The key component to an effective asset protection strategy lies in timely and careful planning. There are varieties of possible strategies, but everyone's circumstances are different. What works for one person may not be an affective protection technique for others.
The most common form of asset protection strategy is insurance: ensuring comprehensive coverage to an appropriate level is an easy and quick means of providing basic asset protection. Always be careful to read the policies and ask if you do not understand. Umbrella policies can also be a very effective tool. Insurance is a tool that acts as a safety net and if there need be a net; it means that something is falling. This is why insurance is only one part of a strategy for protecting assets.
The situation is obviously more complex for people who own and operate businesses. Wherever possible, a business should be run through a structure that limits personal liability. For instance, the formation of a Limited Liability Company or LLC to conduct business provides greater protection for personal assets than operating through a partnership of individuals. An LLC can be a good start and makes much more sense than running your business affairs as a sole proprietorship.
Transferring the assets into the name of a low-risk individual's name, usually that of a spouse is another asset protection strategy that can prove useful. Although this strategy has worked for many, this does not help much if both husband and wife in are named in the lawsuit. Another consideration, while your spouse may not be doing much to create liability, many risks come from unexpected places, a slip and fall on your property, a car accident which triggers punitive damages above and beyond your insurances will make the use of transferring assets to the low risk individual rather useless. One last consideration is the strength of your relationship with your spouse.
Another asset protection strategy is to transfer assets into a discretionary trust. This trust is for the benefit of a family as a group but without any individual family member having a "fixed" interest. The assets are protected in the event of bankruptcy, unless they can be "clawed back."
Using 401 Plan, IRA's, Veba's and various other plans related to your business interests are very effective methods of asset protection. By placing assets in these vehicles, they are usually protected from creditors.
For the right client, life insurance and annuities can be good estate planning tools, but also a very good asset protection tools. Please look into this carefully, as some states do protect life insurance and annuities and some state do not.
A concept known as equity harvesting or equity stripping your residence can be a good tool. This is done through borrowing against your homes increased value and creating a second mortgage. This reduces the size of the asset and the amount available to creditors.
These are just a few of the available asset protection strategies. Once again, what is appropriate for one person will not necessarily suit another. Careful and timely planning is the key as there is no substitute for being prepared.
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