You have worked extremely hard to build your wealth. You have a house, a vacation home, stocks, bonds, a business, cash, insurance, automobiles, and more.
In a single moment, it could all end up belonging to someone else.
An accident where you are found at fault. A personal lawsuit. A business lawsuit. Divorce. Death. The list of how you could lose your wealth is long.
This article will share my thoughts on “The 11 Crucial Asset Protection Steps to Take Today”.
The 11 Crucial Asset Protection Steps to Take Today
Table of Contents
Deposit, Securities, Annuities, and Life Insurance
Let us start with your bank and brokerage accounts. Simple safeguards such as deposit insurance on bank accounts and the equivalent for brokerage accounts is a must.
The Federal Deposit Insurance Corporation (FDIC) insures money in member banks for up to $250,000 per depositor, per bank, and per “ownership category.” So, you can have $250,000 each in an individual account, a jointly owned account, an IRA, and a trust account and be covered for the total of $1 million, all at a single banking institution (not branch).
The Securities Investor Protection Corporation (SIPC) provides insurance on your cash and securities in member brokerage houses against that firm’s failure. In some instances, it also ensures against theft from your account. The maximum insurance coverage is $500,000, but you can structure your accounts in diverse ways (the SIPC calls this “separate capacity”) to multiply your total content.
The state of Florida also offers an elevated level of protection for annuities and life insurance. In Florida, safety is available if the annuity or life insurance proceeds benefit another and not used for the insured.
Personal Liability Insurance
A greater risk to your wealth than the possibility of a bank or brokerage failure is a costly personal lawsuit. An individual suit is where private liability insurance can help.
Start by making sure that you have sufficient liability coverage for your home, auto, and business.
In the case of an automobile, you could be personally sued if you or a family member are involved in an accident and someone is seriously injured. Most states require automobile owners to have a certain minimum level of bodily injury coverage. Sadly, in most states, this minimum level is enough to protect high net worth individuals financially.
In many states, the minimum bodily injury coverage is $25,000 or less. Minimum bodily injury coverage of $25K will provide inadequate protection if another party is seriously injured.
You can raise your coverage to several hundred thousand dollars with most insurance companies. Even that amount may be insufficient in a severe accident. You will also want to consider Umbrella Insurance, Professional Liability Insurance, Business Liability Insurance, and Directors and Officers Insurance. I discuss each of these in this article.
An Umbrella Insurance Policy picks up financially where your home and auto insurance end coverage.
So, for example, a $1 million umbrella policy would extend your liability coverage to $1 million.
These policies cost about $150 to $300 a year. Adding another $1 million in coverage on top of the first $1 million should cost you around an additional $75 a year.
Homestead or Personal Residence Protection
Florida offers a level of protection for the family home, or homestead in Florida, which is among the best in the country, second only to Texas.
Florida grants 100% protection against the forced sale of a home. Homestead protection is guaranteed under Article X, Section IV of the Florida Constitution. Homestead law covers 100% of the real property value of up to 160 contiguous acres in any county in Florida and up to ½ acre in a municipality.
There are exceptions to Florida homestead protection. One is the default of your home mortgage because a security interest in the home secures it. A second is your Homeowners’ association actions for the community where the home often secures the homestead. Another exception can include IRS tax liens or divorce actions by a spouse, both of which may be imposed on a Florida homestead.
Business Liability and Professional Liability Insurance
Business Liability Insurance protects you in activities related to running your business. One option for small and mid-sized companies is what is known as a Business Owner Policy (BOP), which includes property, liability, and other types of coverage, all rolled into one.
Professional Liability Insurance is used to provide insurance to a range of professional specialties. Medical malpractice insurance is the most well-known, but you might need professional liability insurance whatever your field. Some of the most vulnerable professions are Accountants, Architects, Engineers, IT Consultants, Investment Advisers, Lawyers, and Real-Estate Agents.
Florida general liability insurance is required for most business owners. General Liability (GL) coverage is designed to protect FL business owners from direct or indirect damages to another party. Your business liability insurance pays for damages caused by the actions of your business or your employees. Florida general liability coverage pays for property damage and personal injuries involving customers, visitors, and sub-contractors.
A typical small business in Florida can expect to pay between $300 and $5,000 annually for its general liability policy. A basic $1 million general liability insurance policy will cost a business between $300 and $1,000 a year. The final cost of liability coverage from one industry to the next will vary significantly based on the SIC code or the insurance company’s classification system for GL rating.
Directors and Officers Insurance
If you serve on a board of directors, including an unpaid volunteer for a nonprofit, you have opened yourself to a personal lawsuit. If the organization does not already provide Directors and Officers (D&O) liability insurance, you should not agree to serve on their board.
