When most people hear the words “asset protection,” visions of offshore trusts and numbered Swiss bank accounts come to mind. While these techniques certainly are within the realm of asset protection for the ultra wealthy, there are many techniques that are available to the middle-class that often are more powerful and (much) less expensive. The core of every asset protection plan starts with basics concepts. More often than not, these basic concepts can provide sufficient protection to give most people peace of mind.
The best asset protection plan is one that is combined with a comprehensive estate plan, regardless of the complexity or value of the assets owned by the client. Both types of plans are important and generally tie in together inextricably. While some advanced techniques and plans provide heightened protection, they come at a cost, both monetary and otherwise. Certain techniques are more complicated than others, not necessarily just in the creation, but in the ongoing maintenance and reporting. Other techniques require the client to give up unfettered control of the asset. It is often difficult to balance the protection that a client may seek with the complexity and release of control, both of which most clients dislike.
An experienced attorney will generally outline the spectrum of possibilities and explain the pros and cons of the various options. It is within this spectrum that most middle-class clients will find comfort that they too can be protected without the need of an offshore trust or a numbered Swiss bank account.
Below is are brief descriptions of various techniques and concepts that are integral in any asset protection plan.
1. Insurance: The first line of defense is insurance. Take the time to understand all of your policies. Make sure you have all of your areas covered – automobile, homeowners, life, disability, and umbrella. Read your policies and know what the limits are, what is covered and (most importantly) what is excluded. Too often, clients take their insurance for granted. It is a good idea to sit down with an insurance agent every year or so to make sure that you are properly protected. Oh, did I mention an umbrella policy? If you don’t know what that is, run to your agent and ask about it. Best of all, it’s CHEAP! At the same time, be careful not to rely solely on insurance. Too many exclusions exist and often policy limits may not be sufficient.
2. Read what you sign: Have you ever signed a document that you did not read thoroughly? This could be a liability release agreement before a kayaking trip. It can be your purchase documents when buying a car or a number of other documents that we are asked to sign almost on a daily basis. You don’t have to be an attorney to understand most of what is included in these documents. If you don’t feel comfortable waiving your rights, feel free to ask about revising the document or simply go somewhere else. Be an informed consumer. Don’t sign documents without knowing what it is that you are signing.
3. Know your statutory rights: Florida is perhaps the most debtor-friendly state in the nation. The protections afforded to us in our Constitution and in our statutes cause deadbeats from all over to flock to this great state. Assets protected statutorily include six months worth of wages for the head of household. Life insurance and annuity products are also strongly protected under Florida statutes as are retirement plans, IRAs and other qualified plans. Take the time to understand how these assets can be protected, to what extent and what exceptions may apply.
4. Homestead: In many cases, the homestead is the most valuable asset owned by an individual and is also the most protected. Your Florida primary residence is protected from most creditors under the Florida Constitution. One of the most common pieces of advice given to physicians or others in high risk professions is to own the most expensive house that they can afford. There are certain exceptions to the homestead protection, including mortgages, property taxes and debts to the IRS. Also, for a homestead to be protected from creditors, did you know that only a property up to one-half acre is protected if it is within a municipality and up to one hundred sixty acres if outside a municipality?
5. Utilize Tenancy by the Entireties: Florida is one of the few states that recognizes tenancy by the entireties (“TBE”). TBE is a non-statutory exemption available to Florida residents and applies to ownership of assets by husband and wife. Sorry single folks! Assets that are owned TBE are protected from creditors of a single spouse. For example, if a judgment exists against a husband, the judgment creditor would not be able to attach a bank account the husband owns with his wife in a TBE account. Several requirements must be met for this protection to exist. Furthermore several exceptions exist. One exception is for debts of both spouses. TBE property can be attached by a creditor of both spouses.
6. Separate liabilities: Too often, people create liability unnecessarily. The most common example is with cars. In Florida, not only can a driver be sued for negligence, DUI, etc. because of his or her control of the vehicle at the time of accident, but the title holder can also be sued under the doctrine of “dangerous instrumentality.” Accordingly, if a husband and wife are both on the title of a car, both could be sued regardless of who was driving. Attention Parents of teenagers: please reread the prior sentence. From a practical standpoint, TBE assets that were protected could now become exposed. Dangerous instrumentality applies to many things including cars, boats, jet skis, planes. Another example of unnecessary liability is where people apply for joint credit when only an application by one individual would be sufficient, such as for a home equity loan or a car purchase.
7. Utilize business entities: It should go without say that any business venture should be operated through a separate entity, such as a corporation, partnership or LLC. This form protects the assets of the owners from the liabilities of the business. However, a business owner should also keep in mind other concepts related to the business entity. First, do not keep too many eggs in one basket. You probably shouldn’t own five rental properties inside of a single entity. The liability from one house could put at risk the value of the other four houses. Secondly, personal creditors of the business owners can easily reach shares of the corporation but have a much harder time reaching the interests of an LLC or a limited partnership. For this reason, asset protection plans often include LLCs and limited partnerships as opposed to corporations.
8. Why own the castle when you can live there for free?: Consider using trusts. In most estate plans, the assets of the decedent go outright to a spouse and/or children. In many cases, the spouse or children may have creditor problems of their own. The distribution of assets outright to them could be easily be intercepted by a waiting creditor. Also, what if a child is having marital problems? Assets given to a child could end up as part of the marital estate for divorce purposes. Although exceptions A simple way of avoiding these potential creditors is by leaving these assets for the benefit of a spouse and children in a trust that is insulated from their creditors.
9. Consult an attorney: The ideas set forth in this brief article are superficial and are meant to give you a flavor of basic asset protection concepts. Just like a TBE account, the rest of the protections discussed have requirements and exceptions. Consult an experienced attorney to find what is the best solution for you given your situation, budget and desired protection. Do not rely on the internet, friends or non-attorneys to give you the advice necessary to create an asset protection plan. Simply too much is at stake. Furthermore, the cost of a one or two hour consultation will almost always be worth the protection you are able to receive.
10. Don’t wait: Remember, “Noah began to build the Ark before it started raining.” The best advice is to do something and to do it NOW! Asset protection like insurance, if you wait until you need it, it’s generally too late.