Exchange Your Mattress for Asset Protection

Have you heard the story about the person who had a big windfall of new wealth one day, and the next day received enough court documents to paper the wall of his or her home three times over?

If you have money, you’re unfortunately at risk for being sued. We witnessed this recently when Bethenny Frankel’s ex-managers sued her for a share of a $120M deal she received for a stake in her cocktail brand.

Unless you’re a hermit with limited interaction with other humans, the chances of a similar situation occurring in your life may be greater than zero. In fact, there are generally several circumstances under which your assets may be taken from you including:

  • Personal Injury Claims
  • Contract Violations
  • Bankruptcy
  • Divorce

It’s a blessing and a curse that as a society we’re able to sue when we feel that an injustice has occurred.  However, it’s fair to say that an individual who has gained new money in a fairly public way has a target on their wallet.  It’s enough to make someone place their money in a mattress, bury it 6 feet underground and pretend the windfall never happened.

As a result, consider these measures for building a moat around your assets.  The key point to take away is you must take appropriate measures prior to a lawsuit being filed against you:

Asset Protection Trust:  This measure is synonymous to placing your assets in a lockbox under the care of an independent party — e.g., a trustee — while receiving occasional distributions.  Asset protection trusts may be used to shield assets from creditors.  However, regulatory requirements must be fulfilled when structuring the trust.  Therefore, ensure that your trust is set up by a qualified attorney if you’re considering this measure.

Corporate Business Structure:  An LLC or Limited Partnership for your business may enable you to shield your personal assets from lawsuits or bankruptcies involving your business.

Life Insurance and Annuities:   The cash value of a permanent life insurance or annuity contract, and some or all of the contract beneficiary’s benefit may be shielded from garnishment by legal processes.  The extent of protection, however, is dictated by state law.  Research and speak with an advisor prior to relying upon this strategy.

Retirement Plans:  If you file for bankruptcy and have assets in an employer-sponsored plan (including a 401K, SEP IRA, and SIMPLE IRA), those assets will be shielded from creditors.  However, if you are a business owner and the only plan participant, protection of the assets in your plan is dictated by state law.  Once again, do your research and speak with someone you know and trust.

Other types of protections exist.  An investment advisor and a qualified attorney are great places to start in order to determine the suitability of a particular measure.

New wealth should be a happy occasion, and not a fretful one.  If you feel you may be at risk, talk to someone you know and trust today.


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