Asset protection is a serious concern for anyone whose goal is financial independence. Business owners and professionals earning six-figure incomes are particularly at risk. While appropriate insurance coverage is integral to any Asset Protection strategy, insurance is only a partial defense. Be aware of how the actions of family members can jeopardize your security and take preventive action. For example:
Spouse HNW (High Net Worth) individuals sometimes attempt to shield assets by putting them in the non-working spouse’s name. Be mindful that, if you are relyi the spouse may not have the level of umbrella coverage that the primary breadwinner does. Should he/she be sued for online defamation or be at fault in an accident where someone is severely injured or killed, those assets are now at risk.
Divorce is a net worth killer that sometimes flies under the radar, but it’s one of the top 10 causes of filing for bankruptcy. You can spend 30 years building up wealth, paying off debt, and buying every insurance policy known to man, only to lose half in a divorce and owe monthly maintenance (alimony) for life.
Children Consider some of the crazy things you got away with in adolescence. You may be remembering fast cars and parties when your parents were away. Now imagine the 21st century teenage experience with Twitter, Instagram, cellphones, and all the temptations of the internet. Your exposure is multiplied beyond car accidents and unexpected pregnancies.
In most states, parents have civil (non-criminal) parental liability for property damage done by their children. 42 states and the District of Columbia also hold parents responsible for “contributing to the delinquency of a minor”, including internet crimes such as hacking, bullying, and allowing access to firearms.
The age of majority (when parents are no longer responsible) is 18 in all but four states. Laws vary by state, with some states having no cap on damages for certain acts. Hawaii’s law is one of the most broadly applied as it doesn’t limit financial recovery and also imposes liability for both negligent and intentional torts by the minor child. Other states allow jail time for parents. Would a year in jail affect your asset protection plan? If you are a respected physician in your community, would a public trial affect your practice and livelihood?
Your homeowner’s insurance may cover damages by your minor children, but you should go over what is and isn’t covered with your agent. Also make sure that you have adequate amounts of coverage beyond required minimums to fill any gaps until your umbrella policy kicks in.
Note that we haven’t even touched on typical risks like having a trampoline in the yard or letting your child’s friends drive home after a few beers in your basement.
In-laws When your children marry, you add a son or daughter – one who may have a claim on your child’s assets in the event of a divorce. Have you brought your son into the family business? Did you buy a nice house for your daughter when she married? Without proper protections put in place ahead of time, you may have an unexpected partner in the event of divorce. And the house is up for grabs.
What you can do?
- Live in a state with good asset protection laws.
- Know the strength of your state’s tort reform laws and the medical malpractice laws in your state.
- If your marriage is not what you would consider strong, try to save the marriage by working on it and getting counseling. Don’t compound your risk by trying to hide or retitle valuable assets.
- If you are already divorced, do not enter into another marriage without a prenuptial agreement, particularly if children are involved, whether minors or adults.
- Use trusts for passing assets along to children who are or will be married and in other areas that might be appropriate.
- Fill up all protected space available to you: retirement accounts, Health Savings Accounts, even 529 accounts.
- Use LLCs (Limited Liability Companies) and FLPs (Family Limited Partnerships) if suitable.
- Have adequate insurance for your business, not just personally.
- Divide valuable assets among protected entities. For example, the LLC used for your business should not also hold a valuable piece of property, such as the building where your business is located.
- Have a succession plan in place for your business, particularly if your spouse would depend upon it for his/her livelihood in the event of your death.
- Know how to title assets for maximum protection. For example, in some states, assets owned together are either partially or fully protected from creditors of a single spouse.
We live in a litigious world. These suggestions aren’t meant to take the fun out of your family but to help avoid unnecessary suffering. Asset protection techniques don’t have to be overly complicated and neither are they strictly for the “Ultra” High Net Worth. Seek out the advice of an experienced attorney along with a CPA or CERTIFIED FINANCIAL PLANNER™ who has expertise in tax planning and asset protection strategies.
What is umbrella insurance and do you need it? Watch and learn from our video here.