Asset Protection ABC’s

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Lawsuits are filed for all sorts of reasons. (For some really bad reasons, check out, which is named for the woman who sued McDonalds over that hot coffee.) Unexpected things also happen, and sometimes they lead to suits. And people in affluent areas are easy targets to blame . . . and sue. So how do you hedge the bet? I can wait, right? Won’t my liability insurance protect me?

Maybe. It’s great to have coverage, so the insurance company’s lawyers come in to handle when you’re sued and the insurance can cover any damages.

But what if you’re sued for something which isn’t a covered risk? You’d be amazed at what is and isn’t covered, and what changes over time in your policies. So while it may not be great entertainment, invite your insurance agent to give you a face-to-face guided tour through your policies’ liability provisions. Holes in the umbrella? What about taking assets off the table?

With the right drafting, a judgment creditor can only reach what the LLC might distribute; a creditor cannot take the LLC shares themselves. And with the right modeling and strategy, the LLC might not ever distribute what a creditor could get.

Face it: if you were in business, you’d be protecting yourself by running the business in a corporation or an LLC. The same kind of protection can cover your bank accounts, stocks, bonds, mutual funds, CDs, et al.

And whatever you do with your investments in an LLC will not generate any additional income taxes. Done right, the LLC is invisible for IRS purposes. What’s the catch?

Afterward, you pay the Secretary of State a $30 annual fee. You pay your accountant to do a tax return for the LLC (though remember, an LLC never pays any income tax, unless you gum things up). And you run the LLC like a business.

And that’s not bad for effective asset protection that’s simple.

You have to form an LLC; you just don’t find it in your front porch, wrapped in a basket. You then need an “Operating Agreement” with particular features in it, if you want the LLC to be truly effective. And you have to put your assets into the LLC a particular way. You can shield your investments. The best way isn’t tough: put your assets in your own limited liability company. An umbrella policy is great protection. But gaps can cost you plenty. If your home, auto, or other basic policy protects you to $1 million, and your umbrella coverage starts at $2 million, you could be in for a bad day in court. An umbrella policy needs to be synchronized with your other policies.

Waiting for something to happen or for a lawsuit to be filed against you before acting is locking the barn door after the proverbial horse is out. Waiting for a judgment before acting is like locking that barn door after the horse is glue. Do some common sense things to protect your assets. They won’t protect themselves.