Four Steps in Protecting Your Assets

We live in a highly litigious world.  It is no wonder why I am commonly asked: "How do I protect my home if I am sued?"  While it is important for many to have a revocable living trust, a common misconception is that a revocable living trust will protect your assets if you are sued.

Some states (such as Florida) protect your entire residence from being attached by a creditor – no matter what the value.  Unfortunately, in California, there is limited protection for the home.  California law allows some equity in your home to be protected from a creditor.  This is generally referred to as a “homestead exemption.”  California’s homestead protection is limited to $50,000 in equity for a single person and $75,000 for married debtors (these limits go up if the debtor is over a certain age or disabled).  In order to claim the homestead offered under California law, every homeowner should record a Declaration of Homestead in the county where the residence is located.  This form may be downloaded and completed from the local county recorder’s website.  The Orange County Declaration of Homestead may be found by clicking here.

While asset protection and proper estate planning generally involve many different steps, below are some tips that can get you started in the right direction.  So, how do you make sure you are adequately protected in the event you are sued?  Best answer is to make sure that you have consulted with a knowledgeable attorney.  Until then, here are some suggestions....

TIP #1:  MAKE SURE YOU HAVE SUFFICIENT AUTOMOBILE AND HOMEOWNERS INSURANCE.  For obvious reasons, it is imperative that you have adequate auto and homeowners insurance.  

TIP #2:  INVEST IN AN UMBRELLA POLICY.  An umbrella policy is an additional insurance policy which covers the damages above what your homeowners and/or automobile policy is willing to pay for.  The umbrella policy will provide coverage when your other insurance has run out.  For the most part, umbrella policies may be purchased for a minimal cost, and generally are available in increments of $1 million in coverage.  If you consider nothing else, talk to your insurance agent about an umbrella policy.  These policies are sometimes called “excess liability policies.”

Tip #3:  SAVE AS MUCH AS YOU CAN IN A RETIREMENT PLAN governed by the Employee Retirement Income Security Act of 1974 (commonly known as ERISA).  ERISA plans generally include provisions that prohibit a creditor from attaching funds invested by you in the plan.

TIP #4:  IF YOU OWN RENTAL PROPERTY, FORM A LIMITED LIABILITY COMPANY (also known as an LLC) and place the rental property in the LLC.  If the rental property is correctly placed in an LLC, and all the formalities of the LLC are complied with, your personal assets will not be at risk if there is a liability arising from rental property.

While asset protection involves the analysis of each person’s individual situation, the above tips highlight what can be done, at a minimum, to protect what you have.

This article is intended only for the purpose of providing general information and does not constitute legal advice.  By providing the information contained in this article, no attorney-client relationship is established and nothing contained in this article should be construed to necessarily be applicable to your unique situation.  You should always engage the services of an attorney to determine which, if any, legal solutions are right for you.