How to Protect Investments from Creditors

Imagine you worked hard to build your savings and purchase your own car, home, or company, but then you find yourself in the middle of bankruptcy, a lawsuit, or a divorce. In such cases, you might risk losing your assets, as creditors can come after them. Fortunately, you can take steps to protect your investments by working with an attorney or advisor to create an asset protection plan.

Key Takeaways:

• You can potentially lose your assets in bankruptcy, a lawsuit, or a divorce unless you’ve taken steps to protect them.
• There are various ways to protect your investments, such as retirement plan contributions, insurance policies, trusts, homestead exemptions, or the separation of business and personal assets.
• Because laws affecting asset protection strategies can be complex and vary by state, work with an experienced advisor to ensure your investments are truly safe from creditors.

9 Ways to Protect Your Investments

Federal and tax laws have made it possible to invest your money in ways that protect it from creditors. Legal documents such as trusts also allow you to prevent your assets and properties from being seized. Here are nine ways to safeguard your investments from creditors.

1. Contribute to Retirement Plans

If you contribute to a qualifying retirement plan, state and federal laws protect a certain amount of those savings from creditors. The money in 401(k) accounts, for example, is off limits to most creditors. IRAs are protected as well, but only up to a certain amount. Consider funneling more of your money into a secured account, such as your 401(k), to keep it safe from creditor claims.

2. Purchase Insurance

Insurance can protect your assets against creditor claims. Depending on your profession and individual situation, here are some coverage options you can choose from:

• Life insurance: The money in your life insurance policy is either partially or entirely protected from creditors, depending on the state.
• Homeowners insurance: This coverage can prevent you from getting sued and taking a significant financial hit if someone gets injured on your property.
• Malpractice insurance: If you work in the healthcare industry, consider getting this insurance to protect your assets in the event of a medical malpractice lawsuit.
• Commercial liability insurance: If you own a business, this coverage will protect your company and assets if someone gets injured on the property.
• Worker’s compensation insurance:  Required in most states, this coverage prevents you from having to pay for an injured employee’s medical and living expenses.
• Umbrella policy: This policy kicks in to cover the money you owe beyond what your traditional liability insurance covers. This backup insurance can be helpful if a lawsuit or court judgment exceeds your policy limit.

When in doubt, buy as much coverage as you can afford to protect your finances and investments, especially if you work in a high-risk industry with lots of liability.

3. Set Up an Asset Protection Trust

If you transfer some of your assets — which could include cash, bonds, real estate, or business property — into a trust run by a designated trustee, creditors can’t access them. This is an irrevocable trust (meaning it can’t be changed after its formation) called an asset protection trust. Its benefits include knowing your assets will go to your loved ones instead of creditors and being able to receive periodic distributions from the trustee. Many regulatory requirements surround the formation of such a trust, so make sure to work with a knowledgeable attorney.

4. Take Advantage of Homestead Exemptions

If you live in a state that has a homestead exemption, it will protect your main residence from creditors in the event of bankruptcy or the passing of a spouse. However, states have varying levels of protection and caps on exemption amounts. Ask your tax or legal advisor how much home equity your state’s homestead exemption protects.

5. Separate Your Business and Personal Assets

If you own a business, create a separate entity for its assets, so you don’t lose your personal investments due to a lawsuit or business dispute. There are various asset-protecting types of business entities you might form, depending on your business type and needs:

• Limited liability company (LLC): An LLC protects your personal assets, but not the business ones, from lawsuits. This can be a good option if you own a small business.
• Corporation: Corporations also protect business owners’ personal assets. As they are taxed differently, they are more suitable for companies with shareholders.
• Limited Partnership: With a limited partnership, you can only lose what you have invested in your company. Creditors cannot take your personal assets.
• Family limited partnership: If you’re involved in a family business, this classification can protect your personal investments from creditors.

Other business entities include general partnerships and sole proprietorships, but these offer less asset protection.

6. Retitle Property

If you and your spouse own your primary residence jointly, consider retitling the property as a tenancy by the entirety. This can help you protect your home equity in case one of you gets sued, as creditors cannot come after the other spouse’s interest in the home. However, if you both have creditors after you, then retitling does not offer protection.

7. Transfer Assets

Spread around your assets, so creditors can’t seize them all at once. You can do this by transferring assets into your spouse’s, children’s, or another relative’s name through an unbreakable trust. Because you technically no longer own those assets, creditors can’t come after them. Be sure you’re transferring them to trusted family members who are unlikely to run into legal and financial issues of their own.

8. Mediation and Arbitration

If you or your company end up in a legal dispute, you risk being sued, going to court, and losing assets by dispute resolution. You can reduce this risk through mediation or arbitration, which are particularly useful in divorces, disagreements between landlords and tenants, personal disputes, and custody battles. Mediation allows the two parties to reach an agreement or settlement by themselves. In an arbitration, an arbitrator assesses each side’s case before deciding how to resolve the dispute.

9. Sign a Prenuptial Agreement

Before getting married, consider signing a prenuptial agreement that outlines your and your future spouse’s debts and assets. The agreement also specifies how those assets will be distributed in the event of a divorce. This document protects your current and future investments; signing it might be a wise decision if you have inherited your family wealth and/or want to safeguard yourself from your spouse’s debts.

Build a Better Defense

Take defensive measures to protect your investments in the unthinkable event of entering bankruptcy, losing a lawsuit, or having a judgment against you. Insurance, trusts, retirement accounts, and other methods can help safeguard your assets, so you and your loved ones can enjoy them for decades to come. To start creating a customized asset protection plan, contact our team to set up a consultation.