Protecting business assets from lawsuits is something all business owners should consider. Asset protection simply means shielding your asset from creditors of all kinds. Selecting the most effective, and legal, methods to protect your assets is a concern for everyone, especially those who own their own business. But, remember, that creditors are not only bill collectors, but also anyone who obtains a legal judgment against you. That includes lawsuits. The best way to prepare for the possibility of a lawsuit resulting in a legal judgment against your business, is to create an asset protection plan now.
Which assets do I need to protect?
There are some types of assets that are not subject to creditors or judgments. Federal and state laws determine which types of assets may be at risk, and which are protected from creditors automatically. Consider your assets as belonging to one of three general categories: your personal residence, your retirement accounts and your taxable income. Each of these categories of assets is affected in a different way by legal judgments.
Protecting your personal residence
Most states recognize a homestead exemption from creditors and judgments. A homestead exemption will protect your personal residence from legal claims against you. Each state’s homestead exemption is different. In California, there are two exemption systems. One allows you to exempt up to specific amounts, depending on various situations. The other simply allows homeowners to exempt up to $25,575 of the equity in their home. Discuss these exemptions with your attorney to determine the type of exemption you may be allowed to claim.
Protecting your retirement accounts
Two of the most common retirement plans, IRAs and 401ks, provide limited protection against lawsuits. These protections only apply as long as the money remains in the retirement accounts. Once any of the funds are withdrawn, that amount may become subject to a judgment. On the other hand, employer-sponsored retirement plans are usually protected, unless the retirement plan is for a business owner and his or her spouse.
Taxable income remains subject to legal judgments
If you are facing a lawsuit, your taxable income will be the most at risk. All of the income you earn is considered taxable, such as bank accounts, individual and joint investment accounts and money market mutual funds. You may be able to protect your taxable accounts with various types of liability insurance, such as automobile and homeowner’s insurance. Depending on the type of business you operate, professional liability insurance may also be available. Also consider umbrella policies that may provide additional coverage.
Protect your assets with trusts
If you have significant business assets, you should consider further protecting those assets with an irrevocable trust. Unfortunately, a revocable trust does not provide the same asset protection because it can be revoked at any time, allowing your creditors access to those funds to satisfy their judgments. But, as long as your trust is “presently funded,” meaning the assets are actually transferred to the trust, then the funds are safe from lawsuits.
If you have questions regarding lawsuits and legal judgments, or any asset protection planning needs, please contact the Schomer Law Group either online or by calling us at (310) 337-7696.