What is asset protection?
Asset protection is a set of legal strategies used to protect your assets from creditors. Asset protection is an important part of financial planning that can help you protect your wealth in the event of a lawsuit or bankruptcy
Asset protection methods
There are several methods of asset protection you can use depending on your individual circumstances and financial goals. It is generally advisable to take steps toward asset protection before any claim or liability occurs.
Here are a few common strategies to protect your assets:
Asset protection trusts: Asset protection trusts provide the strongest protection to assets against creditors and lawsuits. Once an individual creates the trust, it cannot be removed or transferred. Creditors cannot consider the assets in the asset protection trust as yours.
Accounts receivable financing: This is a type of asset-based financing where businesses use their accounts receivable as collateral to get a loan. This allows companies to access cash without waiting for client payments. This type of asset protection helps professionals, like physicians, who may have fewer assets and larger accounts receivable. By financing their accounts receivable, these professionals can protect themselves from lawsuits.
Family Limited Partnerships (FLPs): When family members pool in their money collectively to run a business, it is called a family limited partnership. The members own a part of the shares and gain profits according to the number of shares they each own. FLPs are a useful way to protect family wealth while also reducing taxes. FLPs are a form of asset protection because creditors cannot access a limited partner’s assets without the approval of the general partners.
Tenants by entirety: In some states, married couples can hold the title to a property jointly. If there are any changes that need to be made to the property, it cannot be done without the consent of the other. Creditors cannot claim property under tenants by entirety if only one of the two people who own the property has a debt. It can be claimed only if both parties are indebted to the same creditor.
Naming an heir: Another way to protect your assets is to name a family member or trusted associate as your heir. If you do not have a will, your assets will be distributed according to the laws of intestacy, which may not be in your best interests. By creating a will and naming an heir, you can ensure that your assets are distributed according to your wishes.
If you have few assets, bankruptcy may be a more favorable choice over asset protection.