Protect Your Assets: 4 Key Strategies for Shielding Yourself and Your Family from Creditors
We’ve all heard the old adage “the best defense is a good offense.” This is certainly true when it comes to protecting your assets. Taking simple proactive measures to safeguard your hard-earned wealth can save you in the long run.
In our litigious society, you run the risk of being sued even if you may not have been negligent or irresponsible. All kinds of creditors are willing to take their chances in litigation to attempt to reach your assets. However, working with your financial advisor to develop a strategy for protecting your assets can be an invaluable decision.
1. Appropriate Insurance
Appropriate insurance coverage is the most fundamental step in protecting your assets from potential creditors. Regularly reviewing your homeowners, auto and professional liability policies with your financial advisor is a simple step toward protecting your wealth. These policies are the first to kick in when someone is accidentally injured at your home, in a car accident or otherwise. Having appropriate primary coverage in these scenarios can help ensure that a potential plaintiff is adequately compensated and has little to no need to continue pursuing your personal assets.
2. Excess Liability Insurance
Another active step you can take to protect your assets is to obtain a Personal Liability Umbrella (or “Excess Liability”) Policy, also known as a PLUP. These policies cover liabilities over and above the underlying coverage of your homeowners or auto policies. They are often sold in denominations of $1 million, and premiums are generally relatively inexpensive. However, it is keenly important to review your PLUP with your financial advisor to ensure that required underlying liability limits are satisfied. Think of a PLUP as being layered on top of your primary insurance policies for extraordinary circumstances or damages that might lead someone to sue you in an attempt to attach your future earnings or home to meet the liability.
Examples of common scenarios that, in the extreme, might activate your PLUP coverage:
- A catastrophic car accident
- A person injuring themselves in your pool
- Your child destroying another’s property
For a relatively low annual premium and the ultimate value it delivers, excess liability insurance is definitely worth the investment.
3. Titling of Assets
In New York State, for example, a married couple exclusively may own a home as “tenants by the entirety,” which means that one spouse’s creditor cannot put a lien on the home if it’s owned by both of them in this way. Essentially, if only one spouse is found liable in a lawsuit, a creditor will be unable to force the other spouse to sell his or her interest to satisfy the debt.
If this option is not available to you, it may be worth speaking to an attorney about the benefits of owning a home in a limited liability corporation (LLC) and the protections such a corporate entity would afford.
4. Safeguard Your Assets with a Trust
We may also suggest establishing an irrevocable spendthrift trust with your attorney as an additional way to shield your assets, should you be sued. This type of trust either limits or altogether prevents a beneficiary from transferring or assigning his or her interest in the income or the principal of the trust. Thus, a creditor cannot reach a beneficiary’s interest because a beneficiary has no right or ability to transfer his or her interest in the assets of a spendthrift trust. If properly established and created outside the bounds of any fraudulent conveyance statutes, this type of trust also can help by eliminating the wealth owner’s unfettered control over the assets and by preventing a creditor from accessing these funds.
Speak with your Altfest advisor or schedule a complimentary consultation to discuss how to optimize your creditor protection.
Keith Feinberg, JD, CFP® works to help clients and their families achieve their goals by creating customized and comprehensive financial plans. He specializes in Estate Planning and Tax Planning. Keith earned a JD from St. John’s University School of Law.