Your assets—cash, real estate, savings accounts, stocks, and bonds are vulnerable in the case of lawsuits from creditors or legal claims. A single judgment could result in the seizure of your assets, leaving you with nothing.
If you want to avoid this devastating situation of assets being seized, read this guide till the end. In this article, we’ll find the detailed answer to how to protect your assets from a lawsuit or creditors.
We’ll explain the six most effective methods, including utilizing business entities (LLC), establishing trusts, purchasing insurance policies, and more. We’ll provide a detailed explanation of each approach and what actions you need to take.
Why Is Assets Protection Important?
Asset protection simply means using strategies that can protect your assets. In case of a lawsuit from creditors, personal injury claims, or disputes over beneficiaries, all your assets will be at risk if you’re unable to pay the debt or compensate.
The court can order you to pay the compensation, and if you fail to do so, every asset can be seized. If you want to avoid this type of situation, you should always do the planning of asset protection as soon as possible. Delaying only increases the risk to your assets.
6 Ways To Protect Assets From Lawsuits Or Creditors
Here are the top six ways to protect assets from lawsuits or creditors. You can select a few methods based on your assets and the protection you want. If you’re confused about making a decision, you can also hire a lawyer for asset planning.
1. Limited Liability Company (LLC)
If you’re running a business and want to protect your personal assets, registering it under a Limited Liability Company (LLC) is the best option. It’s also a business structure, such as a limited partnership or sole proprietorship.
However, the benefit of an LLC is it protects personal assets. Suppose you have a pet food business, and the food causes health issues for the pet, leading to a lawsuit. In such cases, only the business assets will be at risk; personal assets such as homes and cars will remain protected.
2. Trust (Irrevocable)
The next best option you’ve is to create an assets protection trust, which means an irrevocable trust. This type of trust can’t be reversed after they’re created, so always ensure to choose the trustee and the beneficiaries carefully.
Once you’ve created an asset protection trust, the assets won’t be under your name but the name of the trust. Since they’re not your assets legally, no creditors or any lawsuit can pose a threat.
3. Insurance Policies
Insurance policies can help protect assets from lawsuits. This is because, in case of any mishap, the insurance company will bear the loss and pay compensation. Here are a few examples of insurance policies:
- Worker Compensation Insurance: Worker insurance mainly compensates workers for injuries that happen during working hours.
- Auto Insurance: This insurance protects the insurance holders from car damage cost and in case they’re liable for someone else’s injuries or damages.
- Homeowner Insurance: This insurance protects homeowners in situations if someone is injured on their property and decides to file a lawsuit.
- Umbrella Coverage: Umbrella coverage extends the limits of other insurance policies if they reach their limits.
4. Homesteads
Homestead protection is another way to safeguard assets. It’s basically a law in which availability varies from state to state. Under this law, the primary home will be safe from creditors in case of death or bankruptcy.
The protection level depends on the state’s specific laws and whether your home meets the eligibility criteria. While some states offer unlimited exemptions, others impose limits on the protected amount.
5. Titling – Play Safely
Ownership of a home, as reflected in property titles, matters a lot during the issue of lawsuits. For instance, if your home is held under a tenancy in a common arrangement where you and your spouse share equal rights, it offers a bit of protection.
Creditors cannot sell a property that also has your spouse’s rights attached to it. Therefore, you can also change the ownership of your home and save it from lawsuits. However, be sure to consult with a lawyer before proceeding with such changes.
6. Transfer The Assets
If none of the available options suit your assets, the only alternative left, aside from surrendering them to the creditor, is to remove them from your ownership. One way to achieve this is by transferring the assets directly to your heir through your Will or trust.
Note: It’s crucial to note that this option is only advisable if you have a solvent estate.
Final Words
We’ve shared the top six methods that answer how you can protect your assets from lawsuits from creditors. Since not every method may suit your circ*mstances, it’s essential to select the approach that offers the most effective protection for your assets.
For business owners, opting for insurance policies, trusts, and the Limited Liability Company (LLC) option is advisable. On the other hand, individuals who solely own real estate can create a trust or choose the option of titling the property.
Dustin MacFarlane
Dustin MacFarlane’s primary focus is on Elder Law and protecting families and seniors. He is a Certified Specialist in Estate Planning, Trust, and Probate Law by the State Bar of California Board of Specialization — a rare distinction.
Prior to becoming an attorney, Mr. MacFarlane worked in the Long Term Care industry. After becoming licensed to practice law in January of 2009, Elder Law quickly became his focus. Seeing the need during his former career, Mr. MacFarlane pursued Elder Law as a primary area of practice.
