We live in a world that is becoming increasingly litigious. Indeed, if you are found liable for damage to a person or his or her property, you could find yourself being sued. Additionally, you can be sued even beyond just property damage or personal injury liability. You can be sued over errors and omissions if you are some kind of professional.
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4 Ways to Protect Your Asset from a Lawsuit
Whether you own your own business, or just want to protect your personal assets, there are steps you can take to protect your money from a lawsuit.
Proper Insurance Coverage
One of the first things you should do in order to protect yourself is to ensure that you have the right types of insurance, and sufficient coverage. You can be protected in the aftermath of an auto accident, or an accident that happened on your property. Your auto insurance provider will often pay damages, and your homeowners insurance can handle liability issues related to injuries on your property. Commercial liability insurance can help pay your liability costs from injuries on your business premises.
You want to make sure you have the right insurance coverage for your situation. Consider the risks involved in running your business and in your personal life. Professionals, for instance, might need additional insurance. Doctors need malpractice insurance to protect their assets from lawsuits. Real estate agents, financial planners, and lawyers might also purchase professional liability insurance (also called errors and omissions insurance) to help them.
When you have the right insurance coverage, your insurance company pays the costs of your liability — as long as you are up-to-date on your premiums. If you are concerned that your insurance doesn’t enough coverage for liability you might incur, or if you have a lot of assets, you can also consider umbrella insurance to help protect your money in a lawsuit.
Interestingly, your retirement account can actually be a good place to protect your assets from lawsuits. ERISA-qualified plans have unlimited protection in the case of liability lawsuits (things are different with regard to bankruptcy and creditors, though). They can’t touch your retirement money. Of course, you are limited by yearly contribution limits, and you won’t be able to withdraw the money penalty-free until you are 59 1/2. However, maxing out your protected, tax-advantaged retirement accounts can be a great way to boost your future savings and protect some of your money.
Another protection strategy is to transfer your assets. However, you need to be careful about this method. It’s actually a no-no to transfer your assets in response to an upcoming lawsuit. Instead, you need to have a policy of transfer in place well ahead of time. The key is to protect your money now, before the threat.
Transferring the ownership of your assets can help you with this. You can transfer your money and other assets to an irrevocable trust that is meant for the use of your family. It is important to carefully consider this move, though, since some of the consequences can be negative in terms of what you control, and how you access your money. Before transferring assets, you should consult a knowledgeable estate planning attorney, and determine whether it’s really the right move.
On a related note, in some states you can protect some of your money by putting it in an annuity. Check your state law, and consult a knowledgeable professional. You need to be especially careful when putting money in an annuity, since there are different types of annuities that come with different risks.
If you are concerned about losing some of your assets because of a divorce suit, you can head it off, at least to some degree, with the help of a prenuptial agreement. While this won’t often change the amount of child support you are responsible for, it can help you protect some of your assets from your ex during the dissolution of a marriage. Of course, your partner might not want to sign one. However, in the current climate, it can make sense to consider a prenuptial agreement in order to protect the assets of everyone involved. If you have a lot of assets prior to a marriage, this can be one way to protect yourself.
In many cases, you can’t completely protect all your assets from a lawsuit. However, with some careful planning, you can reduce the assets that others have access to.
Miranda is a professional personal finance journalist. She is a contributor for several personal finance web sites. Her work has been mentioned in and linked to from, USA Today, The Huffington Post, The San Francisco Chronicle, The New York Times, The Wall Street Journal, and other publications. She also has her own blog at Miranda Marquit.