I have received a number of inquiries lately from potential clients who are interested in asset protection. The absolute best time to engage in asset protection is before you have any creditors or potential creditors. While there are some sophisticated techniques that an attorney can help you with, there are also some simple things that everyone should know. Note that (1) this applies to Florida residents only, as I am not familiar with the laws in other states, and (2) more importantly, this is general information only, and may not apply to your specific facts and circumstances.
- If you are married, then one of the best things you can do for asset protection is to own all of your assets with your spouse as “Tenants by the Entirety.” Tenants by the entirety is a special form of joint ownership that is available only to spouses. What makes it a powerful form of asset protection is that the individual creditors of either spouse cannot reach the asset. However, a creditor of both spouses jointly might be able to. Be aware however that when you own property as Tenants by the Entirety, when one of the spouses dies, the other spouse automatically inherits the entire property. Based on your individual situation, this might not be ideal from an estate planning perspective.
- Certain assets are exempt from creditors. That means that if you are sued and lose the lawsuit, your creditors may not force you to sell these assets to pay them, or collect against them. These assets include (1) your Homestead (with certain very important caveats); (2) your IRA, Pension Plan, 401(k) or other Retirement Plans; (3) the cash value of any life insurance policy that you own on your life; (4) certain annuities.
- The rules regarding your Homestead and its exemption from creditors are tied into the federal bankruptcy law. There may be some limitations based upon how long you have lived in the state and the value of your homestead. If this is a concern, you should consult an attorney.
- Despite what you might have heard, a revocable living trust does not provide any creditor protection at all. Zero. None. Zilch. The purpose of a revocable living trust is to avoid probate, and to plan for incapacity. That’s it. Now, probate avoidance and incapacity planning, can be and is very important. It could save your family the burden and cost of a Guardianship if you are incapacitated (as could a durable power of attorney); and avoid the cost of probate after your death. However, it is not an asset protection tool.
These are just some simple tips that everyone should know. If you are concerned about potential future creditors, by putting your wealth into some of the above assets, they should be protected.
There are also some more advanced creditor protection techniques, including family limited partnerships, irrevocable trusts in certain states, and other ownership structures. However, if you are interested in these, you should see an attorney.