A common concern for many clients is asset protection, which means shielding your assets from creditors. Not all creditors are bill collectors. If someone obtains a judgment against you, as the result of a lawsuit, your assets will also be at risk. So, if you are wondering, “how can I protect my assets from lawsuits,” asset protection planning is the way.
Which of my assets are at risk?
Asset protection can be a very complicated area of the law, as it is governed by both federal and state laws. When considering asset protection, it is easier to view your assets as being in three categories; your home, your retirement accounts and your taxable income.
Protecting your home
Many states have established a homestead exemption, which protects your home from someone who has a legal judgment against you. California recognizes the homestead exemption. That means, depending on the situation, your home could be completely protected from creditors. The homestead exemption applies only to your primary residence.
There is one very important exception. If you transfer the title of your home to your spouse or a child, because you believe you are about to be sued, it may be considered a fraudulent transfer.
Protection for your retirement accounts
Two very common retirement tools, IRAs and 401k plans, offer limited protection from lawsuits. But, when the money in these plans is withdrawn, it may be subject to a legal judgment at that point.
Generally, all employer-sponsored retirement plans are protected from creditor judgments. However, this blanket protection does not extend to retirement plans for business owners and their spouses, only. In some states, including California, annuities and life insurance policies are protected from creditors, to a certain extent.
Taxable accounts are at a higher risk
Unlike your primary residence and your retirement accounts, your assets that are held in regular taxable accounts is more at risk, if you are sued. If the income earned in an account is taxable at the time the income is earned, it is known as a “taxable account.” Examples of a taxable account include bank accounts, individual or joint investment accounts, or money market mutual funds.
Insurance can protect taxable accounts
One simple way to provide protection is to obtain insurance which can limit your exposure if you are involved in a legal matter. Both automobile and homeowner’s insurance policies can provide liability coverage, especially against personal injury claims. You can also purchase an umbrella policy in order to obtain additional coverage.
Trusts can also offer protection
You may need to obtain additional protection, beyond insurance coverage, if you have more substantial assets or if you own a business. A good method is to place your assets into a trust. The trust must be irrevocable, however. A revocable trust does not protect your assets because your trust can be revoked for the benefit of your creditors. Not only must the trust be irrevocable, but it must also be presently funded. This means that, until you transfer assets to your trust, they are still considered your assets and can be subject to a judgment.
If you have questions regarding protection from lawsuits, or any other asset protection planning needs, please contact the Schomer Law Group either online or by calling us at (310) 337-7696.