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Creditor Protection

Creditor Protection

February 01, 2024

How can I protect my assets?

Holding assets is a major responsibility and involves strategic decision-making. It is essential to shield yourself from potential liabilities and creditors with claims. This is where creditor protection comes in.

Creditor protection is the ability to protect assets from the claims of a creditor. A creditor’s claim is a demand by another person or entity (business, organization) to obtain a part or all of your assets. The opposing party may claim debt against you that you supposedly owe to them. Creditor protection is essential if you’re a business owner or self-employed (“solopreneur”), in a profession with legal liability (doctors, lawyers, etc.), or holding a trust fund with another trustee (family member/spouse).

Having creditor protection will enable you to stay ahead of unexpected events that may hold you liable, whether directly or indirectly. Your goal is to create as many roadblocks as possible against creditors before they can pursue legal claims against you.

For assets, consider asset protection trusts. They’re typically irrevocable and involve a portion of your assets being transferred to a trustee, which are then not liable to creditor claims. Also consider a family-limited partnership (FLP), which involves family members buying a unit/share of the business for potential profit.

For a business or self-employment, form a corporation. There are three types:

  1. C corporation: you, the owner, and shareholders are taxed separately from your entity. This allows you to have limited liability in case a claim is filed by a creditor since only the corporate assets are liable.
  2. S corporation: this type is structurally like the C corporation, but your profits are passed through your business and only taxed at the shareholder level.
  3. Limited liability (LLC): this combines elements of corporations and partnerships, in that you can have limited liability if your business fails, but your profits can be “passed through” as part of your own personal income. You can also form a trust to transfer your business assets.

If you’re in a profession with legal liabilities, use professional liability insurance (PLI) against claims that are not criminally prosecutable, or legally liable under civil law. You can also look at retirement plans that qualify under the Employee Retirement Income Security Act (ERISA), which would be sponsored by your employer.

Remember not to mix business assets with personal assets, which unfortunately is common with clients, as you may lose out on tax deductions. If your business is a corporation, all your assets are considered. Any legal action can affect your personal assets (e.g. Bank accounts, home, etc.). Additionally, an auditor will become suspicious and extend your audit process.

Sources:

Creditor Protection And Life Insurance (briansoinsurance.com)

Which Retirement Accounts Are Protected From Creditors? (investopedia.com)

The Major Risks of Mixing Business and Personal Funds - Pooley Accounting Services (pooleyacctg.com)