Lower-risk businesses can pay as little as $250 a year for $1 million in D&O coverage. Companies with a higher risk might pay more than $10,000 a year. In general, the average cost of Directors and Officers Insurance is around $600 for $1 million in coverage.
An Asset Protection Trust
An Asset Protection Trust (APT) is a type of trust designed to hold an individual’s assets to shield those creditors’ assets.
Asset Protection Trusts offer one of the most robust protections from creditors, lawsuits, or any judgments against your estate. An APT can help deter costly litigation even before it begins. It can also influence the outcome of settlement negotiations to be in your favor.
An APT is known as a self-settled trust. In a self-settled trust, the grantor can be designated as a beneficiary and allowed access to the trust account funds. Properly structured, the APT’s goal is that creditors will never be able to reach the trust’s assets. A domestic APT offers other benefits, including state income tax savings when situated in a no-income-tax state.
APTs have the required regulatory requirement of being irrevocable. APTs can provide for occasional distributions, but those distributions can occur happen at an independent trustee’s discretion. An APT also contains a spendthrift clause, whereby the beneficiary cannot sell, spend, or give away trust assets without specific stipulations.
There are two types of APTs’. Domestic APTs’ and Foreign APTs’. Domestic APTs are allowed in a limited number of states. A Domestic APT is used to protect your USA-based assets. A Foreign APT is also known as a Foreign Asset Protection Trust. They are also known as “offshore” trusts because they’re often held in an offshore account.
The State of Florida does not protect a grantor’s assets from seizure if he or she is also named as a beneficiary in the trust. Based on several court challenges, Florida law has established that creditors and those seeking judgments against a grantor have full access to the beneficial interest in the income or principal from a DAPT “self-settled” trust where the grantor is also named as a beneficiary.
Irrevocable Domestic Asset Protection Trust or DAPT
A Domestic Asset Protection Trust (DAPT) is a specific type of trust designed for shielding assets from creditor claims. In general, DAPTs are self-settled and irrevocable.
“An Irrevocable Trust” in Florida (and most states) means that, once the trust is established, the grantor surrenders the right to amend, terminate, or revoke the trust. The only exception is when the trust spells out exceptions in advance in the declaration of the trust and as allowed under state law. An Irrevocable Trust is a trust that is “self-settled” if the grantor is also the beneficiary.
A properly setup DAPT is considered a powerful asset-protection tool, and creditors find them frustrating.
Shelter Key Assets in an LLC
When you establish an LLC, you have founded a new business entity that is legally separate from the LLC owners. This legal separation provides what is called Limited Liability Protection.
If an LLC cannot pay its debts, the LLC’s creditors can go after the LLC’s bank account and other assets. The LLC owner’s personal assets such as automobiles, homes, and personal bank and brokerage accounts are safe. An LLC owner only risks the amount of money he or she has invested in the business.
But there are exceptions to LLC protections.
LLC owners are still liable for debts that they have personally guaranteed. Owners also may be liable for unpaid payroll taxes. Additionally, the owner may be personally liable if they are sued for their wrongdoing.
For these reasons, the LLC should obtain its business insurance. Likewise, it would be best to have your personal liability insurance or a policy covering both entities.
Pros and Cons of Revocable vs. Irrevocable Trusts
If you transfer your assets through the use of an IRREVOCABLE TRUST, you will no longer own them. If you do not own assets, no one will want to sue you as you have nothing they can get.
A Revocable Trust has ABSOLUTELY NO Asset Protection. NONE. The Grantor, The Trustee, and the Beneficiary are the same person. The Grantor (You) did not give up control of the asset(s). Therefore, if you are sued, they will be accessing those revocable trust assets if they win.
As to estate taxes, the Irrevocable Trust wins again. Assets are not subject to the Estate Tax. The deceased did not “own” the assets or have assets in his possession at the time of his death. The Irrevocable Trust owns the assets, and the trust did not, and does not, die.
With a Revocable Trust, the deceased owned the assets and, therefore, must pay estate taxes.
Schedule an Annual Review of All Documents Above
As with most financial and legal documents, you should set aside time each year to review these documents with your lawyer. Laws change, as does your personal and business situation. Adjusts will need to be made to ensure that your Asset protection is consistent with your current personal and business case.
As an experienced Asset Protection attorney, I can help you understand your options and protect your hard-earned assets from those who might want to take them from you.
I hope this article has helped illustrate some of my knowledge in the Asset Protection realm.
I further hope you find this article helpful in your decision-making and encourage you to reach out to me with any questions you might have. Please call me at my office or tap the Appointment icon at the top of the page to schedule an appointment.
With Best Regards,
Paul R. Ferreira, JD CPA CFE
Owner/Founder at The Lexwerx Law Firm, LLC
1550 W. Cleveland St., Suite 8
Tampa, Florida, 33606
** Information contained herein is not to be considered as legal advice. Please consult your attorney for legal advice on this or any legal matter.