Asset protection techniques can be grouped into roughly three categories: insurance-type asset protection, liability-limitation asset protection, and wealth-segregation asset protection.

The first type asset protection...

One of the easiest and most effective forms of asset protection is insurance. With a policy contract in place, an insurer typically agrees to pay a specified amount of money to or for you if a specified event occurs. The event might be you getting sick, someone damaging your property or a natural disaster. Other times, the policy event might be you or someone in your family allowing a dangerous situation at your business or in your home which ultimately leads to someone being injured or to property being damaged.

In all of these cases, a good policy provides a level of asset protection. The terms of your contact may mean that the insurer pays the economic and non-economic damages that you or another person suffer--and that protects your assets!

One thing to keep in mind is that a general liability umbrella policy is often recommended as "backstop" or "fallback" level of protection. For both homeowners and businesses, general liability umbrellas are often quite reasonable. A $1,000,000 personal liability umbrella for an individual might cost only $200 to $300 annually. A $5,000,000 business liability umbrella for a small firm in some innocuous industry might cost $1,000 to $1,500 annually.

The second type of asset protection...

Another form of asset protection is offered to businesses and investors through limited liability companies (LLCs) and corporations.

One local attorney I often collaborate with, for example, tells his clients that an limited liability entity protects businesses and real estate investors from the worst case scenario—which in his mind is a “slip and fall” accident on the business’s or investor’s property. With a limited liability entity as the property owner, so says my attorney friend, the “worst case scenario” is liquidation of the entity. That liquidation means the people who own the entity wind up with nothing—which isn’t good. But all the owners lose is what they’ve invested.

In comparison, without the limited liability entity, the business owner’s or real estate investor’s “worst case scenario” if there’s a “slip and fall” accident is that the owner or investor can lose almost everything they own. In other words, the business owners or investors could lose not only their investment in the business or real estate property but many other assets.

Let me issue a caveat here, however. You may not get as much legal liability protection from these entities as you want or hope. Say, for example, that you’re a roofing contractor operating as an limited liability firm and that, unfortunately, you end up in dispute with a customer. Perhaps they say your firm breached a contract to repair the customer’s roof in a specific fashion. In this case, assuming the customer prevails in some legal action, the customer will almost certainly only be able to look to the business for payment of any damages. Obviously, that’s good. You want that sort of business liability protection.

However, if you personally happen to drop a hammer onto the customer’s head during the roofing project, your LLC probably won’t protect you from that sort of tort liability. In other words, the customer can probably look not only to your business for payment of damages related to the dropped hammer but also to you personally.

And here’s another example, which unfortunately makes things even murkier. What happens if someone working for you, one of your employees or subcontractors, drops a hammer on the customer’s head? The LLC may offer you some protection in this case. But you may still be personally responsible. The customer might reasonably argue that you should have done a better job managing the employee or subcontractor, for example.

Note that a limited liability entity provides all the same asset protection as a corporation—but with much less red tape. A regular corporation, for example, requires regular stockholders meetings, a board of directors, regular board meetings, and of course records of all these activities and bodies. But a limited liability company doesn’t.  For this reason, many attorneys prefer limited liability companies.

The third type of asset protection...

A final category of asset protection measures segregate wealth, in effect putting wealth outside the reach of creditors trying to collect or litigants trying to sue.

Interesting, federal and state bankruptcy and consumer protection laws already offer individuals quite a bit of wealth-segregation-type asset protection. For example, federal and state laws typically protect assets such as a certain amount of home equity, tools of a trade engaged in by an individual, personal items such as clothing, and many retirement accounts.

However, other more sophisticated wealth-segregation-type measures also exist. For example, an individual could contribute assets to a trust that is set up to provide specified beneficiaries with allowances for living. If the terms of the trust state that the trust principal cannot be invaded by creditors or by beneficiaries, the trust's assets may be protected from the claims of creditors. When people use trusts for asset protection reasons, they commonly choose a state or country that allows for trusts that are very favorable to trust creators and to trust beneficiaries but not to creditors of the trust creator or beneficiary. (When you hear about offshore trusts being using for asset protection, for example, what's usually happening is that someone has set up a trust in a country that makes it almost impossible for creditors to invade the trust.)

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