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By Grace S. Yung, CFP
While it can take a lifetime to build up a substantial amount of assets, a single lawsuit or run-in with a creditor might be all that is needed to lose them. This is why all assets should be properly and adequately protected.
The good news is that, while it may sound complicated, the protection of assets is not all that difficult. There are many tried-and-true strategies that can be easily implemented to provide the structure that you’ll need in the event of a lawsuit or claim.
The Concept of Asset Protection
Asset protection involves developing strategies for shielding one’s wealth from creditors, reducing taxation, and ensuring that they do not become the target of a frivolous (or non-frivolous) lawsuit.
Protecting assets can help you insulate property, investments, and other types of wealth-producing and/or enhancing assets legally, without the need to hide what you own. Ideally, assets should be protected long before any type of liability or claim might occur.
Asset Protection Strategies
While assets such as equities and bonds, as well as real property, help you build wealth over time, these assets are often vulnerable to lawsuits, creditors, and other situations that could put them in danger of being lost.
If you own real estate, for instance, it can be beneficial to employ certain strategies for protection. As an example, owning real property in your own name (or jointly with a partner) can place these assets at risk if a lawsuit resulted in damages being awarded to a plaintiff. Therefore, many real-estate investors will instead hold these assets in either a corporation, a limited partnership, or a limited liability company. Transferring title to these types of entities can provide you with additional insulation from lawsuits.
How and Where to Incorporate
Incorporating, or setting up alternate forms of ownership, is not nearly as difficult as you might think. One of the most popular and simple ways of holding property is in a limited liability company, or LLC. The owners in an LLC are referred to as members, and none of the members are personally liable for the LLC’s obligations.
While certain other ownership structures may require a plethora of records and paperwork, LLCs do not have to maintain records such as bylaws, minutes, or shares. Because of this, it is not possible for creditors or other potential risks to “pierce the corporate veil.”
By owning property through an LLC, only the assets of that limited liability company may be used for satisfying claims. This means that your other assets are protected—unlike the case of owning everything in your own personal name.
Setting up an LLC can be as easy as going online to one of the reputable organizations that will assemble your documentation and even file them with the Secretary of State. Of course, it is best to find a qualified attorney to help.
Incorporating can also provide you with various benefits. This is especially the case if you own property with other individuals or partners. There are two main types of corporations—the C Corporation (C Corp) and the S Corporation (S Corp).
• C Corporation – Corporations are entities that are separate from their owners. They can protect shareholders from liabilities, as well as from the responsibility of debts and contracts. C Corporations are recognized by law as an individual entity that is separate from its shareholders (owners), and can essentially be treated as its own being. The shareholders of a C Corporation do not report any of their business income or expenses on their individual tax returns. Rather, the corporation files its own income taxes—oftentimes at a lower tax rate than an individual’s—while the individual shareholders report and pay income tax only on money that is paid to them by the corporation. Corporations also have a certain “immortality” in that they can continue to exist regardless of the circumstances that surround its owners. Even death and/or a transfer of interest in the corporation will have no impact. So, unless the state law places a limitation on the existence of the corporation, it can go on indefinitely.
• S Corporation – An S Corporation is similar to a C Corporation in that it provides its shareholders with protection from liability. However, unlike a C Corp, an S Corp is exempt from federal income tax. In this case, business taxes are paid solely by the individual shareholders.
Many business owners or real-estate investors will incorporate in certain states like Nevada that provide even non-residents with substantial benefits such as no corporate income tax, no tax on corporate shares, and no annual franchise tax.
Another asset-protection strategy that is used by many property owners is to title the asset in a land trust with an LLC or corporation, and then name the LLC or the corporation as the beneficiary of the trust. Enacting this strategy, however, will typically need to involve a legal professional.
A simple and free strategy to protect your privacy (and help with asset protection) is to have your name removed from real-estate property records. You can ask your local county appraisal district to simply list “Current Owner” in place of your name on your property records.
Ensuring Additional Protection
Properly protecting your assets might also require the added layer of security provided by insurance. Depending on the type and amount of assets that you own, you may need to consider the following insurance strategies:
• Umbrella Insurance – While you may already own insurance on various holdings, an umbrella policy can provide an additional level of coverage. For example, this type of coverage can continue where your regular insurance leaves off. This can be an essential form of coverage—especially if you face a substantial amount of liability.
• Life Insurance – Life insurance can also help to ensure asset protection. For instance, in several states—including Texas—life insurance is creditor-protected by statute, possibly including bankruptcy-exemption statutes to an unlimited dollar amount. Because of this, you may even be able to convert exposed assets such as cash (which are subject to creditor risk) into protected assets with a death benefit.
• Annuities – Likewise, money that is in an annuity may also be safe from creditors. In Texas, for instance, there are specific statutes in place that can protect annuity assets from lawsuits and other types of creditors.
The Bottom Line
While most everyone knows how important it is to protect both tangible and intangible assets, going about it in the proper manner can oftentimes lead to confusion—and even a false sense of security. Working with a seasoned professional who is not only well-versed in asset protection, but who also has a focus on the LGBT community, can help ensure that your plan is tailored to your specific requirements and is up-to-date in today’s volatile and sometimes insecure financial world.
Personal finance-related questions may be emailed to [email protected].
Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the 2014 September issue of Texas Monthly.