As your net worth increases, you have more exposure to lawsuits and other financial risks. Laura covers 7 wise strategies to protect your money, assets, and businesses so you worry less and avoid jeopardizing your financial future.
No one wants to deal with the hassle of getting sued, but unfortunately, it happens. So, it's critical to protect your money from risks, such as you, a family member, or an employee getting found at fault in a lawsuit and having to pay expensive damages.
This post will cover seven ways to reduce various risks, so you can protect your money from potential lawsuits and losses.
1. Purchasing liability insurance
Buying liability insurance is one of the most important things you can do to protect your assets. It can be combined with other insurance or purchased as a stand-alone policy. If someone sues you, liability insurance covers your legal costs, up to your policy limits.
For instance, if you have $250,000 of liability coverage and get found at fault for $750,000 in legal damages, you'd be responsible for paying the difference, or $500,000, out of pocket. Having enough liability is critical for protecting your future financial health. Getting involved in a personal or business lawsuit is a significant financial risk you could face.
Here are several common types of liability you may need.
If the court awarded $50,000 for medical bills, but you only had $10,000 of coverage, you'd be responsible for the remaining $40,000.
Auto liability insurance is required in almost every state if you own a vehicle; however, each state's minimum varies significantly. So, if your state has a low liability coverage requirement, you likely need much more. In Florida, my home state, drivers must only carry $10,000 of personal injury liability and $10,000 of property damage liability. That's a small amount of protection if you ever got into an accident and hurt someone or their property.
For instance, if your teen driver got into a car crash and injured a passenger or another driver, you'd likely get sued by the injured party or their insurer. If the court awarded $50,000 for medical bills, but you only had $10,000 of coverage, you'd be responsible for the remaining $40,000. And if you didn't have the funds, the court could garnish your wages or withhold certain federal benefits from you to satisfy the judgment.
Homeowners or renters liability insurance may be required by your mortgage lender or landlord. Like auto liability insurance, home or renters liability protects you from a lawsuit, such as a visitor getting hurt on your owned or rented property. For example, if your dog bit the pet sitter and they sued you, having home or renters liability would protect you up to the policy limit. If you had $100,000 of coverage and a court awarded the sitter $30,000 for medical bills, your insurer would cover it.
Umbrella liability insurance gives protection above liability limits you already have, such as auto and home or renters policies. With an umbrella over your existing coverages, you can cover additional liability up to your polity limit.
For instance, if a handyman fell off your roof and broke their leg, you'll probably get sued. If your homeowner's liability coverage was $300,000 and you lost a lawsuit for $500,000, you'd have to pay the $200,000 difference. However, if you had a $1 million umbrella policy, it would cover your $200,000 shortfall. It's an "umbrella" of coverage that boosts your overall liability and reduces financial risk.
The good news is that the cost of umbrella coverage is relatively low. You can purchase a $1 million policy for about $350 a year. So, it's an affordable policy that you should use to protect your net worth.
Business insurance protects businesses and their owners from various lawsuits. For instance, if a customer slips and falls in your store and sues you for medical costs. Independent contractors and freelancers may need errors and omissions (E&O) insurance for protection against getting sued for mistakes and misstatements.
2. Investing money in retirement accounts
Another terrific way to protect your money from lawsuits is investing it in one or more retirement accounts. Most employer-sponsored plans, such as 401(k)s and 403(b)s, are shielded from creditors under the federal Employee Retirement Income Security Act (ERISA).
However, be aware that your protection for funds in an individual retirement account or IRA varies by state. If you have a traditional or Roth IRA, consult with an attorney or financial advisor to understand how your IRA balances could be at risk if you get sued.
3. Retitling your assets
In extreme cases, retitling valuable assets, such as a home or rental property, to be owned by a spouse or family member may be a wise way to stay protected from lawsuits. But giving up ownership of those assets comes with consequences.
For instance, if you and your spouse get divorced, your ex would own assets in their name. Plus, putting assets in someone else's name means you may owe gift taxes over an annual limit of $16,000 per person for 2022. So, consult with a tax professional before giving away assets valued over that amount.
4. Setting up a trust
If you have many valuable assets, setting up a trust can be the best way to protect them from lawsuits. A trust allows you to transfer ownership of assets to a third party (known as the trustee) to manage on behalf of the trust beneficiaries.
There are many types of trusts suitable for different needs. One benefit of an irrevocable trust is that it's not at risk if you get sued. But if you have a living or revocable trust, it can be at risk in a lawsuit—so avoid them if your goal is legal protection.
Once created, you can't change or cancel an irrevocable trust, which is how it gets protection from creditors and lawsuits. However, setting one up can be complex, so consult an attorney for advice.
5. Incorporating your business
Incorporating your business (even if it's a budding side-hustle) is an excellent way to protect your assets. It allows your business to be a separate legal entity from you. That means your personal assets are protected if your business gets sued.
You have several options for incorporation, including registering as a limited liability company (LLC), S corporation, and C corporation. You file the necessary paperwork with your state and pay an annual filing fee. Plus, you may also need to create an operating agreement that outlines the ownership and management of your business and keep documentation, such as annual meeting notes.
6. Separating your personal and business finances
A good rule of thumb for business owners is always to keep your personal and business finances separate. For instance, you likely need to open a business bank account and pay your expenses (including your salary) from that account. You could also apply for a business credit card to keep changes separate from your personal purchases.
Combining your business and personal funds means it's more likely your personal assets could be at risk in a business lawsuit, even if your venture is incorporated.
7. Knowing your state's laws or seeking guidance
The law varies significantly from state to state. For instance, you may have complete legal protection for your primary home in some states. Some states even allow married couples to title property as "tenants by the entirety," exempting it from lawsuits brought against one of them.
To sum up, it's wise and not too challenging to put some financial protections in place. That way, if the worst happens and you or someone in your family gets found at fault in a lawsuit, it won't jeopardize your current or future financial security.
The tips in this post are common ways to safeguard your money and property but not a complete list. So, if you have questions about how to reduce risk, be sure to speak with a legal, tax, or financial professional.