How to Protect Your Money, Even If You're Not Ultra Wealthy or Rich

Rosemary Carlson
·7 min read
5

Asset protection planning is the process of building barriers around your assets, whether those assets are personal or business, to keep them safe from litigation, creditor claims, seizure and burdensome taxes. It's a vital and completely legal component of both financial planning and estate planning. There are a number of key tools you can utilize to accomplish the goal of protecting your assets. A financial advisor can help you structure and organize your assets so that they are more likely to achieve your financial goals.

What Is Asset Protection Planning?

Contrary to what many people think, asset protection planning is not just for the wealthy. The estates of anyone, in any income group, can be sued or suffer from hefty taxation. These strategies can mitigate the effect of creditor claims and other issues on your wealth.

If you want and need to protect your assets, you have to be proactive. It's too late to employ asset protection strategies after a child is hurt on your property and the child's parents sue you or you are at fault in a serious car accident. You want to set up an asset protection plan before any of these things happen to you.

While many people can benefit from setting up an asset protection plan, not everyone can. If you have a lot of debt and few assets and you are subject to a lawsuit, it may be better to take bankruptcy than set up an asset protection plan. That's because it's only worth it if you have significant assets, though some events cannot be protected against. These include tax liens, mechanics liens, alimony judgments and child support claims.

Who Should Have an Asset Protection Plan?

Anyone can put an asset protection plan into place. A plan benefits the following people the most:

  • While even those with a modest net worth should at least consider asset protection, it's especially important for anyone with a significant amount of assets.

  • Anyone with a significant, recurring amount of credit card debt.

  • Homeowners who are underwater on their mortgage. In other words, if your mortgage balance is greater than the value of your home, you need to consider an asset protection plan.

  • Anyone whose profession carries with it a high probability of liability. Doctors and lawyers are some common examples.

Some assets are not at the mercy of your creditors, such as retirement accounts under the protection of the Employee Retirement Income Security Act of 1974 (ERISA). You may also legally preserve at least a portion of your home equity. Homes may be put in another individual's name. Bank accounts can be transferred to offshore banks to preserve their value.

How Does an Asset Protection Plan Work?

The goal of an asset protection plan is to put a degree of legal separation between you and your assets. With this legal separation, you can legally shelter your assets from creditors without doing anything illegal. Generally, the first step you take to protect your assets is to transfer them from their unprotected ownership to a protected form of legal ownership, such as one or more of the options below.

Family Limited Partnership

One very common vehicle to protect your assets is a family limited partnership (FLP). If there are any family-owned businesses or assets, such as properties, that you want your children to own after you’re gone, you can set up a FLP.

Typically, creating an FLP involves establishing a general partnership and then making your heirs and family members limited partners. As the general partner, you’ll still be able to call the shots. But your partners, whether they’re your children or other relatives, will have a stake in the partnership or own a portion of the assets. As a result, the size of your estate will be smaller.

Each year, members of the FLP can give up to the gift tax limit to other individuals. The gift tax limits are $15,000 for a single individual and $30,000 for a couple. If you have multiple family members you want to gift to, you can gift up to these amounts for each of them. Income from an FLP is also excluded from estate taxes if that person dies.

Tenancy by the Entirety

Another way to achieve asset protection is with tenancy by the entirety (TBE), a form of joint legal ownership between two married individuals. It is only offered in specific states but provides certain estate benefits to those who choose to hold their property in TBE.

Tenancy by the entirety is designed to not only simplify the inheritance process, but also ensure shared ownership of a property while maintaining survivorship benefits. TBE offers some financial protections, as well, safeguarding property from certain creditors and litigation. Both owners in a tenancy by the entirety will hold an equal share of the property, regardless of where the funds to purchase that property came from. The property also cannot be sold or transferred without the consent of the other spouse.

Debt claims against an estate can only be applied to a TBE property if the debts are also shared. Individually owned debts cannot be claimed against the property. This means that if only one spouse is sued or files for bankruptcy as a result of individual debts, the TBE-held property is not generally within reach of creditors.

Asset Protection Trust

An asset protection trust (APT) is an irrevocable, self-settled trust that can insulate your assets from creditor actions, including lawsuits. These legal structures can be domestic or international. Not all U.S. states recognize them, so as of this article's writing, it's only possible to have a domestic APT in 17 states. International APTs are more expensive than their domestic counterparts but offer stronger protection, primarily because they place assets outside the reach of U.S. laws and courts.

Asset Protection Mistakes to Avoid

Just knowing about asset protection isn't enough. Execution is everything, and there are a number of ways that attempts at asset protection can fail to deliver the desired result. Here are some of the most common pitfalls to avoid:

  • Waiting too long: Once you've been named in a lawsuit or litigation against you is imminent, it's likely too late to try to erect a legal fence around threatened assets. Courts generally don't look kindly on last-minute defensive moves, and judges and juries can nullify such moves as fraudulent.

  • Taking an off-the-shelf, one-size-fits-all approach: A successful asset protection plan must be customized to your specific situation. Think of it this way: the legal fence you put around your property should fit your property and not the property of some generic asset-holder.

  • Relying on a will or living trust: These instruments will not protect assets from Medicaid estate recovery or nursing homes.

Bottom Line

Asset protection planning is the process of transferring either personal or business assets into vehicles like a family limited partnership, tenancy by the entirety and asset protection trust. They can be expensive and complex so engaging an experienced attorney is a key part of the process. Asset protection, at least in the U.S., does not create absolute protection from tax liens, mechanics liens, alimony and child support claims.

Estate Planning Tips

  • It might be a good idea to work with a financial advisor who's skilled in estate planning and asset protection planning if you aren't sure where to start. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • Do you want to learn about the estate planning laws in your state? Take a look at SmartAsset's estate planning guide to find that information and much more.

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