Seven Asset Protection Planning Tips
“The time to repair the roof is when the sun is shining.” John F. Kennedy
Asset protection planning seeks to protect your assets from future creditors. An asset protection plan is designed to deter future creditors from seizing your assets or collecting on judgments. Coordinate your asset protection planning with your estate planning, business planning, insurance and other financial planning strategies. Consult professionals as needed to put together the best plan for your circumstances. Seven asset protection tips for Michigan residents are set forth below:
- Plan Early. Put an asset protection plan into place before you experience financial difficulties. While asset protection planning is legal, transferring assets to avoid existing creditor claims is considered fraud. Creditors may use fraudulent transfer law to unravel a transaction that took place after the creditor’s claim arose. Creditor claims are deemed to arise when the event occurs that gives rise to the claim. If you wait until you are sued, it may be too late to put an asset protection plan into place.
- Invest in Exempt Assets. Understand Michigan law on exemptions. A qualified pension or 401k account is generally exempt from creditors in Michigan. Maximize your contributions, if possible. Further, if you are married and hold assets jointly with your spouse, those assets may be exempt from your individual creditors. For example, if your home is held jointly with your spouse (tenancies by the entireties) all of the equity in your home is protected from individual business creditors. In contrast, in Michigan, only a portion of your home equity ($37,775.00 of your personal home, or $56,650.00 if you are disabled or over 65 years of age) is otherwise exempt from creditors. Other exemptions include limited equity ($3,475.00) in a motor vehicle, tools of trade valued up to $2,525.00, household goods up to $3,775.00, some insurance and public benefits and a portion of your wages.
- Choose the best structure for your business. If you operate your business in your individual capacity, without creating a new legal structure, you will be personally liable for all of the debts of your business. If you create a legal structure for your business such as a limited liability company or corporation, you can minimize your personal liability for business debts. Understand your options and consult legal counsel as necessary.
- Separate business and personal assets and debts. Once you create a legal structure for your business, don’t destroy the limited liability by commingling assets and debts of the business with your personal assets and debt. For example, Create separate bank accounts and credit card accounts. Carefully document all distributions from the business that are used for your personal benefit. Keep separate business records.
- Understand what debts are dischargeable in bankruptcy. Some debts are not dischargeable in bankruptcy. These include many types of taxes, student loans, child support and alimony, personal injury caused by driving while intoxicated, court fines and penalties, debts obtained by fraud, debts incurred as a result of willful and malicious injury, among others. If you are struggling financially, consider paying these debts before other unsecured debts.
- Maintain appropriate insurance limits. Asset protection planning is not a substitute for insurance, but rather a supplement to insurance. Understand what types of insurance are available and maintain appropriate insurance limits after consultation with professionals. Consider life, disability, health, car and homeowners, among others. Consider umbrella policies depending on your circumstances. Don’t buy insurance that you don’t need such as credit insurance.
- Keep it simple and don’t try to hide assets from creditors. The best asset protection plans are often the simplest. If the plan is too complicated, it may be questioned by your creditors. Asset protection is also not about “hiding” assets from creditors, but about keeping assets from creditors, even when the assets are in plain sight. Not only will aggressive creditors find hidden assets, hiding assets may cause numerous other problems such as claims of fraud and non-dischargeability in bankruptcy.