Asset protection is not automatic

By Christine Dugas
USA Today

Former officers and directors at Houston-based Enron are facing an onslaught of lawsuits from angry shareholders and employees. Yet, even if they're slapped with big court judgments, they may never have to ante up.

Lipman is not just talking about the good food and friendly people. Texas is one of a handful of states — including Hawai'i — that protect many assets from creditors and legal judgments.

No matter where you live, there are steps you can take to help safeguard your money and property from lawsuits. But most people don't give much thought to asset protection until it's too late.

"Timing is everything," says Stephen Elias, co-author of "How to File for Bankruptcy." "You can't hinder, delay and cheat creditors once you've been sued. You can't scurry and hide an asset, or creditors can sue to get it back."

You might not have to fear costly shareholder lawsuits. But what happens if your dog attacks a deliveryman and he sues you for $1 million? Or what if you serve as a board member of a local charity that's sued for negligence in the death of a volunteer worker? Could you lose everything you own? Could creditors seize jointly owned assets?

Many people don't stop to consider these questions until they're faced with a calamity. Though state laws can be complex, here are basic tips on asset protection:

Newlyweds usually don't consider that by taking a marital vow, they could lose their own savings if their spouse gets sued. That's not always the case, however. It depends on where you live.

• Community property states. Creditors can seize assets belonging to both spouses, even if only one is sued. "Once they are married, anything that comes in is considered community property," Elias says.

There are ways to take community property and make it the separate property of one spouse by using a written agreement. It's best to consult an attorney.

Community property states: Arizona, California, Wisconsin, Idaho, Louisiana, New Mexico, Washington, Nevada and Texas.

• Tenancy by entirety states. "These states protect the marital property from the reckless spending of one spouse," says Albin Renauer, a co-author of "How to File for Bankruptcy." That means creditors generally can't take joint assets to pay for one spouse's debts.

Some states are classified as tenancy by entirety states, but over time, the laws have been watered down, Renauer says. Among the "pure" tenancy by entirety states are Florida, Virginia, Pennsylvania and Wyoming.

• "Common-law states." They fall in between the other two types in terms of the protection of marital property. In general, if one spouse is sued, creditors or the courts can take his or her separate property and half of jointly owned property. To find out about your state, call a local estate-planning lawyer.

Federal law protects company pensions and 401(k) plans from seizure by creditors. But many people don't realize that IRAs are subject to different rules, says William Wixon, a financial planner in Plymouth, Minn.

Though most state laws have been beefed up to protect IRA assets, not all states offer blanket protection. For example, Minnesota allows for up to $54,000 in IRA assets to be exempt from creditors.

If you're concerned about protecting your assets, check your state law. And if you're leaving a job, you might want to consider keeping your 401(k) assets in the existing plan if possible, so it retains federal protection.

If you have assets that are subject to seizure in a lawsuit, don't panic. Your homeowner and auto insurance policies come with some liability coverage against lawsuits for bodily injury or property damage.