How to shield assets from suits, claims of creditors

Don't wait until trouble is at the door, experts say

Your Money

September 18, 2005|By Pamela Yip | Pamela Yip,KNIGHT RIDDER/TRIBUNE

You've worked hard all your life to accumulate a little personal wealth. One frivolous lawsuit could wipe it all out.

In today's litigious society, many people need to take steps to protect their assets from lawsuits and illegitimate creditor claims.

"Many people are good at playing offense, meaning earning the money or saving, but all too often, they forget to play defense," said Michael Busch, a certified financial planner and president of Vogel Financial Advisors in Dallas.

You don't have to be super-rich to take some action.

Some steps you can take include making sure that you have enough liability coverage on your homeowners' and auto insurance policies, and purchasing an umbrella policy that provides additional coverage above the limits on your primary policies.

Don't wait until trouble is at your door to take action. At that point, trying to protect assets from a claim probably would do more harm than good.

"It is imperative that asset protection strategies be implemented before there is a problem," Busch said. "Once a creditor has a claim or is likely to have a claim, any subsequent transfer may be deemed fraudulent. If a court believes a transfer was made with the intent to defraud legitimate creditors, the transfer will not be upheld."

Protecting your personal assets from litigation can get very complicated, and if you have a lot to protect, you should hire a lawyer and financial adviser.

But first, you need to be sure that you have enough assets to make the effort worthwhile.

"Most people, if they don't have a sizable portfolio or net worth to protect, it's not feasible to take the extra steps to protect it," Busch said. "Generally, someone's not going to bother filing a lawsuit against someone who they know has few assets."

But let's start with the basics.

If you own a home, homeowners' insurance protects you against financial loss if you're found responsible for someone's injury or property damage.

Your auto insurance does the same thing as it relates to your automobiles. Liability insurance pays for bodily injury, property damage and some additional expenses of other drivers, their passengers and your passengers when you or a driver covered by your policy causes an accident. Liability insurance doesn't pay for damage to your own vehicle.

If you want more liability coverage than your primary insurance policies provide, you can buy a separate personal umbrella policy.

Umbrella coverage applies only to losses over a large dollar amount, but terms of coverage are sometimes broader than those of underlying policies.

Because umbrella policies vary, make sure the insurance agent or company fully explains the coverage.

You also have some built-in protection under the law. Wages may be garnished only to pay child support, back taxes and defaulted student loans.

Retirement plans, such as individual retirement accounts, 401(k)s, 403(b)s, profit-sharing plans and pensions can't be seized by creditors. They also can't seize the cash value of a life insurance policy or death benefits from the policy.

Busch said if you're worried about future litigation, you can use part of your money to pay down your mortgage. That transfers your money into the protected asset - your home.

"If you had that same money in a bank account, a lawsuit could get to it, but if it's in your house, it's protected," he said. "You're taking exposed assets and converting them into assets that are creditor-protected."

For more complicated financial situations, you need to consult an attorney. That's especially true if you're already in financial trouble.

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