Asset Protection in New Mexico
As you probably already know, we live in a very envious society. Those who have accumulated wealth are often the target of lawsuits, scams, or even their own psychology. So, what exactly is “asset protection” planning? Asset protection is a component of financial planning intended to protect one's assets from creditor claims. Individuals and business entities use asset protection techniques to limit creditors' access to certain valuable assets while operating within the bounds of debtor-creditor law.
There are over 40 million lawsuits filed in the United States each year. If you have any accumulated wealth and are not planning for this risk, it will likely come back to bite you. Some clients are unaware of the risk they face because they feel that only “bad actors” get sued. The unfortunate reality is that anyone can be sued for almost anything. People have been sued for some ridiculous things, including a woman suing Mcdonald’s for her coffee being served too hot, a high school student suing his teacher for being woken up in class, and a graduate school student suing her professor after receiving a C+ grade. These are just some of the examples, the fact remains that anyone who has wealth should plan for the risk of being sued.
A lawsuit filed against a defendant with no assets is a giant waste of time. Often times, the first thing an attorney will do before filing a lawsuit is an “asset search” of the potential defendant in a lawsuit to see if they can even pay. An attorney can win a multi-million dollar judgment against a defendant, but if they cannot pay, it was all for naught.
Asset Planning can get extremely complicated and of course, each individual’s situation will dictate how to establish a proper asset protection plan, however there are some general principles to asset protection planning. The fiver “layers” of asset protection are Insurance, Protected Accounts, Limited Liability Corporations, Homesteads and Trusts. I will provide a brief overview on each of these topics.
INSURANCE
The first layer of asset protection planning is insurance. Insurance is designed to pay a creditor in the event of a lawsuit. Having sufficient liability insurance is one of the hallmarks of a good asset protection plan. How much insurance one requires is always dependent on a person’s specific financial situation, but I will just say that having “sufficient” insurance is an absolute must. In addition to having a sufficient amount of insurance, one must make sure they are covered from various potential liabilities. For example, homeowners insurance will not protect you if you are in a car accident or vice- versa.
PROTECTED ACCOUNTS
Certain types of accounts are protected from creditors. Retirement accounts, such as a 401(k) or a defined benefit plan (pension), up to a certain amount, is protected from creditors. In certain states, traditional IRA’s may be protected from creditors as well. This is why it’s generally prudent to have a certain percentage of one’s net worth in a protected account, not only for the significant tax advantages, but also for creditor protection. One of the most famous examples of this type of asset planning was the judgment against OJ Simpson. In 1997, O.J. Simpson was found liable in civil court for the deaths of Ronald Goldman and Nicole Brown Simpson. As a result of the court’s verdict, Simpson was ordered to pay over $33 million in compensation to the Goldman and Brown families. Mr. Simpson still owns a defined benefit plan from the NFL, valued at over $4 million. Despite O.J.’s $33 million liability, under ERISA law the former star’s defined benefit plan is protected from the Goldman and Brown families. Meaning, OJ Simpson gets to keep his $4mm pension plan, regardless of the lawsuit judgment against him.
LIMITED LIABILITY CORPORATIONS (LLC)
The limited liability corporation, or LLC is a hybrid type of legal entity that combines certain traits of corporations with certain other traits of partnerships and non-corporate legal entities. LLC’s have preferred tax treatment, limited liability and flexibility. Forming an LLC to hold assets such as real estate can be of tremendous value in asset protection planning. The key to maintaining personal liability protection for assets within an LLC is to maintain a separate identity between the corporation and members. Some tips to keep a separate identity between yourself and your LLC: 1) Open a separate bank account for the LLC, 2) Sign all agreements in the name of the LLC, 3)Pay the costs of the property only with LLC funds, 4)Accept rental income only in the name of the LLC, 5) File all annual reports and applicable tax information in a timely manner, and 6) do not co-mingle LLC funds and personal funds.
For more information on the “homestead exemption” and trusts for asset protection, stay tuned for part 2 of this article series. Part 3 and 4 will discuss how to protect yourself from bad financial advice and your own emotions.
Disclaimer: This article contains information on legal topics. However, the information provided is of a general nature and cannot substitute for professional legal advice. Because legal advice depends on specific circumstances and laws constantly change, nothing in this article should be used as a substitute for competent legal advice.