Individual Asset Protection

Do I need asset protection?  Some say they need it to protect the wealth they’ve accumulated over the years, but never end up doing anything about it.  Others recognize the importance of asset protection planning given their liability-prone profession, but think that nothing will ever happen to them.  Most forgo protecting their assets due to a lack of knowledge on why asset protection exists in the first place.  Many feel that asset protection planning is only for the wealthy.

Regardless of the reason, ALL feel the overwhelming need to protect their assets when they find themselves sued, about to be named a defendant, have some ridiculous money judgment rendered against them, or are placed in a situation of duress.

Getting sued is easy in the United States.  Many lawyers will take the case on contingency, or for free, and only take their fee upon recovering a substantial amount of money from you, the defendant.  Note, substantial is a relative term here.  What may be a miniscule sum for a corporate executive, say $5,000.00 in damages, can become very burdensome for a recent college graduate.

There is no discrimination in this legal playing field, and if you have assets, even less valuable assets, they can be taken away.  Results-oriented judges and juries show no sympathy either.  Regardless of your situation, if the facts don’t seem to weigh in your favor, chances are you can expect a judgment.

Moreover, those in liability-prone professions get sued all the time.  A great many of these lawsuits are downright frivolous and are quickly defeated in court.  However, frivolous lawsuits are lawsuits nonetheless, and hiring a good defense attorney will cost you money.

There exists an infinite number of scenarios that could put your assets, or better said, your financial future, in jeopardy.  Luckily, there are many things that can be done to help prevent an unwanted result.

Philosophy Behind Asset Protection

Take these following examples:

Defense against plaintiffs’ attorneys

One goal of asset protection planning is to make it very unattractive to sue you.  As mentioned before, the majority of these cases are taken on contingency, or for free.  If a plaintiff approaches his attorney with a claim, valid or not, the attorney will conduct a cost-benefit analysis.  This entails the following: will the suspected amount of the final judgment rendered against you, coupled with the fee taken out of the recovery, justify the attorney’s time spent on the case?

Evidently, the more difficult it is to secure a judgment that can be enforced and collected on will very much weigh in your favor.  Thus, having your assets shielded off by a wall of protection would have to be dismantled; dismantling takes time, and in a plaintiffs’ attorneys eyes, this upsets the cost-benefit analysis.

On the contrary, failing to protect your assets leaves them vulnerable.  With no “wall” to overcome, securing a judgment that can be enforced and collected on will be much easier, thus increasing the likelihood that a plaintiffs’ attorney would take the case.

Defense against creditors’ attorneys

Nearly all the above applies here.  However, creditors’ attorneys, especially those working for banks, do not work on contingency; they are paid by the hour.  On the one hand, if enforcing and collecting on a judgment proves extremely difficult, i.e. it would take many working hours to accomplish, if at all, the cost-benefit analysis is again weighed back in your favor.

On the other hand, because banks have a seemingly infinite amount of money, they are likely to spend substantial amounts of it to enforce and collect on their judgment.  For these types of creditors, what was a cost-benefit analysis for plaintiffs’ attorneys is transformed into a practical matter for creditors’ attorneys.

Still, protecting your assets gives you bargaining power.  If the creditor does not walk away and give up — which happens — they will likely want to negotiate a settlement.  Therefore, having an asset protection plan will give you the leverage you need to negotiate a favorable settlement and make the creditor go away.

Common Sense Asset Protection Planning

A good asset protection plan always starts with commons sense.  Doing your due diligence, of course, and getting your agreements in writing, are some of the things that can avoid future problems.  The following is a non exhaustive list of common sense asset protection planning techniques:

Insurance

One of the finest and most underrated pre-asset protection planning strategies is to purchase insurance.  First, insurance is inexpensive.  When comparing the costs of litigation to the costs of making payments on your insurance plan, the financial burden of the former far exceeds that of the latter.

Moreover, plaintiffs’ attorneys and creditors are more likely to accept an offer to settle by an insurance company when enforcing the judgment against you proves difficult.  This is why asset protection combined with insurance coverage is a powerful tool.  In essence, having insurance allows you, the debtor or defendant, to bring the deep-pocketed insurance company into the picture.  As such, creditors’ and plaintiffs’ attorneys may focus on them, not you, for payment.  In other words, your insurance company will bear the risk of loss.

State Law Exemptions

I.  Homestead (Florida)

Homestead property is the primary residence of the owner or the owner’s family.  It provides immense creditor protection for debtors who make, or intend to make, the homestead their permanent residence.  Once established, no judgment, decree, or execution can be used to place a lien on a homestead until the owner moves.  Note, these protections derive straight from the Florida Constitution.

Moreover, the homestead and its value are fully protected against the claims of your creditors, in nearly every situation, except the following:  (1) for the payment of taxes and assessments on the property; (2) contractual obligations for the purchase, improvement, or repair of the property (mortgages); and (3) contractual obligations for labor performed on the property (construction liens).  All other creditor claims against you are barred as per the Florida Constitution.

If the homeowner decides to sell the homestead, the proceeds are fully protected as long as the homeowner intends to use them to purchase a new homestead.  Utilizing the homestead exemption to your advantage, whether your located in or out of state (as long as you establish residency), is a valuable asset protection tool.

II. Tenancy by the Entirety

This type of estate is a form of joint ownership of property reserved exclusively for married couples.  In addition, each spouse is entitled to the other spouse’s share of the property upon death (right of survivorship).  In Florida, for example, if a conveyance of property is made to a husband and wife, even if they are not identified as husband and wife in the deed, a tenancy by the entirety is presumed.

For asset protection purposes, titling property as tenants by the entirety has significant advantages.  First, one spouse’s attempt to convey or sell the property is deemed wholly void.  In other words, neither spouse acting alone can convey or encumber his or her interest voluntarily or involuntarily.

This means that a creditor cannot contract with one spouse to place a lien on the property without the consent, in writing, of the other spouse.  As such, an individual creditor of the husband, for example, cannot reach any interest in the property unless the wife and husband are joint debtors of the same creditor.

It would certainly be wise to title property as tenants by the entirety should you be liability-prone, are involved in a high risk profession, or want to add a layer of protection to your non-homestead property.  However, divorce or death of either spouse severs the tenancy by the entirety, including its protections, and could subject the property to the claims of your creditors.