Protecting Your Assets
Most people think that as long as they save enough of their income and invest it wisely that they will be okay financially. Well today I want to add in another very important piece of advice. You also need to protect your money.
I’m not talking about a pitch for some great investment product that will give you upside potential and protect you from the downside (warning: this is how annuity salesman try to sell expensive insurance products). I’m talking about protecting your investments from creditors in case of a lawsuit.
Besides doctors I don’t meet many people who spend a lot of time thinking about how they might get sued. However I think about this for my clients every time I’m preparing their financial plans. I worry about these things so they don’t have to! It’s part of my job.
Many clients tell me they aren’t worried about lawsuits because they don’t have jobs susceptible to being sued. So it helps to think through a scenario of how this might play out. The worst case I can think of is that you are driving to work in the morning and cause a serious car accident with a school bus.
Now you can bet that you are going to face several lawsuits if this situation ever came up. The families of the students involved are going to expect your financial support. And it could wipe out your assets if you aren’t intentionally protecting them.
Some of the assets you own are already protected in situations like this. Most of your retirement accounts are protected. 401(k)s, pensions, and most other employer retirement accounts are protected under the Employee Retirement Income Security Act of 1974 (ERISA). IRAs receive some protection depending on the source of the funds in the account and how big the account is. There are Federal laws regarding IRA protection, and then some states have their own laws regarding IRA protection. This is too detailed to discuss in this blog, but I’d be happy to discuss it with you if you have questions.
Something interesting is that in a 2014 Supreme Court case, the court ruled that an IRA inherited by someone other than the decedent’s spouse is not protected from creditors. Some states have since amended their laws to extend protection to these types of accounts.
Another big account that may be protected from creditors is your primary home. This is very dependent on what state you live in. In Texas the entire equity in your home is protected. But some states do not protect your home, and some states only protect $5,000 of equity in your home.
Some states will also protect college savings accounts from creditors. Again, this is very state specific.
Annuities and the cash value in life insurance policies are also protected, but I would not seek out these products just for the creditor protection.
When planning for Texas clients, I generally look at their net worth, and then reduce that by the value of their home equity, retirement accounts, 529s or prepaid tuition accounts, and any annuities or permanent life insurance. The remaining amount is usually just the value of bank accounts and “taxable” investment accounts. This is the amount of their net worth that could be subject to creditors in a lawsuit.
Of course, the best advice is to avoid the lawsuit altogether by being a good driver and staying alert. But it’s good to know that many of your accounts already receive protection in a worst case situation. For many people, the liability protection in their home and auto insurance policies are enough to cover the portion of their net worth that is subject to creditors.
Next week on the blog I will discuss a good, inexpensive insurance policy that you can add on top of your home and auto policies in order to better protect your assets. If you want to review your accounts to see what is already protected, reach out to me! I’m happy to discuss your specific situation and help you understand where you can be better protected.
**Note that this article should not be considered legal advice or advice tailored to your specific situation.
