Asset protection
4 mistakes you can’t afford to make
By Edward R. Collins

A judgment resulting from a lawsuit, divorce, negligence or injury claim that exceeds professional liability insurance limits, or a seizure by a federal agency could leave you financially devastated.

To avoid this fate, asset protection planning becomes an extremely important component to your financial plan. But take care not to make four critical mistakes that can affect your financial health:

1) Procrastination. After you are sued, it is too late to set up an asset protection plan. All good asset protection plans involve transferring assets/property out of your name in some way or another. However, if you do this in response to a lawsuit, you are breaking the law.

2) Doing it on your own. Success in one area of business does not guarantee success in another. Nothing can take the place of experienced, highly specialized, well trained advisors when it comes to asset protection planning.

3) Putting your assets in your spouse’s name. This strategy may provide modest protection in the event of a lawsuit, it has significant drawbacks:

• The courts carefully scrutinize conveyances between relatives for potential fraud.

• Even if the property conveyance is done properly, your spouse may not be insulated from a lawsuit.

For example: If you were named in a malpractice lawsuit and during the course of a trial it is learned that your spouse wrote checks for business-related expenses and performed a number of other bookkeeping tasks, he or she could be declared an implied officer in your practice. The shield of protection could be pierced.

• If you transfer ownership of assets into someone else’s name, you expose yourself to that individual’s personal liabilities.

• The national average for divorce is more than 50 percent, with some professional groups averaging from 10 percent to 20 higher than that. You could lose assets in a divorce.

4) Relying on one strategy. Asset-protection is done in three ways: insurance, statutory protection, and asset placement. A well constructed asset protection plan includes a combination of these strategies.

• Insurance. The simplest way to protect yourself is to shift the risk from you to an insurance company. This should be the first line of defense for any successful business owner or professional. Consider insurance to protect you against death and disability, long-term care, personal and business liability and property loss, and other business losses.

• Statutory protection. This refers to a creditor’s inability to enforce a lien or judgment against property that is exempt under federal or state law. Both federal and state laws govern property exemption in non-bankruptcy proceedings, and separate federal and state laws govern exemption for bankruptcy proceedings.

Some of the assets that can be protected include your principal resident, personal proerty, cars, IRAs, pensions and Keogh plans, prepaid college tuition plans, life insurance, annuities, and wages.

• Asset placement. This refers to the transferring of legal title to other persons or entities, such as corporations, limited partnerships, and trusts. Creditors can not reach property that you do not own or control.

Just as diversification is important in investment planning, developing an asset protection plan that utilized diversified strategies improves your chances for surviving potentially devastating lawsuit. Don’t make the mistake of relying too heavily on just one strategy.

Edward R. Collins, AAMS, RFC, is a family wealth management specialist at Collins Wealth Management, LLC. He can be contacted at 973-292-8728 or 770-933-6285, or through the company’s Web site, www.collinswealthmanagement.com.