How to Protect Your Assets When Getting Sued
There is always the risk of being sued, no matter what the nature of your business. A lawsuit may involve a claim of negligence or recklessness, nonpayment of debts, a defective product, services not rendered, or some other kind of dispute. Individuals, too, are at risk for being sued. According to a recent U.S. Department of Justice study, the actual number of lawsuits filed has declined in recent years with more cases being settled out of court. Still, it remains important to protect both business and personal assets from creditors and others who may win judgments against you.
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Instructions
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Consult a qualified attorney and financial planner. They may advise you to take steps such as the ones described here. For example, incorporate your business to protect personal assets such as your home and savings should a judgment be rendered against your business. Incorporation also offers the additional advantages of tax savings and deductions.
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Create a holding corporation to protect your most valuable business assets, including equipment, machinery or intellectual property. This allows you to separate business activities from business assets, significantly reducing liability. In this arrangement, the holding company actually owns the business's assets, but leases them to the operating company.
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Transfer ownership of certain assets to your spouse. Use this strategy to protect either business or personal assets. Keep in mind, though, that your spouse might also be sued at some point. Divorce is another possibility that puts you in a vulnerable position. Should your spouse die suddenly leaving the assets to you, any unpaid judgments remaining against you can then be collected.
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Gift property to your spouse if you live in a state where community property laws apply. In that case, a married couple is considered to own all property acquired during the marriage jointly, even if assets are titled in only one spouse's name. In some states, gifting the property to your spouse is an exception. Again, you might consider this approach as one way to protect certain personal property should a lawsuit be initiated against your business.
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Ask your attorney about tenancy by entirety as a way to protect the home in which you reside. In states where this type of joint ownership is available to married couples, a judgment cannot be placed against the property unless the judgment is placed against your spouse as well, as in situations where both spouses are held jointly responsible. Tenancy by entirety can protect your home from personal or business creditors who win judgments against you.
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Look into the homestead laws in the state where you reside. You may be able to exempt a portion of your home's equity, putting it out of the reach of creditors or other judgments placed against you. Amounts that can be exempted vary from state to state.
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Keep a large mortgage on your home to make it unattractive to creditors or others who are suing you. Although perhaps not the most practical solution, it may offer some protection from a lawsuit filed against you as an individual or against your business.
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Roll over an IRA into another qualified retirement plan like a 401(k). The investment returns may not be as high but it offers some protection for retirement funds.
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Create a family limited partnership to protect real estate, bank accounts, and other investments against business risks. Either you or your spouse would be named a general partner with a 1% interest. Then you and your spouse, or you and your children, (if you name your spouse the general partner) own the remainder of the assets as limited partners. In either case, you or your spouse would keep control of the assets.
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Tips & Warnings
Taking the steps necessary to minimize the likelihood of someone collecting in the event a lawsuit is filed and a judgment awarded can be a real challenge. The problem is that some of the most successful strategies used to protect one's assets require careful planning well in advance of any indication of a potential lawsuit. If you invest funds in a foreign account, you must still report these assets. If a judgment is issued against you or your business, the court can order you to bring these assets back to the U.S. and make them available to satisfy the judgment.
General liability insurance policies do not protect businesses against allegations of gross negligence or recklessness. Being sued for punitive damages is usually not covered. Another disadvantage of liability insurance is that you could be sued for more than the policy's limit.
