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Do You Have An Asset Protection Strategy In Place?

Asset ProtectionYou’ve worked hard, have been frugal, paid off your debt and have started to accumulate assets. Your net worth is in positive territory and your feeling pretty good about you’re overall financial state. Financial Independence seems like it may be right around the corner!

But… you don’t have an asset protection strategy in place.

 Now, let’s take that scenario and add a dramatic twist to it. You’re driving to town on an errand. You’re temporarily distracted and accidentally run a stop sign. The resultant collision is pretty severe; you’ve run into a family of four in their minivan. You think and feel that you’re ok, but the passengers in the minivan are not. There appear to be some serious injuries and all of them are taken to a local hospital.

After a few days and harrowing hours spent on the phone with your insurance company you find out that everyone in the minivan survived, but some of the injuries were fairly serious and will require long term treatment and medical care. Thankfully you have decent insurance so those expenses will be covered. Are you sure about that?

An unfortunate event like I just described will almost always lead to a personal injury lawsuit. Awards may range from one to two times the total medical bill or more! Add in the medical bill and you can be looking at some pretty serious liability. To give you an example, I recently had a close family member that was involved in a car accident. They spent less than a day at the Hospital. The total cost for that stay was in excess of $35,000!

Your liability may only cover a fraction of the medical costs and the potential personal injury awards. So where does the rest come from? Your assets! Your savings, possessions and potentially even the equity in your home could be at stake. This is not a one in a million chance occurrence. The numbers of personal lawsuits filed every year are astronomical. They not only result from car accidents but from common everyday occurrences. A neighbor or delivery person slipping and falling on your property could end up with you on the wrong end of a personal injury claim.

There is also the possibility of bankruptcy. Unforeseeable events can devastate one’s personal finances. Sometimes to the point where filing for bankruptcy is the logical option to get a fresh start. I think all of us hope that we never have to worry about a lawsuit or bankruptcy. But, are you prepared should the worse happens?

There are steps you can take to protect your assets. Some of them are fairly simple and inexpensive. Others take a bit more planning and may involve paying for professional help. But if you have assets and a positive net worth,  you should consider reviewing some of these as part of your overall strategy to protect yourself.

The Easier Asset Protection Strategies

The first step in safeguarding your assets is to make sure you have adequate insurance coverage. Liability is a significant portion of both your auto and homeowners insurance. Renters insurance can come with or without liability coverage so you would need to check with your insurer to make sure you have liability protection. You should also consider an umbrella liability policy. Umbrella policies are designed to cover liability claims in excess of what your auto or homeowners insurance provides. The most common policies provide one million dollars in liability protection but are available for higher amounts as well. A one million dollar policy can run anywhere from $200 to $500 per year. Whether you opt for this type of coverage should be dictated by the value of your assets and net worth.

There is also professional liability coverage that you should consider. Certain professions carry a high amount of liability risk, Medical providers and Lawyers are the obvious ones. Financial Advisors, Sport and Fitness Trainers, and other vocations can also carry some liability risk. If you are in a job where there is some potential for liability exposure you should look at either an umbrella policy or a policy that specializes in coverage for your profession.

How much coverage you opt to take should be determined by the value of your assets and your net worth. If it’s below the liability limits in your auto and home coverage then extended coverage may not be necessary. Many personal injury lawyers will look into a person’s net worth and assets when filing a personal injury lawsuit on behalf of a client. You can make a safe assumption that they will go after “everything you have”.

Another strategy to help protect assets is banking as much as you can in retirement accounts. This area gets a little murky as to what accounts are protected as well as what type of protection is afforded. IRA’s and 401k’s have fairly broad protection against bankruptcy, but limited, if any protection against lawsuits. U.S. federal law protects some retirement accounts, such as employer sponsored 401k’s but offers no protection for individual retirement accounts. Some state laws offer protection for these accounts but it varies widely. Individuals will need to do their homework or consult with a professional to see how much if any protection their retirement assets have for the location they live in.

More Complex Asset Protection Strategies

There are other more complex ways of protecting your assets. Trusts can be set up to offer protection from creditors and liability claims. They can be complex and like retirement accounts, the measure of and under what circumstances they offer protection vary widely depending on the type of trust and where you are located. Trusts should be considered if you have significant assets and a high net worth. They should also be approached with caution and guidance from certified professionals. The type of trust you would ultimately set up needs to be tailored to your specific goals in asset protection and have to be structured in an exacting method to meet legal criteria which of course vary by your location.

Incorporating is yet another method of protecting assets, typically from liability claims. There are a wide variety of corporations that can be used in an asset protection strategy, Limited Liability Corporations and Partnerships seemingly the most popular in recent years. Incorporating is typically best used for individuals running a business as a sole proprietor or in a partnership. Without the benefit of incorporating the business owner and or partner run the risk of having their personal assets at risk.

Asset protection and planning is a complex topic. With the exception of insurance, any of the above tactics to protect assets should be done with the guidance of a financial or legal professional. The ramifications of making a mistake are high enough that saving a few bucks up front can cost you large in the end. One last thought, many of the actions you can take to protect your assets from Bankruptcy or Litigation should be done early on. Any of these tactics that are undertaken once an action has been filed against you would probably be invalidated by the court involved. I’d be interested in hearing from you what you have done as far as asset protection.

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John Schmoll is a Dad, husband and veteran of the financial services industry. He's passionate about helping people learn from his mistakes so that they can live lives free from the shackles of debt and empowered to make their money work for them. You can check out his other sites: Frugal Rules, for ways to improve your financial literacy; and Sprout Wealth for tips on different ways to make more money. John has been featured on Forbes, Lifehacker, Yahoo Finance and US News & World Report and more. If you're wanting to grow your blog, check out my blog coaching services to see how I can help you take your site to the next level.

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6 comments

  1. Great stuff and very thorough, Jose! Our coverages are pretty solid across all of our insurance but I do need to look at getting an umbrella policy. It’s something I’ve been putting off but it’s really not worth it considering the low cost with umbrella policies.
    Jason @ WSL recently posted…SmarterBucks – Helping You Pay Down Your Student Loans More QuicklyMy Profile

    • Thanks Jason, I missed your post. I installed Askimet and it got stuck in the spam folder. I agree, I’ve neglected to get umbrella coverage for a while and am at the point where I should. I would suggest shopping around since there seems to be a wide ranges of pricing when it comes to umbrella coverage.

  2. I don’t drive so at least I don’t have to worry about that! I didn’t realize that retirement accounts offered some protection against bankruptcy or lawsuits at all. Good to know, just in case.
    CF recently posted…Updates: Jan 24 – Feb 2My Profile

    • My understanding is that personal retirement accounts offer some protection against bankruptcy but very little against lawsuits. ERISA protected retirement plans (corporate sponsored as an example) are better protected. The challenge is that federal laws only apply to ERISA covered accounts, State law applies to all other. So how well your retirement account is covered really varies depending on where you live.

  3. Great post with some really good information. Umbrella policies are a must and you can actually get $2 million of coverage for the price range you mention if you shop around.
    Use some corporate form to operate your business is essential. The same with real estate. Choosing between a regular C corporation, S corporation, and LLC, etc should be explored with a tax or corporate attorney to see what makes sense from a tax perspective. At my website, readers can find a lot of free articles dealing with choice of entities and tax issues.
    Finally, states can differ in their protection of corporate retirement plans versus IRAs and the like.
    Steven J Fromm recently posted…Estate Planning 2013: Now What? A Must Read For EveryoneMy Profile

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