When you plan your estate, your primary focus is often on your loved ones and your legacy. And, while you know a big part of that plan is minimizing taxes and liabilities, what you may not realize is that a huge part of a good estate plan is protecting your assets from lawsuit and creditors.
Is it important?
Yes. While it may seem like only doctors, lawyers and business owners need to protect their assets from lawsuit and creditors, in reality, everyone needs this protection. Of course, some professions do end up in court more often than others, but you can find yourself in court for any number of reasons.
For example, if you are involved in a car accident where you are at fault, and the other person’s damages exceed your policy limits, you could find a lawsuit seeking your assets.
If someone is injured on your property, and their damages exceed your homeowner’s policy limits, you face a similar reality. There are any number of reasons you could find yourself in court.
One way to protect your assets from lawsuits and creditors is through retirement accounts. Both traditional and Roth individual retirement accounts (commonly known as IRAs) have protection from lawsuits and bankruptcy proceedings. Though, for bankruptcy proceedings the limit is $1 million (inflation-adjusted).
Qualified retirement accounts (accounts under the Employee Retirement Income Security Act of 1974), like 401(k), 403(b) and 457 plans, pensions, etc., have unlimited protection, but that only applies to bankruptcy proceedings, not court judgements. Most states do provide some level of protection from judgements.
Divorces and the IRS
Nonetheless, ERISA plans are not protected from your spouse or the IRS. Specifically, as part of a divorce, a judge could award a qualified domestic relations order that gives your former spouse (or another party) part of your retirement plan or pension. The IRS can gain access as well.
The family homestead
If your family home is filed as your homestead in your state, it is usually protected from lawsuits and creditors.
For our Bowling Green and Louisville readers, these are only a few ways you can protect your assets in your estate plan. There are many others that we will cover in future posts as well.