Keeping Your Legacy Secure

Simple strategies for protecting your assets from creditors and lawsuits

As your wealth grows, asset protection – the effort to insulate your wealth from the reach of creditors, lawsuits and other predators – becomes critical. Asset protection is not a goal in and of itself but rather a tactic that should be incorporated into your primary objectives, whether that’s saving for retirement or legacy planning. It’s also not about hiding your money from the world, but rather about making it difficult for anyone to get unwarranted access to the wealth held by you and your family.

There are two important components to asset protection: knowing which of your assets are already protected by law, then knowing how to safeguard the assets that aren’t already covered. First, let’s take a look at what’s protected:

Assets That Are Likely Protected

Qualified Retirement Plans

The Employee Retirement and Income Security Act specifically protects 401(k), 403(b), and other defined contribution and defined benefit retirement plans from creditors or bankruptcy, although that protection does not extend to SEP IRAs, SIMPLE IRAs, or 401(k)s set up by a single owner. Depending on your state law, your IRA balances may be either entirely exempt, exempt only to a point, or not exempt at all.

529 Savings Plans

The account balances may be protected from creditors of not just the beneficiary, but the owner and/or the donor as well. However, as with IRAs, there may be a dollar limit on what your state protects, as well as a look-back period that protects only contributions before a cut-off date.

Life Insurance

Different states handle insurance proceeds in different ways. Deferred annuities and life insurance – both in terms of their cash value and their death proceeds – are fully insulated from creditors in some states, such as Florida and Texas, and may be partially protected in others.

Residence

Some states, like Florida, offer homestead protection, which means that the entire value your home (as well as the equity in it) is excluded when determining what is available to satisfy other debts. But that’s not the case everywhere. Depending on where you live, one asset protection strategy is for you to increase your home equity and later borrow against it as needed. Check with your Baird Financial Advisor to see what the optimal strategy for your real estate holdings would be.

Asset Protection Tactics

For your assets that might not be protected by federal or state law, here are a few steps to take that can help ensure they’ll be preserved and passed to future generations:

• One of the easiest moves you can make is to take out an umbrella liability insurance policy to safeguard your assets. Auto and homeowner’s insurance policies tend to offer maximum liability coverage of around $500,000, but injured parties may seek a lot more than $500,000 in damages. That’s where an umbrella policy can make a big difference. Also called an excess liability policy, an umbrella policy kicks in when your other liability policies, such as your auto insurance, have hit their limit. Keep in mind that in order to have an umbrella policy, you need to have the other insurance policies in place at high levels of coverage; an umbrella enhances those policies but doesn’t substitute for them.
• One way to protect your assets is, paradoxically, to give them away. Simply placing assets in someone else’s name, such as your spouse’s or children’s, can help shield them from lawsuits against you. As an added benefit, if you are worried about estate tax, you can begin gifting assets to future generations, especially if the value of those assets is expected to grow. This removes future growth from the taxable estate and protects those assets from any of your potential creditors, although they may not be protected from the heir’s creditors.
• Instead of direct gifts to individuals, you might also consider setting up an irrevocable trust. Unlike in a revocable trust, assets in an irrevocable trust can be protected from your creditors, and they also move out of your taxable estate. Another option is to put personal assets in a business entity like a limited partnership, limited liability company (LLC), or corporation. Structured properly, such a company can protect your assets from personal creditors and your personal assets from creditors of the company. 
• Keep in mind that you can’t move assets to a trust or other “shelter” simply to protect them in anticipation of a real liability or after a liability arises, according to the legal doctrine of fraudulent transfer. If a court finds that you transferred assets with the purpose of keeping them from a legitimate creditor, the court may disregard the transfer and you may lose that asset protection. In other words, if you feel that you might need asset protection at some point in the future, the time to seek it is now.

For anyone interested in leaving a legacy to future generation, asset protection is a necessary part of your financial planning. If you have yet to begin implementing any protection strategies, your Baird Financial Advisor can help you get started.

Some products or services listed above may not be offered by all Baird associates, are intended for illustrative purposes and to be used as a guide for topics to be considered during your financial planning process. It is strongly encouraged that clients speak with their real estate, mortgage, tax or legal professional prior to acting on this information.

Note: This article was originally published July 2022 and was updated in March 2023 with more current information.

The information reflected on this page are Baird expert opinions today and are subject to change. The information provided here has not taken into consideration the investment goals or needs of any specific investor and investors should not make any investment decisions based solely on this information. Past performance is not a guarantee of future results. All investments have some level of risk, and investors have different time horizons, goals and risk tolerances, so speak to your Baird Financial Advisor before taking action.