Your assets are the things you own; they may be worth money or they may have only sentimental value. They may also include intangibles such as the rights to market a product or an invention. In our society, it is becoming increasingly important for everyone to protect their assets.
Q: Why should I worry about protecting my assets?
A: All of us have exposure to potential creditors who could take your assets to pay your debts. You may have exposure due to the assets you own. Perhaps you cannot shovel the sidewalk in front of your home and your neighbor slips and breaks a hip. Perhaps you own a rental property and the roof collapses.
You may have exposure due to your employment. Perhaps you are a physician whose patient has a bad outcome and whose family believes you to be responsible. Perhaps you are an accountant who signed off on Enron’s books.
You may have exposure from ordinary everyday acts. Perhaps you do not see that the traffic light has turned red and cause an accident. Perhaps you let go of your shopping cart to answer your cell phone and the cart rolls down the hill, hitting a baby stroller.
You may have exposure to bank loans that you may not be able to due to job loss or health problems.
Any one of the foregoing examples could result in you owing a substantial debt to a creditor for which you do not have enough money to pay.
Q: How can I minimize risks to my assets?
A: There are a number of ways to manage and minimize the risks that your assets could be used to pay your debts. Placing income-producing property or assets into a corporation, trust or other entity can protect your assets from being taken to pay debts arising from rental property or other assets. Further, you can get insurance to protect against the most significant risks. Auto and homeowner’s liability insurance can provide insurance up to a certain dollar limit for automobile accidents and home injuries, respectively. An umbrella policy can provide additional coverage for multiple risks, such as home, auto and other risks. Malpractice insurance can provide protection from workplace-related exposure.
Q: What about risks insurance won’t cover?
A: Insurance policies do have limits in the types of claims covered and the amount of any claim. Also, insurance policies have deductibles for which you will be responsible, and they do not cover debts you have incurred. It is important to structure your assets to minimize exposure in the event the policy limits are exceeded or in case you are not insured for the particular risk. Ohio law allows people to protect assets from all creditors. Creditors may not touch retirement plans such as pensions, 401k accounts, IRAs, and cash value in certain life insurance policies for which your spouse, children or dependents are beneficiaries and to the extent reasonably necessary for your support. It makes sense to fund these accounts as much as possible. States also typically provide protection for the family home. In some states, such as Florida and Texas, the value of the entire home is protected. In Ohio, only approximately $133,000 of home equity is protected. Within reason, you can protect assets by placing a non-exempt asset, such as cash, into an exempt asset, such as a retirement account or equity in your home.
Q: Can I protect my assets by putting them in trusts?
A: Putting some of your assets into trusts as gifts for children or others also may provide some protection from creditors. However, you must make these gifts far enough in advance so that a creditor cannot make a claim against these assets. For these assets to be safe, you typically must make such a gift before you know of, incur, or foresee a creditor’s claim. If you do transfer assets after you incur a debt, the length of time a creditor has to make a claim depends on the circumstances of the transfer. Additionally, the type of trust you choose will affect whether or not your assets may be taken by creditors. You should consult with a professional to determine which type of trust is best for you.
Providing asset protection for your children or others is much simpler than protecting assets for yourself. You can leave the assets in a trust for them and name an independent trustee with the power to make discretionary distributions. Assuming the creation of the trust is not subject to attack by your creditors, your children’s creditors also would not be able to touch the assets in the trust except in rare circumstances.
Additionally, Ohio has recently enacted th Ohio Legacy Trust Act. It is beyond the scope of this article to provide all the details of a legacy trust permitted under Ohio law. You should contact an estate planning professional to discuss whether a legacy trust is appropriate for you.
This "Law You Can Use" consumer legal information column wa provided by the Ohio State Bar Association (OSBA). It was originally prepared by Akron attorney Richard W. Ashley and Canton attorney Anthony J. DeGirolamo. It was updated by Anthony J. DeGirolamo.