Bad things happen to good people. With our society becoming increasingly litigious, people could be looking for any reason to sue you for what you have. Consequently, the importance of protecting one’s assets cannot be overemphasized. It is important to understand that asset protection is not about evading your debts by defrauding your creditors, rather, it is about preserving your hard-earned/inherited wealth from financial predators and frivolous lawsuits. The following are ten asset protection strategies you should consider using to protect your wealth.
1. Utilize Business Entities
If you are an entrepreneur, you must separate your personal assets from your business assets. If you do not take the necessary steps to create separate business entities such as limited liability companies, corporations, or limited partnerships, a business dispute could see you lose everything.
Some business entities to consider include:
- Sole proprietorship. This entity offers no limit on personal liability. A mistake could see you lose everything you own.
- General Partnership. This is even worse. You do not have to be involved for you to lose your assets. If your business partner has a personal dispute with someone else and they go ahead to lose that lawsuit, your assets will also be on the line.
- Limited partnership. This is better because if your business partner gets into trouble, only the investment you have made into the business will be at risk. As such, they cannot come after your personal property.
- Corporation. This provides excellent protection for your personal assets. If your business loses a lawsuit, your personal property will not be at risk unless it is a case of fraud.
- Limited liability Company. An LLC has provisions that keep a creditor from acquiring the company or its assets.
2. Increase Your Liability Insurance
Liability insurance should be your first line of defense against any potential litigation. Liability insurance protects you from lawsuits made against your business for real or alleged injuries that occurred at your place of work. These injuries include actual physical ones that occurred as a result of tripping and falling, defamation, or employees claiming wrongful termination. If you just received a settlement or inheritance, consider increasing your liability limit. It would be wise to obtain a personal umbrella liability coverage that is equal to or more than your new net worth. Make sure you get it before receiving the settlement or inheritance.
3. Utilize Retirement Accounts
Federal law offers unlimited asset protection to Registered Retirement Savings Plans in case of bankruptcy. However, the amount in assets that is protected differs between provinces with some providing more protection than others. Look into the laws in your province to see how much protection you can get from using retirement accounts.
4. Create An Irrevocable Trust
You can further protect yourself from creditors by use of trusts. The most effective type of trust is the irrevocable trust which implies that the trust terms cannot be modified after it has been created. And when you transfer assets to this trust, they will no longer be considered yours but as properties of the trust. As such, creditors cannot go after these assets.
5. Homestead Exemptions
There are provinces which provide protection to home equity. This means that if you declare bankruptcy, the law will prohibit the court from awarding home equity to your creditors. Nevertheless, the amount of home equity protected varies between provinces. Some protect an unlimited amount while others provide very little protection in the event of bankruptcy. Look into your province’s laws so you can be sure about this.
6. Place Some Assets In Your Spouse’s Name
If one spouse’s occupation or lifestyle is risky, then it is wise to have some of their assets in the other’s name. In most cases, the creditors of one partner are not allowed to reach for the separate properties of the other. Therefore, marriage can be used as an asset protection strategy whereby valuable assets are held as separate property of the partner with the least exposure to risk. It is in such cases where prenuptial or postnuptial property agreements are beneficial.
Nevertheless, it goes without saying that you need to be careful when implementing this strategy. While it is an effective way of protecting your property against creditors, it will have serious implications in the division of assets if you were to divorce.
7. Annuities And Life Insurance
Certain provinces offer a significant amount of protection to annuity balances and assets in cash value life policies. Again, each province has its own laws regarding this.
8. Consider Tenancy By The Entirety
Some provinces allow you to title your personal residence as tenancy by the entirety. The implication here is that if one spouse gets sued, the property cannot be attached to or separated by the lawsuit. Another good thing about utilizing this strategy is that it is statutorily based. This means that you do not have to pay large sums of money to implement and maintain the designation. The important thing here is to ensure that your property is properly titled. If your province allows, this is an excellent way of protecting your home. A real estate lawyer can guide you through the process. You can learn more here.
9. Avoid Flaunting Your Wealth
There is a reason why the majority of lawsuits are filed against people with deep pockets. Flashing your cash is an invitation for financial predators to sue you. Remember, ostentatious displays of wealth breed more jealousy than admiration. It is better to be rich than to look rich.
10. Do Not Wait To Protect Yourself
You cannot begin implementing the above strategies when a lawsuit is imminent. This will appear suspect to the courts and they might prohibit you from transferring your funds into protected classes thus leaving your assets exposed. As such, start implementing these moves as early as you can.
The above is by no means a comprehensive guide to protecting your assets. There are a lot of intricate factors surrounding this topic because each case is different. The most important thing is to take action before your wealth is threatened.
