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When we give thought to our personal wealth, we naturally think about how to spend and grow our money, but neglect protecting our assets from lawsuits, creditors and, in certain situations, our own family members. Doctors, corporate executives, and those in other litigation-prone professions are not the only ones who need to be on guard, as there are many circumstances in which assets can be attached or garnished━bankruptcy, divorce, or lose a civil lawsuit.

Retirement Accounts Are Mostly Shielded

We often advise clients to take advantage of their retirement plans and IRAs, as they allow you to exclude contributions from taxable income and provide tax sheltered growth. Another benefit is the legal protection they provide. The Bankruptcy Abuse Prevention and Consumer Protection Act, passed in 2005, allows Roth and Traditional IRAs to have an inflation adjusted protection cap of more than $1 million (currently more than $1.3 million) against bankruptcy proceedings.

Other types of retirement plans – SEP, SIMPLE, and assets rolled over from qualified plans to IRA’s – have an unlimited cap on the amount of the protection. ERISA plans, such as employer sponsored 401(k) and 403(b) plans, have had this protection in place for years prior, and may also provide an additional layer of protection against other court cases with two notable exceptions: 1). Divorce, where a qualified domestic relations order (QDRO) can award retirement assets to your former spouse, and 2). tax levies from the IRS.

Home Equity is Protected in Some States

Some states provide a homestead exemption, which allows homeowners to declare a certain amount of equity in their home as exempt from creditors. These exemptions are not available in every state, and the amount in each state also differs. Rhode Island currently provides a generous exemption of $500,000, so paying your mortgage balance down sooner to build equity not only eliminates debt but can provide further asset protection.

An Asset Protection Trust

While a revocable living trust allows the grantor (the owner of the assets) to designate the terms of how their assets will flow to the trust beneficiaries and avoids probate court, it does not provide protection from creditors or lawsuits against your estate. An asset protection trust, which is not available in all states, is an irrevocable trust that allows the grantor to name themselves the beneficiary. Even though the grantor no longer owns the trust assets, they may (at the discretion of an independent trustee) provide distributions to the grantor and, given that these assets are no longer owned by the grantor, they are out of reach by creditors. Whether the asset protection trust is a Domestic or Foreign (offshore) trust, the services of an experienced estate planning attorney is highly recommended.

Other Forms of Protection

Other considerations include purchasing an umbrella insurance policy, which is a type of personal liability insurance, that can help protect your assets in excess of what your homeowners, auto, or other insurance policies cover. Business owners are often advised to separate personal assets from business assets by establishing the business as a corporation, a limited liability corporation (LLC), or limited partnership which, if a lawsuit goes against you personally or the business, the assets of the other will be excluded from liability.

Final Thought

Remember, asset protection measures like those mentioned do not work if you are already in trouble. So plan ahead and consider Lincoln Capital as a resource. Feel free to contact us for assistance with any financial matter.

About The Author

Alex Albert is a Certified Financial Planner for East Greenwich-based Lincoln Capital, a financial planning and wealth management firm. He is a graduate of the University of Rhode Island and earned CFP® certification from Bryant University.

DISCLOSURES – This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third party sources and is believed to be dependable; however, its accuracy is not guaranteed and should not be relied upon in any way, whatsoever. This presentation may not be construed as investment advice and does not give investment recommendations. Any opinion included in this report constitutes the judgment of Lincoln Capital Corporation as of the date of this report and are subject to change without notice. Additional information, including management fees and expenses, is provided on Lincoln Capital Corporation’s Form ADV Part 2. As with any investment strategy, there is potential for profit as well as the possibility of loss. Lincoln Capital Corporation does not guarantee any minimum level of investment performance or the success of any portfolio or investment strategy. All investments involve risk (the amount of which may vary significantly) and investment recommendations will not always be profitable. The investment return and principal value of an investment will fluctuate so that an investor’s portfolio may be worth more or less than its original cost at any given time. The underlying holdings of any presented portfolio are not federally or FDIC-insured and are not deposits or obligations of, or guaranteed by, any financial institution. Past performance is not a guarantee of future results. Lincoln Capital Corporation prepared presentation, 401.454.3040, Copyright © 2023, by Lincoln Capital Corporation.