end of a lawsuit. While these might seem like two quite different problems, in both cases you could end up filing for bankruptcy.

By the time bankruptcy or litigation is threatened, however, there isn’t much you can do. It’s probably too late to rearrange your finances by, say, gifting assets to your children. Such gifts could be deemed a fraudulent transfer. Instead, your best bet is to take steps now, before there’s any hint of a financial claim against you. That’s especially true if you’re in an occupation that tends to attract legal claims, such as working as an accountant, doctor or lawyer. Lawsuits are also a risk if you work in real estate, including as an architect, builder or developer. What to do?

• Find out which assets enjoy creditor protection in your state and consider making the most of those assets. Your retirement accounts, and possibly your home, may be protected. A few minutes with an Internet search engine will likely turn up key details about the law in your state. To get started, try LegalConsumer.com.
• Look into buying umbrella liability insurance to supplement whatever liability coverage you have through your auto, homeowner’s or renter’s policies.
• Think about whether your business life puts your investment accounts and other personal assets at risk and, if necessary, take steps to limit that risk.
• If you’re wealthy, you might talk to an attorney about trust arrangements that can help protect your assets. Different trust arrangements are discussed in the chapter devoted to estate planning.

What if you have already been slapped with a lawsuit or you’re considering bankruptcy? You will need to hire a qualified attorney. Ask which assets enjoy creditor protection in your state. It might be ill-advised to move money into these assets now, but you also shouldn’t pull money out. For instance, given the creditor protection enjoyed by retirement accounts, you don’t want to use those accounts to pay legal bills and other expenses. If you fear a lawsuit, you should also immediately contact your insurance company to see if your various policies will provide liability coverage.

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