How To Protect Your Assets Before Getting Sued by Creditors
If you know that a lawsuit from a creditor is on the horizon, ensuring certain assets are protected is essential. Otherwise, they can be targeted during the proceedings, and you may lose far more than you would if you take precautionary steps. Along with ensuring certain laws work out in your favor, there are other measures you can take to safeguard as much as possible. Here’s a look at how to protect your assets before getting sued by creditors.
Put Money in Retirement Accounts
In most cases, retirement accounts are at least partially shielded from lawsuits, if not entirely so. There’s unlimited asset protection for ERISA- qualified retirement accounts in many cases and IRAs are typically safeguarded for up to $1 million.
Precisely how much you’re protected depends on your state, as some may provide more coverage than others. Research the exemption amount in your area as a starting point. Then, if you have more protection available and can add money to that account, consider doing so to protect any savings.
Just be aware that shifting the cash back out of that account may lead to a penalty if you aren’t at least 59 ½ years old. Additionally, there are annual contribution limits that may prevent you from sending over as much money as you’d like. However, even with that, it’s a path worth considering.
Some states also shield annuities from lawsuits, either partially or in entirety. Since that’s the case, getting an annuity setup could allow you to protect assets from a lawsuit.
Whether this is an option depends solely on where you live. States offer different degrees of protection in this regard, including some that don’t shield annuities at all. Since the protection can vary significantly, you’ll want to do your research before pursuing this option. When in doubt, consult with an attorney or certified financial advisor.
Consider a Trust
A trust is a legal entity that can hold assets for a listed beneficiary. A trustee manages those assets, as well as any legal obligations related to them.
Usually, you’d need an irrevocable trust to shield assets from creditors. With that approach, you can’t shut down the trust to regain personal control over the assets. Additionally, you have no say regarding the fate of the assets while they’re held, as the trustee is the only one that does.
The trustee will follow any formal steps outlined regarding asset disbursement, so the assets aren’t necessarily stuck in the trust indefinitely. However, those arrangements can be complex, so you may want to consult with a legal professional to evaluate your situation and determine the best course of action.
Make Use of Homestead Exemptions
In many cases, your primary residence is wholly or partially shielded from creditors. Whether it’s covered in its entirety largely depends on where you live and the value of the property. Some states exempt all primary residences regardless of values, while others set value limits. In the latter situation, if your home is worth more than the limit, any value above and beyond the exemption is potentially targetable.
Research the homestead exemption in your state to determine if there’s an upper limit. Then, you can decide whether directing cash toward your home is a wise move. For example, if you aren’t a homeowner, you could consider making a down payment on a house with the cash. If you already have a primary residence, you could explore paying down your mortgage or making certain improvements.
Just keep in mind that protections usually only extend to primary residences, not investment properties or vacation homes. Since that’s the case, don’t use any available cash to purchase or improve a non-primary residence, as that won’t be shielded from the lawsuit.
Separate Out Spousal Assets
If you’re about to be sued by a creditor, but your spouse isn’t, you may be able to protect some assets by ensuring your spouse’s share of them is separated from your half. For example, if you have a joint savings account, setting up two individual accounts and dividing the money in half could be a way to safeguard the portion that’s legally considered to belong to your spouse.
Whether this works can depend on the nature of the credit account in question, whether the debt is considered communal, or if your spouse is in any way associated with it. Laws in that regard are complex and can vary by state, so you may want to consult with an attorney to determine whether this option is available.
Move Equity Between Assets
One option that’s technically on the table is to take equity from an at-risk asset and transition those funds to a protected one. For example, if you have an investment property with equity, you could take out a loan to tap that equity and direct those funds to your primary residence – such as by paying down the mortgage – or your retirement account.
Whether this approach is viable depends on the available equity and the other assets at your disposal. Additionally, there could be laws regarding this type of activity that you’d need to navigate. If you aren’t sure whether it’s a sound move, consult with a lawyer or certified financial advisor to see whether it’s a viable option.
Create a Separate Business Entity
If you operate a business, creating a separate entity for the company provides you with a degree of protection. It allows you to separate business and personal assets, limiting what creditors can target during a lawsuit.
For personal creditors, a separate business entity safeguards company assets. For business creditors, the separation safeguards your personal assets instead.
When it comes to the entity type, you need to choose something other than a sole proprietorship. Sole proprietorships don’t create the required separation, and there’s no limit on personal liability. That means a lawsuit directed at your professional operations could target personal assets, such as your home.
General partnerships offer even less protection. Whether creditors sue you or your partner for business or personal reasons, they could come after your personal and business assets.
Instead, consider options like corporations and limited liability companies. These create the needed separation, allowing you to safeguard personal assets.
Do you have any other tips about how to protect assets before getting sued by creditors? Have you used any of the techniques above and want to tell others about your experience? Share your thoughts in the comments below.
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Tamila McDonald has worked as a Financial Advisor for the military for past 13 years. She has taught Personal Financial classes on every subject from credit, to life insurance, as well as all other aspects of financial management. Mrs. McDonald is an AFCPE Accredited Financial Counselor and has helped her clients to meet their short-term and long-term financial goals.