In this new age and with the advent of technology, people still find it very hard to hide or protect their money from lawsuits. The IRS are working on finding secret Swiss bank accounts, which has yielded a solid understanding between the agency and so many Swiss banks.
Reports are showing that the rest of the world are continuously becoming less hospitable to American tax dodgers. This is why no matter how astute a business person you are, or how skilled you are as an investor, or how lucky you are with your lottery tickets, it does little good if you leave your assets porous for trial lawyers to sink their teeth into.
The United States is growing increasingly litigious, and the more money people think you have, the more tempting a target you will become for frivolous lawsuits. If you are a business professional or if you own a business, you could be hit by Trademark Infringement Lawsuits, Sexual Harassment Accusations, Employment Discrimination, Faulty Products, Malpractice Claims, Breach of Contract Claims, Work-related Vehicle Accidents, Workers’ Compensation Incidents, “Slip-and-Fall” Accidents etc.
It is also important to note that your business isn’t the only source of potential liability. Divorce can pose a key threat to your finances for many reasons. You need to understand that your former spouse likely has more detailed knowledge of your total finances than most creditors.
Unlike other creditors, your spouse can break up a retirement plan under a QDRO (qualified domestic relations order) obtained through the courts, and furthermore, you cannot discharge alimony or back child support debt in bankruptcy, and unpaid alimony has priority over your heirs in probate courts.
Have it in mind that unlike your other creditors, your former spouse can also have you thrown in jail for failure to pay child support. One other difficult circumstance is when a former spouse is awarded a number of shares in a corporation you own with him or her.
In this case, your ex will have full access to your books, and is entitled to a dividend whenever you pull money out of the corporation for yourself, even when they no longer contribute anything of value to the business.
So to protect yourself against this potential situation, you should consider a prenuptial agreement or other buy-sell agreement to make sure both parties can be satisfied, and the business protected.
Also you don’t have to be the one in a car wreck to be held accountable. For example, say your uninsured or under-insured teenager causes a wreck – even if your teen is insured, you could be liable if your car insurance isn’t adequate. The more reason it is advisable that you check your own coverage to be sure it’s sufficient.
Also money can be taken from you using social host liability. This applies if you have a party, serve alcohol, and a guest causes an accident or injury after leaving. Also, your kids could have a party while you’re out of town, drink a few beers out on your deck, and expose you to the liability, even though you weren’t even in the same state at the time.
Also if your employee causes damage, it could result in a liability to the company. That liability could attach to you personally as well if you don’t take specific steps to protect your personal assets from business debts. They are a lot of possible scenarios that may lead to you losing your money in lawsuits, and the best you can do is to put plans in place to protect your money and assets.
Protecting your Money from Lawsuits
One of the greatest financial tragedies anyone can face is to diligently build up a substantial net worth, just to have it seized as part of a legal action. It has been known to wreck some people, as all of your hard earned assets will go right down the drain in a single court decision.
But you can learn how to protect your money from lawsuits and other legal grabs. You just have to use a few of the right strategies to make it happen. You have to understand that in this world we live, very bad things happen to good people all the time. You don’t have to be irresponsible or negligent to get sued.
It falls on you to make all legal arrangements to protect what you have, it’s very crucial that you take some defensive measures to make it hard for creditors to seize your assets in the event you lose a lawsuit, have a judgment entered against you, or are forced into bankruptcy.
1. Make use of Business Entities
As an entrepreneur, it is advisable that you separate your personal assets from those of your business. If you forget to take considerably legal steps to establish a separate business entity, such as a corporation, limited liability company (LLC), or limited partnership, a simple business dispute could well cost you everything you own. Below are a number of business entities to consider:
Sole Proprietorship. Note that sole proprietorships offer no limit on personal liability. One mistake could cost you your home, depending on your state.
General Partnership. General partnerships are the worst. If your business partner has a personal dispute that has nothing to do with you and he or she loses a lawsuit, you two are joined at the hip. Technically, lawyers could come after you because of your partner’s actions, whether regarding the company or his or her personal life.
Limited Partnership. Also have it in mind that a limited partnerships can help limit your liability. For instance, if you invest as a limited partner in a partnership, you cannot be sued for anything more than what you have invested in the business. Note that the worst that can happen is that your investment will be wiped out. But lawyers cannot come after you personally to make good on a claim against the business.
Corporation. A Corporation provide excellent asset protection for their owners. With the exception of cases of egregious fraud – such as if you fail to pay payroll taxes to the IRS, or if you do not treat your corporation as a separate entity from yourself – your personal assets cannot be stripped from you in the event that your business loses a lawsuit. There are two kinds of corporations: S corporation and C corporation. These Corporations are taxed differently and have different restrictions on ownership, but both provide similar asset protection for their owners.
Limited Liability Company. This form of business structure provides asset protection against business lawsuits for their owners, but with fewer restrictions on ownership than S corporations. Also note that they allow their owners to choose whether to file federal taxes as a corporation or as a partnership. There is one major advantage LLCs have in some jurisdictions: charging order protection. If your corporation loses a suit, a judge could award a number of the shares of the business to the creditor. This gives them access to your books. With an LLC, even if the plaintiff gets a membership interest, he can’t force a distribution of cash, but he still gets taxed as if he received it.
