We all work hard to build up what we have, so the idea of losing it to a lawsuit or creditor can be worrying.  The good news is that Tennessee offers some strong asset protection strategies that can help keep your assets safe.  In this post, we’ll break down five asset protection strategies, from basic statutory safeguards to more advanced measures like self-settled asset protection trusts, so you can feel confident that your hard-earned wealth is as secure as possible.

 

What is Asset Protection?

Asset protection is about strategically safeguarding your wealth from threats like lawsuits, creditors, bankruptcy, or divorce.  Unfortunately, many people are misled on this subject—often hearing from a friend or co-worker that simply placing assets in a trust makes them “untouchable.”  While certain trusts can offer some protection, they’re not always practical for everyone.  Let’s explore a few practical strategies and tools that many people may already be using unknowingly, plus one more extreme option involving a specific type of trust.

 

✅Some of Your Assets are Already Protected by Law

The first layer of asset protection involves statutory safeguards that automatically protect certain assets by law.  For example, federal law generally provides significant protection for retirement accounts like 401(k)s, 403(b)s, and IRAs from creditors.  Similarly, Tennessee state-sponsored retirement plans, such as the Tennessee Consolidated Retirement System (TCRS), enjoy protections under state law.  Life insurance policies are also protected and typically pass to beneficiaries free from creditor claims.

A certain amount of equity in your home may also be protected from creditors through something called the Homestead Exception.  Under the Tennessee Homestead Exception, if you were to face financial difficulties and creditors sought to seize your assets, they would generally be unable to take your home and all of your equity.  The amount of equity that is protected depends on your age, whether you own the home jointly with someone like your spouse, and whether you have minor children, with the amount protected ranging from $5,000 to $25,000 at the time of this post.

 

✅Your Marital Home is Protected from Creditors of One Spouse

We are fortunate to live in Tennessee when it comes to asset protection, as our state affords us many protections that other states do not.  One of these protections applies to a marital home.  Under this unique protection, spouses in Tennessee each own their marital home as a single legal entity—meaning both spouses are considered to own 100% of the property as opposed to a 50/50 split.  This structure protects the home from being seized by creditors of only one spouse.

For example, let’s say a husband and wife purchase a home together after they are married and one of them is a doctor.  If the doctor spouse makes a mistake with a patient and gets sued, the home cannot be taken through the lawsuit because the other spouse is not being sued and owns the home completely—it does not matter that the doctor spouse also owns the home completely.  In other words, since the spouse not involved in the lawsuit owns the entire home as well, creditors cannot force its sale.  This makes tenancy by the entirety a powerful tool for protecting your primary residence from individual creditor claims.  An important note here is that this protection ends after the death of a spouse.

 

Insurance is a Simple and Inexpensive Form of Asset Protection

A low-hanging fruit when it comes to asset protection is always insurance.  If someone is worried about exposure (liability), they are well advised to implement insurance policies for their specific concerns.  This means maxing out their home and auto insurance policies for maximum protection from lawsuits if someone injures themselves on their property or in a car accident.

For broader concerns, it is advisable to obtain coverage through an umbrella policy, which extends beyond the limits of your existing auto or home insurance, providing an additional layer of protection against lawsuits and other liabilities.  These umbrella policies offer a broad range of protection from lawsuits caused by many things and can also cover legal expenses.  On the other end of the spectrum, professional liability insurance is a very specific type of coverage that is important for anyone whose career comes with enhanced liability, like doctors and lawyers.

LLCs and Asset Isolation

For those who own income-generating assets like rental properties or a business, it’s important to keep those assets legally separate from your personal wealth.  If you own a personal residence for your family along with a rental property that you lease to tenants, and you own the rental property in your own name without an LLC, you may be exposed to unnecessary risk.  If a tenant sues after being injured at your rental property, all of your personal assets, including your home, could be subject to being seized through the lawsuit.

A better idea is to form an LLC that owns your rental property.  An LLC acts as a shield between the property and your personal assets.  In this case, the suing tenant could not typically pursue your personal family home or any of your other personal assets.  The LLC essentially puts a wall of insulation around the rental property.  (Note: there are other legal entities aside from LLCs, like corporations and limited partnerships, that may be better suited for specific businesses, situations, or assets.)

 

Self-Settled Asset Protection Trusts

The final strategy is a more drastic measure: a self-settled asset protection trust, often referred to as a Tennessee Investment Services Trust.  This trust allows you to shield certain assets from future creditors, but it comes at the cost of significant control.  To implement this type of trust, you must transfer the assets that you want to protect out of your own name and into the name of this trust.  While you can still benefit from the trust’s assets, an independent trustee must manage them, and the trust is irrevocable, meaning you cannot simply take back control and reclaim your assets into your own name.  Due to these restrictions, this strategy is best suited for individuals with substantial assets who have exhausted other options.

An important note here is that this type of trust only provides protection from threats that are not foreseeable at the time of the trust’s creation and only after a waiting period has passed.  For example, if a person finds out they are likely about to be sued and immediately creates this type of trust to avoid liability for that lawsuit, not only would the trust not provide the intended protection but it would also be considered fraudulent.

 

No Plan is Foolproof

These strategies provide some strong steps for protecting your assets, but no plan is entirely foolproof.  Each approach comes with its own limitations and potential exceptions, and the success of your plan depends on how well it’s tailored to your specific needs.  Additionally, both Tennessee and federal laws change over time, which could impact the protections you have in place.  That’s why it’s important to speak with an estate planning attorney who can help you navigate the complexities of estate planning and asset protection and keep your plan up-to-date over time. Contact our offices and schedule a call with me by clicking the link below.