Dollars & Sense

Protecting Your Assets

When it comes to protecting your assets there is no single iron clad action you can do to protect yourself completely. It’s more about layers of protection and adequate planning.

Your assets are vulnerable to the claims of creditors, the IRS, various state agencies, individuals and ex-spouses that might sue you. What can you do to protect yourself?

Insurance Coverage
Most homeowner and auto insurance policies are too low in relation to current personal injury awards, even when you have the maximum available coverage. A solution to this would be to have an umbrella policy. You can purchase umbrella coverage for $5 million for about $1,200 per year.

Some states offer protection for certain assets. In Texas and Wisconsin all IRA’s are exempt from creditor’s claims. But in Florida state law allows unlimited protection on personal residences.

Homesteading
Homesteading helps protect home equity. Homesteading is a legal procedure which allows a homeowner to protect the equity they have in their home, up to a maximum dollar amount. The Homestead Act helps to protect the homeowner from losing their home to creditors. If you are sued for money in court and lose, the person suing you will receive a judgment from the court. If you do not pay the judgment, they can try to collect the judgment by garnishing your wages, having your vehicles sold or by having your home sold. Homesteading protects a certain amount of your equity (in some cases, all of your equity) from being taken to pay the judgment. Note: Homestead amounts vary state to state, contact an attorney in your state familiar with real estate law for more information.

Retirement Plans
Money held in qualified retirement plans, such as 401 (k) accounts are protected against all creditors, thanks to the Employee Retirement Security Act of 1974 (ERISA) and the Bankruptcy Abuse Prevention and Consumer Protection Act. Funds held in rollover IRA’s are fully protected while the funds in a contributory IRA are subject to a $1 million dollar limit. Note: When rolling over funds from a qualified plan to an IRA, use an account that is separate from any contributory IRA to get the unlimited protection.

When leaving a job or retiring, it is advisable to keep funds in a qualified plan instead of rolling them over into an IRA. The ERISA protection for assets within a qualified retirement plan render the assets untouchable, therefore creditors cannot get the funds under any circumstances. IRA funds are protected from bankruptcy but are vulnerable to creditors.

Trusts
There are several types of trusts that offer different degrees of protection from creditors.

Domestic Asset Protection Trust
This type of trust is intended to protect the assets of the trusts creator from claims of his/hers own creditors. Only certain states allow this type of trust – Alaska, Delaware, Nevada, Rhode Island and Utah. It has not been determined if the resident of another state can set up a trust within one of theses states. This type of trust will probably work best for a resident of the state.

Spendthrift Trust
This type of trust is set up with assets held in trust for a beneficiary. This trust includes a clause preventing undistributed income and principal from being used to satisfy the claims of the beneficiary’s creditors. This type of trust is used solely for the beneficiary, not the person who sets up the trust, such as that person’s spouse, child or grandchild.

Foreign
This type of trust is set up in jurisdictions that do not enforce the judgments of the US Court System. Note: These types of trusts are not necessarily impenetrable.

When considering setting up a trust always talk with an attorney that specializes in these matters.

This article has been presented by PBS Tax & Bookkeeping Service, a company that has been providing income tax and bookkeeping services to the trucking industry for over a quarter century. If you would like further information, please contact us at 800-697-5153. Visit our Web Site at www.pbstax.com .