How To Protect Your Assets From Lawsuits Or Creditors

John Egan
Forbes News Contributor

If you’re hoping to protect your assets from lawsuits or creditors, several types of vehicles can help.

“There’s certainly more than one way to skin a cat, and there are lots of different tools that are being used to protect assets,” says Blake Harris, a Florida attorney whose specialties include asset protection.

Options for asset protection include:

• Domestic asset protection trusts
• Limited liability companies, or LLCs
• Insurance, such as an umbrella policy or a malpractice policy
• Alternate dispute resolution
• Prenuptial agreements
• Retirement plans such as a 401(k) or IRA
• Homestead exemptions
• Offshore trusts

Why Do You Need Protection From Lawsuits?

To put it bluntly, if you lose a lawsuit—one filed by a creditor, for instance, seeking to recoup the money you owe—you face the loss of assets such as your home, your car and money in your checking and savings accounts. Furthermore, a lawsuit can siphon money for legal fees, gobble up your time and energy, cause stress and damage your reputation.

“Really, the key with asset protection planning is doing it in advance, and the longer you can do it in advance of a lawsuit, the safer your assets will be,” Harris advises.

How to Protect Your Assets

The approaches to protecting your assets are almost as varied as the assets themselves. Here are nine ways you may consider shielding your assets from a court judgment.

1. Domestic Asset Protection Trusts

Attorney, accountant and author Mark J. Kohler calls the domestic asset protection trust “the most affordable asset protection tool” available in the U.S. This type of trust is aimed at protecting your assets from creditors.

This kind of trust “allows you to protect your accumulated wealth from future creditors so that you can pass your property on to your loved ones after you die. If you do not expect any risk of creditors in your future, you may not need this type of trust,” according to the legal website, Nolo.

According to Kohler, 17 states allow these trusts, which are set up as irrevocable trusts. In most cases, an irrevocable trust can’t be revoked or changed once it’s been created.

Assets in a domestic asset protection trust may include cash, stock, LLCs, business property and real estate. Keep in mind that the trust may be forced to pay obligations like child support, alimony and taxes.

2. Limited Liability Companies (LLCs)

A limited liability company, or LLC, houses the assets of a business. This legal structure can protect your personal assets from being seized by business creditors. In other words, your home, car or bank account typically would be safe from a business creditor, while your business assets in an LLC normally would not be safe.

Harris says an LLC is like a financial manhole cover. “You can put it on top of your assets, and if something toxic occurs with those assets, that liability is not going to bubble up and affect your other assets,” he says.

3. Insurance Policies

Liability insurance policies may protect your assets. Here are three policies that may safeguard your house, savings and other assets.

Umbrella Policy

An umbrella policy supplements liability coverage you already have through a homeowners policy, an auto policy or another type of policy. Let’s say you’re hit with a $1 million court judgment as a result of an auto accident. Your auto policy contains liability limits that cap an insurance payment. For example, you might have a cap of $300,000 for injuries to others and $100,000 for property damage. If those limits are maxed out, an umbrella policy could cover the other $600,000.

Malpractice Policy

Malpractice insurance can safeguard some of the assets owned by a doctor or other healthcare provider who loses a medical malpractice lawsuit.

4. Life Insurance Policy

Many life insurance policies are exempt from seizure by creditors who’ve obtained a court judgment against you. Whether cash values and death proceeds are entirely or partially protected varies by state. An annuity, a type of insurance contract, enjoys similar protections.

5. Alternate Dispute Resolution

Alternate dispute resolution, such as mediation and arbitration, can avoid a court case and help cushion your assets.

An employer, for instance, can benefit from alternate dispute resolution. As a condition of employment, a business might require an employee to resolve disputes through mandatory arbitration rather than through a lawsuit. Harris says this can be “an effective means of reducing your chances of being sued.”

6. Prenuptial Agreements

A prenuptial agreement, signed before a marriage, can protect certain current and future assets owned by a spouse rather than being jointly owned by the couple when they’re going through a divorce.

7. Retirement Plans

In most situations, a creditor can’t access your retirement plan. This can include an IRA or an employer-sponsored 401(k). However, a creditor may be able to tap into your retirement account if, for instance, you owe back taxes or past-due alimony payments.

If you’re hoping to protect your assets from lawsuits or creditors, several types of vehicles can help.

“There’s certainly more than one way to skin a cat, and there are lots of different tools that are being used to protect assets,” says Blake Harris, a Florida attorney whose specialties include asset protection.

Options for asset protection include:

• Domestic asset protection trusts
• Limited liability companies, or LLCs
• Insurance, such as an umbrella policy or a malpractice policy
• Alternate dispute resolution
• Prenuptial agreements
• Retirement plans such as a 401(k) or IRA
• Homestead exemptions
• Offshore trusts

Why Do You Need Protection From Lawsuits?

