The most obvious way is to set up an irrevocable trust,
which are designed to protect the assets therein in the event that you get sued
for all your worth. Generally speaking, the assets in a trust aren't vulnerable
to creditors because, in the legal fiction underlying trust law, you don't
possess the assets. They're owned instead by the trust itself, which is a
separate legal entity, and possessed by the trustee, who is often a separate
The keys to establishing a valid trust are threefold. First,
you, the "settlor," must transfer the assets into the trust. Second,
you must designate a trustee -- who could be anyone, including yourself. Third,
you must designate the "beneficiaries" who are entitled to the income
produced by the trust.
Assuming you meet these requirements, as well as any other
standards under the state's trust laws in which the irrevocable trust is
formed, you can rest easy knowing that the assets contributed thereto are
generally safe from the prying eyes of anyone set on depriving you of them.
A second way to shield your assets from potential creditors
or litigants is to stash them in a qualified retirement plan -- namely, an IRA
or 401(k). Of all the benefits associated with legally sanctioned retirement
plans, this is second only in significance to the substantial tax benefits they
To be clear, not all types of retirement accounts will
protect your assets from judgment creditors -- that is, someone you owe money
to as a result of a lawsuit. This depends on whether or not the plan is
qualified under the Employee Retirement Income Security Act of 1974, or
ERISA. While there are multiple features that a retirement plan must satisfy to
qualify for this protection, one type of account that generally does meet the
requirements is the 401(k).
Consequently, and this is an important point, regardless of
how much you have contributed to your 401(k), the amounts therein are yours and
yours alone. Even if you're found liable for a multi-million dollar legal
claim, the opposing party can't touch your 401(k) -- except, that is, when the
creditor is either a former spouse or the IRS.
Individual Retirement Accounts, or IRAs, don't offer the
same level of protection, but they, too, provide some shelter from creditors.
In this case, as Nolo.com explains here,
when a person files for bankruptcy protection, the assets in their IRA are
exempt from creditors up to roughly $1.25 million. Thus, even assuming the
worst-case scenario in which a creditor's claims vastly exceed your net worth,
you should nevertheless be able to maintain ownership over your primary
residence and, at the very least, a substantial portion of your IRA.
At the end of the day, there are a seemingly endless number
of arguments in favor of maxing out your legally sanctioned retirement
accounts. However, few are more powerful than the legal protection that these
accounts provide to your hard-earned money and assets.
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