Let’s dive deeper into the realm of assets, risks, and protections. Scary as it may be, the hard truth is that your assets are all at risk the moment you lose a lawsuit and a judge decides you must pay your creditor. This creditor could be anyone – a dissatisfied customer, an employee who feels discriminated against, a stranger who gets injured in a building that you own… the potential creditors are endless, especially given the legal landscape in California. Your savings, your home, anything of value that you own can be turned over to creditors. Even if the lawsuit is against your business, if the total judgement is greater than your insurance policy limits and any assets owned by the business, then the creditor’s lawyer will try to attack your personal assets, and the reverse can be true as well. The judicial system is not set up to protect defendants, so the best things you can do is take preventative action to protect yourself.
The first step is to claim any state and federal exemptions you qualify for. An exemption is a right that you have under the law, and once you claim it, no court can take it from you. For example, there is a federal law called the Employee Retirement Income Security Act (ERISA) which guarantees that any money you contribute to certain retirement plans, such as a 401k, is completely protected from creditors. These kinds of exemptions, as long as they are set up properly, are automatic and absolute – these are your rights under the law.
The next step is to explore what “maybes” you can use to protect your assets. These are any actions you take to transfer ownership of your assets in the hopes that they can’t be taken by a creditor. This can include, for example, creating a Limited Liability Company (LLC) to protect your real estate and transferring ownership of the property to the LLC. The problem here is in the word “limited” – this means that the protections offered by this action are literally limited, and courts have been known to dissolve LLC’s, thereby exposing those assets to creditors. This is why Reed Scott refers to these actions as “maybes,” compared to the “rights” that are offered by exemptions.
When it comes to protecting your assets from litigation, you can take a comprehensive approach: carry insurance, claim every exemption you are entitled to, and set up some entity structures like LLC’s or trusts, etc. to hopefully offer additional protection.
Stay tuned for our next post in this series, where we will discuss some specifics about state exemptions available in California.
Scott, R. K. (2017). California asset protection guide: The NON-legalese California business owner’s & professional’s guide to asset protection & tax planning. Retrieved from https://app.luminpdf.com/viewer/ne6hiAMBas6o4tzmZ