Last week I began a series on asset protection by discussing how you can reduce your risk of lawsuit through making changes in your lifestyle and protect assets by purchasing an umbrella insurance policy. When working with our clients, we do a Liability Risk Assessment whereby we attempt to determine if there are any obvious liability risks that need to be addressed with a particular strategy. I have had people tell me that they are not concerned about liability because if they feel threatened, they’ll simply transfer assets out of their name. This won’t work because of the federal ‘fraudulent transfers rule’ that states that funds transferred in an attempt to avoid creditors is illegal and the court will order the transaction be reversed.
Professional Liability Insurance. If you own a business, you’ll want to explore professional liability coverage which may come in a variety of forms including malpractice insurance (doctors, lawyers and other professionals), errors and omissions, product liability, premises liability coverage. From time to time, you may be asked to serve on various boards of either non-profit or for-profit organizations often serving with little or no pay. This can be very dangerous to your wealth. Generally, my recommendation is to avoid such appointments. If you are considering joining a board, make certain there is significant Officers and Directors liability insurance. Remember, as a director, you are liable for the misdeeds of the people who are running the organization and rarely do you have access to much information about their activities. I have a personal friend who forfeited hundreds of thousands of dollars after the board on which he served received a massive judgment.
To Do: Get with an insurance agent who specializes in commercial insurance and have him or her do a complete insurance review with particular emphasis on liability coverage.
Beyond insurance, both federal and state law provide a variety of protections that are vital that you know about and consider taking advantage of to protect your assets from lawsuit.
Federal Exemptions. Federal law protects all assets held in certain retirement plans including company sponsored profit sharing, 401k, 403b and pension plans (Employee Retirement Income Security Act- ERISA). In addition, in a law passed in 1995 (Bankruptcy Abuse Prevention and Consumer Protection Act), Individual Retirement Accounts (IRAs) are exempt from creditors for up to $1 million if the owner files for bankruptcy protection. Assets rolled over from a qualified plan such as a company retirement plan to your personal IRA do not count towards this $1 million limitation and remain fully protected from a law suit.
To Do: Consider shielding assets by investing through retirement plans. If you want to invest primarily in alternative investments such as real estate, oil and gas, or non-public business enterprises, consider setting up a self-directed IRA. You’ll need a custodian who specializes in these types of accounts.
State Exemptions. Each state has its own set of exemptions laws that provide a varying level of protection of assets from bankruptcy. For a state-by-state summary, visit the Resource Center at www.welchgroup.com; click on ‘Links’, then State-by-State Bankruptcy Exemption Laws.