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.

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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".

Totally out of my area of expertise, but another quick search turn up this quote from Wiki:

"Most U.S. States now recognize the validity of Totten trusts. The Restatement 3d of Trusts Section 26 and the Restatement 3d of Property (Section 7.1 comment i) also recognize its validity. Such a device can be revoked at any time by the settlor, either by closing the account or by executing a will which disposes of the property in the account. The funds in the account can be reached by the creditors of the settlor during the settlor's life"

"IF" this quote is indeed accurate, it would seem "to me" that the assets would not be protected.

Totten trusts definitely do not protect against creditors.

I'm not sure an LLC does, either, but not sure. If, for example, an LLC owns a $1 million building, outright, and you are the only member of the LLC, I think that a creditor is going to find a way to get to that building. You, the individual, "own" or have the equity interest in the LLC. It's that equity interest in the LLC that the creditor would go after (again, I'm not sure exactly with an LLC, but if it were that easy to shield your personal assets, then everyone would be holding all of their assets in an LLC).

Very generally, if you still direct what can be done with the asset, then you own it as far as creditors are concerned.

Interesting perspective the... I truly don't know for sure either.

If you are trying to protect yourself from what I imagine is the most common way of losing your assets - get a prenup. :D
-Chris

Forbes mag occasionally hits these subjects in an relevant article.

try search
http://www.forbes.com/

Good one :)

Some may find it funny, but I do have one. SmileWavy


p.s.,

Even though the prenupt was discussed prior to my proposal, it still hurt her (I think) when I had her sign it.

If there is a second marriage involved, a prenup is an absolute necessity, particularly if there are kids from the first marriage. By giving the new bride a "Life Estate" in the home and the children as "Remaindermen", the children's interests are protected. With cash types of assets, they can be put into a form where the surviving spouse gets an annual/monthly payout and the trust reverts to the children or anyone else you may wish to leave it to.

Bob,

Assuming 1) you are currently married, 2) it is your 1st one, 3) you have been married for some years, don't you want to also recommend that even in the first marriage, a prenup is a 'must'?

Hopefully, my question will not turn the original intent of my post to a "prenup" arguement(s).

You are not alone. Know many people in this position and very well may join them someday.

Cab,

Bob lost his wife of many years recently. He is a financial adviser and from what we hear is very good at it.

Joe

Without belaboring this more (I'd also like the thread to return to good tax/probate shelter advice), I would point out that fully 100% of failed marriages happened between people who thought "it would never happen to them".

I'd absolutely positively recommend a prenup to anyone (especially men) that care about protecting the fruits of their labor and effort.

Back on topic - the specific differences between LLCs and corporations are still a bit unclear to me - can someone elaborate on this?

generally, LLCs is used with professional partnerships.

I'm single, and don't intend to change that, but if I were to decide to get married, at my age (47) you can bet a prenup would be "a given". Just the way it's got to be these days imo.

Now take all this with a big 'ole grain of salt, but in a nutshell, here's my layman's understanding of the second part. A corporation is a "legal entity" that is taxed as a corp. and is more complicated to setup and maintain. Income, etc. would be passed to the individual as salary, dividends (as you own stock in the corp.), etc. which would again be taxed as individual "personal income". An LLC is a more simple structure to setup and maintain, and although it's also a "legal entity", is NOT taxed as such. Income is passed through to it's member(s) where personal income tax takes effect. In my case, the primary reason for the LLC was to "own" my rental properties so if a liability etc. occured with one of my properties, the exposure would be limited to the LLC's assets (and you "can" minimize those if you get creative), but most importantly, MY personal assets would be untouchable. That part I am 100% sure of. The inverse of that (as "the" refers to above) is not crystal clear to me. (i.e. If I am personally sued for example, could someone "go after" my holdings in the LLC). As I posted to "the", I'm really not sure. That's the "high level" view, and maybe someone else will explain it better and there's plenty of info online if you search around. As usual, don't take my word for it, consult a professional as "you get what you pay for" :).

In a first marriage, a pre nup may make the party with the most to lose feel a bit safer, but in a way, it seems to me that it is to some extent setting the union up for failure, giving a "way out".

I dunno...it's just the romantic in me to think that a marriage shoud be a "forever" thing and if there are doubts, then it probably shouldn't be........

Joe...thanx for the kind words.

Ask you atty about "piercing the corporate veil..."

In most places, the best way to protect your assets from outside creditors is to be married, and never enter into joint ventures or liability producing behavior with your spouse.

Of course, being married unsucessfully is another story...

I think most laymen waste way too much time worrying about "asset protection". Most significant creditors require personal guarantees of entity loans etc, unless the entitities have significant assets of their own, and liability for tort etc is best dealt with by having large insurance.

I agree 100% that a large insurance policy is effective and probably the best option for most. I won't go into details, but I needed to protect our family holdings from a local attorney who imo would not stop at the "low hanging fruit" of an insurance policy if he could somehow acquire the land that's adjacent to his mini-Ponderosa. He's been salivating over it for thirty-some years, I needed "bulletproof protection", and an LLC provides that. Is it overkill? Possibly, but I don't take chances when my parents are in the equation and he has proven himself to be extremely devious in related matters with other adjacent property owners...after all, he is an attorney :).

I've found that not having any assets is a pretty good game plan. Yep, that the ticket it's all by design.