2. Adequate Insurance
Indeed there are some professions that are more prone to liability than others. If you are a financial advisor, an OBGYN, a real estate agent, or a professional in any other field that generates a lot of lawsuits for malpractice, keep your errors and omissions coverage paid up, and, if you can afford to, invest in extra or expanded coverage. These coverages may include;
Auto Insurance. You shouldn’t settle for the minimum legal liability coverage – additional coverage is generally advisable and affordable. It’s very crucial that you buy enough additional coverage for your auto insurance so that you will have meaningful protection in the event your vehicle is involved in an accident and generates a lawsuit.
Umbrella Coverage. This insurance coverage is a backup insurance that can be used when your other coverages are insufficient. In the event that your auto, homeowners, or other liability coverages are exhausted, umbrella coverage pays benefits up to the limit of the policy.
Homeowners Insurance. This type of insurance helps cover you in a situation where someone is hurt on your property. Choose a deductible you can cover with your savings, and make sure liability coverage is adequate in case someone gets hurt on your property and decides to sue you.
Commercial Liability Insurance. This type of insurance protects your business if someone gets hurt on the premises, or is injured as the result of an action by an employee.
Worker’s Compensation Insurance. In some states in the United States, this form of insurance is mandatory. Worker’s compensation protects you and your workers alike by making sure there’s enough liquidity in place to take care of any employee who gets hurt on the job, and that the expenses don’t come out of your pocket.
Long-Term Care Insurance. Long-term care insurance is a form of insurance that protects you against the financially devastating costs of in-home or nursing home care for chronic ailments such as dementia, Alzheimer’s, stroke, paralysis, multiple sclerosis, spinal cord injuries, and the like. Medicare doesn’t provide much coverage for these afflictions, and most major medical insurance policies don’t provide any. Have it in mind that without long-term care insurance, you may have to pay over $200 per day in nursing home costs – until the expenses drive you into poverty so you can qualify for Medicaid. The longer you wait, the higher the premiums get.
3. Leverage Retirement Accounts
The federal law provides unlimited asset protection to ERISA-qualified retirement plans, and up to $1 million in assets in an IRA in the event of bankruptcy. In the United States, some states provide even more protection to IRAs, though some states have also opted out of the 2005 Bankruptcy Reform Act’s federal bankruptcy exemptions and exempt a lesser amount.
First and foremost, it’s advisable that you check the laws in your state to see how much protection is provided to funds in these accounts. If your state has a generous exemption, consider moving cash you won’t need until you reach at least age 59 1/2 into one of these protected entities. Do not forget that you will be restricted by an annual contribution limit, which differs depending on the type of retirement plan.
If you go over this limit or withdraw funds prior to age 59 1/2, you may be assessed penalties. Retirement accounts are excellent vehicles to protect long-term savings, and provide substantial tax benefits, but it needs to be thoroughly understood and used with care.
4. Homestead Exemptions
Have it in mind that some states in America provide a lot of protection to home equity, which simply means that if you declare bankruptcy, the law prohibits courts from awarding home equity to creditors. In some states, including Texas and Florida, state law protects an unlimited amount of home equity.
Other states provide relatively little protection to home equity in the event of bankruptcy. But you will have to check the laws in your state – if your state provides a generous homestead exemption, you should then consider contributing extra principal to mortgage payments to protect those funds.
Principal contributions to the vagaries of the housing market are subject to risk, in that you will lose access to the equity and the cash if property values fall.
It’s also advisable that you verify how your home is titled. For instance, if you own your home with your spouse, both you and your spouse own an indivisible interest in the home. If only one of you is named in a suit, creditors cannot force the other spouse to sell his or her interest in the house. Because the interest is indivisible, this can help you protect home equity where state law doesn’t provide a sufficient homestead exemption.
But note that this option is only available in some states, and it only applies to your personal residence, not investment property. Other forms of titling include tenancy in common: joint tenants with rights of survivorship. Do not forget that the way you have a property titled can have profound ramifications in the event that a creditor makes an attempt to seize it.
Gift tax applies to any transfer of property ownership where you don’t receive fair market value in return for the property. IRS rules allow you to transfer up to $14,000 of property without paying the gift tax. However, there are no limits on the amount of property you can transfer to your spouse.
This means you can freely put property of any value in your spouse’s name without having to pay the federal gift tax. But keep it in mind when transferring property to your spouse that your state tax laws may be different. Also, transferring property to your spouse could become problematic if you end up getting divorced.
Protecting your money from Lawsuits will require some time, investment and planning. You will have to spend some money to consult with an attorney, accountant, or to obtain additional insurance coverage. Indeed there is no magic trick to guarantee that no one will ever seize your assets.
Just like life itself, it is impossible to anticipate every possible scenario. This is why you have to plan ahead and do your homework, so you can put yourself in the best possible position to protect your money from creditors. Sudden wealth can be a life-changing experience that can improve your life and the lives of those around you, but only if you keep it.
Only people with enough money become bigger targets for lawsuits. Protect your hard work before you get the windfall and you will sleep a little easier knowing your struggles are safe.