How to Protect Your Assets?
 

New year 2008 is coming up and it is clean-up time again.

Prior to visiting a new attorney ( and more fees), I want to make a list so everything gets discussed. What do you guys have in place to protect your assets? I mean everything, such as:

1. Your house.
2. Your pension
3. Your 401K
4. Your rentals.
5. Land you may own.
6. Your other properties which you may have partners.
7. Life Insurance.
8. In case I live past 60 and the agency is still not bankrupt, my Social Security

What could cause someone to 'forcibly' lose any one, or combination, or the items listed above? When I say 'forcibly' I do not mean me gambling, betting, losing my sanity, etc. For example, I heard that if you cause a car accident and your policy is not enough, they can go after your other assets.

I hear something about homestead.

Again, what do you guys have in place? :rolleyes:

Protection:
Homestead declaration for your home. LLC for your investment & business.
Pump shot gun for the rest, see your attorney.

Really, the only way I can think of to lose your house (taking out gambling it away, not paying your taxes, a fire, etc.) is if someone sues you, and either gets a lien or a judgment against it. Either way, you would very likely have some advance notice, so could do some planning.

With your house, the homestead exemption helps, but in most states (including California) it isn't very high.

A house with equity is "number one" on the list that a creditor likes to see. It is the proverbial sitting duck. With one filing with the county recorder's office, title to it can be tied up.

One way that some protect their house is to never have any equity in the house! That makes it useless to a creditor. If there is some equity, you could have a big HELOC, that you could draw down on quickly to suck out all the equity (although not sure how HELOCs are going these days).

The best way, IMO, to protect your assets is to be insured in the appropriate amounts. $1 million isn't what it used to be, but even in this day and age, a $1 million umbrella policy goes a long way to defending and settling a liability claim against you.

My insurance agent wants to talk to me about the umbrella policy only "as soon as I am ready to move 'all' insurance policies to him (house, auto, fire, etc.)"

I have the usual 1M umbrella policy.

a great insurance add on to car insurance is 350k-1M uninsured motorist/vehicle policy. It's not unusual for hospital bills to hit 1M. It'll even cover you if you're hit as a pedistran or riding in another car. It's about $75-100/yr.



The last thing the courts want from me in this state is my house in a law suit.

Appropriate insurance, an LLC (that owns the properties), and a shotgun are all good options, but it really depends upon the state you live in. For the most part, in many states, your primary residence, 401ks, retirements, etc. will already be somewhat protected. Don't use my advice (or the Internet in general), but consult with a professional that knows how it all works in CA, or simply move to FL like OJ did (his house, NFL pension, etc. is protected from being seized) :(.

Given my present age and my wife's, we will be setting up trusts to protect for future generation and avoid some nasty tax issues.

You should be aware that the revocable living trusts that almost all people use does NOT "protect assets for future generations." It does absolutely nothing to protect the assets from your creditors at all. It is only a probate tax/cost device.

What about simply incorporating and transferring all your assets to the corporation? Effectively you (as an individual) own nothing and the corporation owns everything.

Thanks for the clarification. I understand that but others might not, poor choice of words on my part.

Then all your creditor has to do is levy on your stock in the corporation. Very easy to do.

It would be good to have an attorney chime in here, but here's my take/understanding:

401K, Ira, Pension - those are hard to get to. Look at OJ in FL as evidence.
Life Insurance - your heirs are the beneficiary, so less of a concern.
Home - Homestead protection varies from state to state. In some states it is automatic. Basically it is designed to prevent the forced sale of your primary residence to satisfy creditors. Some states have very generous provisions (FL again).

Some have suggested putting your assets into an LLC or C Corporation. One of the purposes of a corporation is to shield the assets of the officers and directors from the actions of the entity (Corporate Veil). That means it needs to be a bone fide entity, and in the case of a C or S corp, closely follow the required record keeping and structure. In particular, for a very closely held C or S corp (just family) with just family on the board, a good attorney has a reasonable chance of piercing corporate veil. What is suggested is placing your high value assets into a corporation to make it more difficult for creditors to make a claim. As the has pointed out, if your negligence is established and a judgment is made against your assets, in theory you could be forced to liquidate your stock in the corporation.

Ultimately, what is needed is an umbrella liability policy of sufficient coverage. As has been said, $1M isn't that much anymore. But having an insurance company on the hook means they are supportive in defending a claim.

As for me, we have a bypass trust for the big assets - but that's just set up for tax reasons. And we have a reasonably umbrella policy (which has the net effect of lowering coverage on the auto policies which save a few quid). And a life insurance policy which is as large as my family needs to keep going for quite a few years in the case of my untimely demise.

Sobering, isn't it.

An LLC is a better technique for accomplishing that imo. Your liability as an individual is isolated from the assets held by the LLC, and you avoid all sorts of complicated tax issues.

ps: You don't own "stock" in an LLC...can't be touched.

I did a little reading. Apparently, if assets are owned by a properly setup LLC, a creditor cannot force an LLC to sell assets or distribute income. They can have the courts issue a "Charging Order" which only gives them rights to pay taxes on LLC income and potentially be treated as a partner (for tax purposes) in the LLC. Interesting.

subscribed

Interesting Don...when I mentioned the tax simplicity of an LLC vs. an S corp, I was actually thinking about an ongoing LLC which is generating income and passing income on to it's member(s). If the LLC is set up exclusively for "asset protection" (i.e. is not generating income), then I'm not sure how/what you posted applies. In my case (currently), I have my rental properties owned by the LLC, and they are untouchable by any liabilities that I (as an individual) might incur. I'm certainly no legal expert, but that is the way I understand it. Thanks!

Stocks, mutual funds, etc: Totten Trust.

Totten Trust is something new to me.

Wiki refers to money, not stocks and mf. Perhaps this is something I could discuss further with someone.

OK, I've been aware of a "Totten Trust" for about 5 minutes now :), but a quick search turned up the following:

"A Totten Trust Account applies only to savings balances. It does not apply to securities, such as stocks, bonds or mutual funds"

Obviously this must be true 'cause I read it on the Internet. Moneyguy, this seems to be your area of expertise, would you care to explain a bit more (I'm not being sarcastic (for once :)), just trying to learn). Also, if my understanding of LLC structures and benefits is contrary to what anyone else has experienced, please speak up. These issues aren't necessarily important to me now, but they may be some day. Thanks in advance!

WRONG!!

Any mutual fund or stock can be designated as "Pay on Death".