Few things can derail a retirement plan like a liability lawsuit. Anyone that has accumulated sufficient assets should consider taking proactive steps to protect their assets against such potential litigious actions.
It is prudent to implement risk management strategies in the event you or someone in your family is found to be legally responsible for injuring someone or damaging their property beyond the limits of your standard liability insurance coverage. Under such circumstances and without proactive planning, the legal liability outside your insurance coverage would likely have to be paid from personal assets. This could cause financial ruin.
With this in mind, by proactively implementing some of the following basic asset protection strategies, an individual can potentially reduce the impact of a creditor claim:
Retirement Accounts. Utilize qualified retirement plans, such as an IRAs, 401(k)s, or 403(b)s, to their fullest extent. Such plans are typically fully exempt from claims of creditors.
Real Estate. Since Illinois’ homestead exemptions on a primary residence offers limited protection, titling your primary residence as tenancy by the entireties (allowed in Illinois) is recommended. Unless both parties are subject to the litigation, such titling will protect the house from creditors because individual debts many not be paid with “entireties property.”
Umbrella Insurance. Consider adding an umbrella policy to your existing homeowner/auto policies. This will provide you with additional liability protection above and beyond you existing liability limits. Such policies will allow you to increase your liability limits to $1 million or more. The general minimum rule of thumb is to insure up to your net worth. Such an umbrella policy can be explored through your insurer that provides you with your auto and homeowners insurance.
Trust. If you have significant assets or are in a litigious profession, consider an irrevocable trust. It is important to understand that you are giving up control of the assets placed in such a trust and you cannot take back the assets once placed in the trust. Such trust can be established both in the U.S. and overseas. Overseas trust should be viewed with scrutiny since they are expensive to set up, complex, and risky. Such trusts typically make sense for the ultra-high net worth individuals.
Business Ownership. Depending on the circumstances of the business arrangement, consider structuring the business as a separate entity. Entities that could be created include a Limited Liability Company (LLC), an S Corporation (Small Business Corporation), or a Limited Partnership, to name a few. Such entities have the potential to shield personal assets from business liability.
Asset protection is a fundamental part of risk management. The above ideas and strategies are not all inclusive and may not apply to everyone. Effective asset protection requires good legal and tax counsel. It is strongly encouraged to seek assistance from qualified individuals who regularly practice in this area.
-Michael Smith, MS, CFP®, AWMA®, CRPC®