Have you ever wondered what would happen if you were to get sued? It’s a terrible thought I know, but let’s consider just for a moment if you did.
There’s really no such thing as “bulletproof” asset protection, for the best asset protection is determined by the number of barriers that you put between others and your assets and the difficulty with which it takes to get through each barrier. First, here’s a list of just a handful of areas that may increase your risk of being sued:
- Your net worth or income is high (it’s super easy to ballpark some of this information with Google these days)
- Carpooling
- Carrying teammates to your child’s soccer practice
- Texting or talking on the phone while driving
- You have: teenage drivers, swimming pools, or dogs
- You host: children’s playmates in your home or friends over for a BBQ
- Own rental properties
- And of course, if you own a business
These are just some of the factors that increase your risk of being sued. If you’re like me, I bet you probably could check a lot of things off that list…so here’s the million-dollar (both literally and figuratively) question …how do you protect yourself?
Certainly, the first line of defense would be your auto or homeowner’s liability insurance, but your second line of defense should be an umbrella liability policy.
Many people think they are doing well to add a $1M umbrella liability policy however, depending on your income and net worth, a $1M umbrella policy may not be nearly enough. Consider the judgements from a few years ago in the following cases:
- Dog bite case in Maryland settled for $5.9M
- Defamation lawsuit settled for $11.3M
- Horrific automobile accidents totaling $21M in Texas and in California settling for $49M
Do you still think $1M in coverage is enough? I didn’t think so; A good rule of thumb for the amounts of umbrella liability policy would be either 10x your income or 1x your net worth. Still, this is really only the first step in asset protection.
Other things that I have my clients consider are how they title their assets or how they own their assets. For example, if you own your personal residence in your personal name, it may be wise to put your personal residence in your spouse’s name. Recognize though that this could still be a problem if for example your spouse is the cause of an automobile accident and ends up being sued. Since we’re discussing personal residences, simply having a mortgage on your home is a form of asset protection. When you have a mortgage on your home, that mortgage would have to be paid in full as the first step in acquiring one’s personal residence after a judgement. It may also make sense to own assets inside of LLCs, particularly LLCs with additional members. A single member LLC, depending on the state, may not be that valuable for asset protection purposes. If you own rental real-estate it should most likely be inside some sort of entity, such as an LLC, but please don’t assume you can stop there – more on that in a moment.
In addition, qualified plans tend to have built-in asset protection. Many retirement accounts such as IRAs, Roths, 401Ks, etc. are in most cases judgement proof. (However, one important note is that retirement funds are only protected from judgements while the funds sit in the retirement account). After they have been distributed, they can then be taken, even if taken as income. Many times, accounts held for the benefits of others are also judgement proof. Generally speaking, accounts that have beneficiaries or beneficial interests are protected such as 529 plans, UTMA, or UGMA accounts, and in many states life insurance cash values. Lastly, many people look to trusts for asset protection. Without going into a tremendous amount of detail, the trust structure and the terms of the trust will help define the level and depth of the asset protection.
There are also some misconceptions in the area of asset protection especially because people think that their corporate entity, be it a C corporation or S corporation or LLC, provides adequate protection. While these corporate entities may provide adequate protection, they may not provide you with all the protection you want. In a lawsuit where you are the owner and operator of the business, and that business is owned by a corporation, for example, there is no doubt that the entity will be sued, but you will also be sued as the operator. Moreover, if you are in a car accident and it’s deemed to be your fault, any judgement will be against your assets if you own an S or C corporation; those could be forfeited in a judgement against you.
That won't be the case if the asset you own is an LLC (particularly a multi-member LLC). It can provide additional protection because it doesn’t have shares that can be transferred, rather it has membership interests that cannot be transferred. Instead, particularly in the state of Georgia, someone may be awarded a charging order which, depending on other circumstances, may not be valuable at all and in some cases, may be detrimental to the one who won the judgement and receives the charging order.
In summary, asset protection isn’t an “I’ve done X, so I’m covered.” The best asset protection employs several different tactics and strategies to keep your hard-earned stuff.
Up next, we’ll dive into #6 of the 10 Most Common Business Owner Blind Spots series - Retirement Accounts. Stay tuned!