The Biggest Risks to Your Assets
The biggest risks to consider when protecting your assets include the following:
Bank account garnishment: A writ of garnishment allows creditors to collect money after a judgment. The judgment often allows the creditor to withdraw funds from your checking or savings account.
Real estate lien: A real estate lien is a legal claim that gives creditors interest in your personal or investment property. When there’s a lien, you can’t sell or refinance your property until it clears.
Foreclosure: If a creditor gets a judgment on you, they may foreclose on your property. A foreclosure forces you to sell and directs any earned capital to pay off your debts.
An asset protection strategy can protect you from all these issues.
How Does an Asset Protection Strategy Stop Creditor Claims?
An asset protection strategy stops creditor claims by keeping you anonymous and making your personal and business assets appear indebted. Here are a few ways an asset protection strategy stops credit claims:
Shields Personal Worth
Creditors are less likely to pursue legal action, like liens, if you have minimal personal wealth. Moving personal and business assets into a different entity shields you from their liability and value. While you can still access the assets, creditors cannot garnish or place a lien on these accounts.
An asset protection strategy also prevents business liabilities from affecting your assets. An unprofitable or unexpected business debt might otherwise threaten your residence, retirement accounts, or savings. Creating multiple LLCs can protect individual business endeavors, preventing an unsuccessful business venture from affecting your more successful ones.
Displays Indebtedness to Creditors
If you owe a substantial amount of money, creditors may not act against your assets. You can file a lien against one of your businesses using a separate business entity. A friendly lien may prevent frivolous lawsuits by shielding the profitable assets within your business. However, to use this strategy, it’s important to note this process requires you to back the lien with the loan amount.
While having a large loan with your own LLC may prevent you from borrowing additional funds from banks or other lenders, you can typically dissolve the filing later.
Separates You From Your Assets
Asset protection strategies aim to separate your identity from your assets. You avoid creditor garnishment by removing your name from your accounts, including personal savings and checking accounts. Most state laws allow you to move personal funds to your LLC bank accounts, which can shield your identity from creditors.
After creating an LLC to hold your personal assets, you become the manager. This gives you complete access and control over your funds, just as if they were in your personal checking account. Creditors are only able to collect from your personal accounts.
Transfers Property Ownership to a Trust
Trusts can also help protect your assets. Real estate property may be one of your most valuable assets, so it’s important to protect it. Creating a personal resident trust (PRT) allows you to assign the property’s ownership to another LLC as the beneficiary. This process shields your identity from the public. If a creditor or lawyer attempts to research who owns the property, the title will show your LLC rather than your personal information.
Creating a trust is an excellent strategy for protecting your residence. If someone were to file a complaint against you with the local county, your real estate assets would no longer be included. You can also protect stocks, savings, brokerage accounts, and any other assets of value in your newly formed LLC. The funds are easily accessible by writing a check or transferring them to a new account.
When creating an asset protection strategy, you can choose a revocable or irrevocable trust. A revocable trust allows you to make changes, while an irrevocable trust makes this more challenging. Trusts help protect your assets from creditors and can assist your estate planning. A trust allows you to assign beneficiaries to your assets while allowing them to avoid probate, an often expensive and time-consuming process.
Strips Equity
Available equity in a property may be appealing to creditors. For example, if you owe $150,000 on a property worth $500,000, lawyers, tenants, and creditors can use public information to identify the substantial equity available in your property, potentially putting you at risk. Stripping or removing that equity may make your business appear less profitable and valuable, reducing the chance of lawsuits.
You have a few options for stripping equity. An equity line of credit is one, but there is often a limit of 60% of the property’s value. Another strategy is to use your LLC to file a deed of trust against your property. This deed is public, meaning anyone can see the original mortgage and other debts, but it doesn’t show the additional debt is a personal loan. This strategy makes your assets appear as a liability.
The important thing about these strategies is they’re legal. State and federal laws allow you to create an LLC to manage and hold your assets. Since some states allow you to create an anonymous LLC, which offers another layer of confidentiality, review local laws.