To put it bluntly, if you lose a lawsuit—one filed by a creditor, for instance, seeking to recoup the money you owe—you face the loss of assets such as your home, your car and money in your checking and savings accounts. Furthermore, a lawsuit can siphon money for legal fees, gobble up your time and energy, cause stress and damage your reputation.

“Really, the key with asset protection planning is doing it in advance, and the longer you can do it in advance of a lawsuit, the safer your assets will be,” Harris advises.

How to Protect Your Assets

The approaches to protecting your assets are almost as varied as the assets themselves. Here are nine ways you may consider shielding your assets from a court judgment.

1. Domestic Asset Protection Trusts

Attorney, accountant and author Mark J. Kohler calls the domestic asset protection trust “the most affordable asset protection tool” available in the U.S. This type of trust is aimed at protecting your assets from creditors.

This kind of trust “allows you to protect your accumulated wealth from future creditors so that you can pass your property on to your loved ones after you die. If you do not expect any risk of creditors in your future, you may not need this type of trust,” according to the legal website, Nolo.

According to Kohler, 17 states allow these trusts, which are set up as irrevocable trusts. In most cases, an irrevocable trust can’t be revoked or changed once it’s been created.

Assets in a domestic asset protection trust may include cash, stock, LLCs, business property and real estate. Keep in mind that the trust may be forced to pay obligations like child support, alimony and taxes.

2. Limited Liability Companies (LLCs)

A limited liability company, or LLC, houses the assets of a business. This legal structure can protect your personal assets from being seized by business creditors. In other words, your home, car or bank account typically would be safe from a business creditor, while your business assets in an LLC normally would not be safe.

Harris says an LLC is like a financial manhole cover. “You can put it on top of your assets, and if something toxic occurs with those assets, that liability is not going to bubble up and affect your other assets,” he says.

3. Insurance Policies

Liability insurance policies may protect your assets. Here are three policies that may safeguard your house, savings and other assets.

Umbrella Policy

An umbrella policy supplements liability coverage you already have through a homeowners policy, an auto policy or another type of policy. Let’s say you’re hit with a $1 million court judgment as a result of an auto accident. Your auto policy contains liability limits that cap an insurance payment. For example, you might have a cap of $300,000 for injuries to others and $100,000 for property damage. If those limits are maxed out, an umbrella policy could cover the other $600,000.

Malpractice Policy

Malpractice insurance can safeguard some of the assets owned by a doctor or other healthcare provider who loses a medical malpractice lawsuit.

4. Life Insurance Policy

Many life insurance policies are exempt from seizure by creditors who’ve obtained a court judgment against you. Whether cash values and death proceeds are entirely or partially protected varies by state. An annuity, a type of insurance contract, enjoys similar protections.

5. Alternate Dispute Resolution

Alternate dispute resolution, such as mediation and arbitration, can avoid a court case and help cushion your assets.

An employer, for instance, can benefit from alternate dispute resolution. As a condition of employment, a business might require an employee to resolve disputes through mandatory arbitration rather than through a lawsuit. Harris says this can be “an effective means of reducing your chances of being sued.”

6. Prenuptial Agreements

A prenuptial agreement, signed before a marriage, can protect certain current and future assets owned by a spouse rather than being jointly owned by the couple when they’re going through a divorce.

7. Retirement Plans

In most situations, a creditor can’t access your retirement plan. This can include an IRA or an employer-sponsored 401(k). However, a creditor may be able to tap into your retirement account if, for instance, you owe back taxes or past-due alimony payments.

8. Homestead Exemptions

In some states, a homestead exemption protects at least some of the value of your primary residence from most creditors. Certain states allow an unlimited exemption, while others cap the exemption amount. In Massachusetts, for example, the exemption limit is $300,000.

9. Offshore Trusts

Though not as common, offshore trusts may be an option for some segments of the population. For example, Harris says that one tool he uses to protect his clients’ assets is an asset protection trust in the Cook Islands, a nation made up of 15 atolls and islands tucked between French Polynesia and Samoa.

“This is an offshore trust which allows clients to keep beneficial ownership of their assets so they can still use and enjoy their property,” Harris says. “But the control of the trust is held outside the United States, so that clients are not subject to losing their assets due to U.S. court orders.” Harris adds an important note: “This is not about tax dodging; it’s not about avoiding your debts to the IRS.”

A 2013 New York Times article refers to the Cook Islands as a “global pioneer in offshore asset-protection trusts,” offering a great deal of anonymity and security for U.S. citizens trying to shield their assets from legal claims.