Serving families throughout Lynnfield, Wakefield, Reading, Peabody, Danvers, Beverly, the Greater Boston, North Shore, and Southern New Hampshire area
Are you trying to protect your personal assets from potential claims resulting from the operation of your business? Or do you want to prevent tenants or other people entering your investment property from suing you with the intention of seizing your personal wealth? Or are you trying to prevent your child’s spouse from making a claim against assets your child will inherit in the event of a divorce?
Once these questions are answered, your asset protection plan can become part of your integrated estate plan. Essentially, asset protection planning involves making prudent decisions today to protect yourself, your business, and your hard-earned assets from loss due to lawsuits, divorces, creditors, or bankruptcies. This type of legal planning is especially prudent for professionals and business owners whose personal assets could be at risk due to the nature of their employment.
When contemplating asset protection, you must ask two important questions:
- From whom do you need to protect your assets?
- What assets do you want to protect?
Statistically and anecdotally, we all know that the number of divorces, lawsuits, and bankruptcies is staggering. While no one believes lightning will strike them, wealth created through a lifetime of work, saving and investing can be lost overnight if these forms of man-made lightning do strike. To protect your assets from such disaster, proper risk management strategies should be given careful consideration. These strategies include exempting your assets from the claims of creditors, limiting your liability through legal entities, and transferring your risk through insurance.
Exempting Assets in Massachusetts
State and federal laws exempt some of your assets from the claims of creditors. This means that the federal government or the Commonwealth of Massachusetts has listed several types of assets that cannot be touched in bankruptcy court and these assets are exempt from the claims of creditors. For example, 401(k) accounts may be protected from claims made by creditors in bankruptcy actions under federal ERISA laws. In Massachusetts, exempt assets include, but are not limited to: pensions, IRA accounts, 401(k) accounts, life insurance, annuities, and, if declared, the homestead exemption amount for your primary residence ($500,000 in 2016).
Once you have identified the protected asset classes available to you under applicable law, it may be prudent to maximize your protection by converting non-exempt assets into exempt assets.
Limiting Liability for Professionals, Business Owners, and Real Estate Investors
Many entrepreneurs operate their businesses as sole proprietors rather than through a legal entity, such as a Corporation or a Limited Liability Company. In addition, may real estate investors own investment or rental real estate in their individual name or in “Real Estate Nominee Trusts”—trusts that do not provide any protection. Whether their business is home-based or in the Fortune 500, and whether it is residential or commercial real estate, these business owners and real estate investors are attracted by the informality of sole proprietorship and individual or “simple” trust ownership. They also do not want to incur legal fees to create and maintain a legal entity. However, in addition to other advantages, conducting business and owning investment real estate through a legal entity may offer substantial risk management benefits.
While lawsuits brought against a sole proprietorship, individual owner, or simple trust are really lawsuits against the owner’s personal assets, lawsuits against a properly created and maintained legal entity are really lawsuits against the entity’s assets. Nevertheless, the selection of an appropriate legal entity is critical for managing your risk.
Protecting Your Personal Assets with Liability Insurance
When was the last time you reviewed the details of your liability insurance program with your insurance professionals? Are your policies current? Are the coverage limits adequate and are the deductibles reasonable? Have you scrutinized the policies for loopholes? Remember: the fundamental philosophy of any insurance coverage is to pay a premium you can afford to transfer a risk you cannot afford. Take time to understand both the risks you have retained and the risks you have transferred.
Many of our clients are surprised that liability insurance may be the best and most effective tool to protect their personal and business assets. We are an estate and elder law planning firm and are not licensed to sell any type of insurance, nor do we receive any commission when our clients purchase insurance. However, we frequently recommend that our clients do a comprehensive review of all their liability insurance before suggesting the use of any type of legal entity or trust.
Again, while we do not sell insurance or receive commissions, we counsel our families to make sure they review and potentially maximize their liability insurance coverage, even if it results in our office doing less legal work to prepare legal entities for asset protection. First and foremost, we want to ensure your family is protected and taken care of when it really matters.