Protecting Assets From Possible Future Creditors

Everyone wants to protect their assets from possible future creditors. What's the point of working to build up savings if you could lose it all in a lawsuit?

There are all sorts of reasons why nearly everyone should give at least some thought towards protecting what they have. An honest law abiding citizen who has spent years paying off their home and saving up for retirement could suddenly be slapped with a lawsuit because of one bad decision - or even be falsely accused. We live in a society where six and seven figure personal injury awards sometimes occur without even making the news.

Fortunately, the law recognizes people are not perfect, and that sometimes bad things happen to good people. The law therefore allows certain kinds of assets and income to be protected from most though not all creditors even when a person does not have any kind of special asset protection trust. The Nevada Legislature has laid out numerous items which are exempted from execution (court-ordered collection) in Nevada, the list is contained in NRS 21.090. Life insurance (on the life of the person being sued) proceeds, $605,000 of a person's homestead (residence), and retirement account. Notably, certain kinds of creditors may be able to go after assets that are protected from most other creditors; in the law there are often exceptions to the general rule.

Tranferring your homestead into a Trust does NOT invalidate a filed homestead exemption.

If a Nevada resident owns a home in Nevada they may be able to "homestead" it and protect up to $605,000 in the home's equity from most creditors. Since home equity is determined by subtracting the amounts owed on the home from the home's fair market value, most Nevadans have much less than $605,000 in home equity.

However, any debt secured by the home will generally not be stopped by a homestead exemption. For example, if you do not pay the mortgage on the home, the bank can still foreclose on you regardless of whether you file a homestead. If you do not pay your taxes or HOA dues, you can still lose the home. A homestead exemption will also be ineffective against an IRS lien, mechanics lien against the home, child support payments, spousal support payments, and certain other kinds of debt.

Filing A Homestead Declaration In Clark County
Filing a homestead declaration for your own home if it is located in Clark County is fairly easy and consists of filling out a form available on the Clark County Recorder's website, getting it notarized, and then filing it. Clark County will charge a filing fee of $42. Many people can easily figure out how to file their own homestead declaration. However, if you would like us to help you file a homestead exemption for your primary residence if it is located in Clark County, we can help for fee of $200 which includes the Clark County recording fee of $42.

BUT many attorneys DO NOT SEE ANY NEED FOR THE AVERAGE PERSON TO FILE A HOMESTEAD EXEMPTION. The reason for this is that in order for someone to take your house away from you in a legal proceeding they first have to sue you. They have to serve you with a summons and a complaint. The most common reason for an average person to get sued if someone sues them for a traffic accident. In that case your insurance company will provide you with a lawyer and if the case does not settle within policy limits, any judgment against you will take years. You can file a homestead exemption at any time before someone takes a judgment against you to court to foreclose on your house. 

Many retirement accounts such as a regular IRA, Roth IRA, 401K or other pension plan are protected under Nevada law for a cumulative amount of $1,000,000, see NRS 21.090(r). Further, under federal law some retirement accounts enjoy additional protection.

Importantly, once money is taken out of a retirement account, or when a retirement account is borrowed against, the money may then be exposed to creditors. You should consult with a bankruptcy attorney before using money in a retirement account to pay off debt if you may be declaring bankruptcy at some point in the future.

What about assets that are not protected? What about the risk of getting wages garnished? What if you own more than one home or you have more than $550,000 in equity in your home?

The best thing you can do is make a lawsuit against you someone else's problem: Ideally it can become your insurance company's problem, not yours.

Find out more in the article Asset Protection & Good Insurance.

Examples of What Insurance Will Not Cover
Insurance will not cover every claim against you. It generally will not protect you from choosing to go into debt via gambling markers, student loans or credit card spending, etc., or suffering from a failure of your business, or having to pay child support, etc. Insurance also almost always excludes intentional bad acts. With respect to auto collisions it almost always excludes any extra damages allowed for drunk driving, and in a minority of cases may even exclude any coverage if drunk driving is involved.

But, the right insurance will protect you from most negligence claims not involving spending choices or deliberate bad behavior. (The decision to drink and drive can be considered an intentional bad act.)

The best general rule is to have insurance coverage limits substantially larger than your assets. We will explain below why this almost always works to protect against negligence claims. But, even lower limits of liability insurance often ultimately protect you in a lawsuit.

Nothing beats having adequate insurance. Some of us at Reed & Mansfield get our insurance from Bernadette Horn in Las Vegas at 702-545-9618, a conscientious insurance agent we like.

Additional Techniques In Asset Protection

         The best way to protect your assets is by having adequate insurance to cover you for events that are likely to get you sued. Every driver of an auto, truck, motorcycle, or boat faces the possibility of getting in a collision or hurting a pedestrian or swimmer and getting sued over that. Now here is a secret that most plaintiffs's personal injury attorneys don't tell you when they are advertising about how aggressive they are: The huge majority of personal injury cases are settled within insurance policy limits. Let me give you some examples from our own personal injury practice:

         Near drowning case against apartment owner: A woman resident in New York owned a large Las Vegas apartment complex. The management negligently left unrepaired a child proof gate to the outdoor swimming pool. One evening Dad was at work and Mom, in charge of their toddler, passed out in their apartment from drugs and booze. The toddler wandered into the pool and almost died of drowning. He was rescued before he died but was permanently brain damaged and would never be able to care for himself. We sued claiming a multi-million dollar life care plan, although the toddler had a severely reduced life expectancy. We also claimed damages for the father, but not the mother. This case was arguably worth more than the apartment owner's $6,000,000 policy limit. But by settling for policy limits, we insured an adequate care plan for the toddler with his reduced life expectancy and avoided the risk that one of the 8 jurors in a civil trial would be so offended by mom's behavior that we would get substantially less than the policy limits. The insurance company was afraid to turn down our offer to settle for policy limits because if we got a substantially bigger judgment at trial, then they would probably be liable for the full amount of the judgment because the apartment owner would claim the insurance company was in bad faith in refusing the policy limits settlement. 

         Leg fracture car collision: Our client was the innocent victim of a car crash. She broke her leg. The adverse driver had a $100,000 insurance policy limit. Our client chose to settle fairly quickly for the policy limit. We might have gotten more going to trial. But had we chosen that option, in the insurance company would have had to provide their driver a defense. It might have taken years to get to trial and even if we got a bigger judgment we might have trouble collection more than the $100,000 insurance policy limit. (If we had never offered to settle for policy limits, then the insurance company would not have been on the hook for refusing to settle for policy limits so any judgment in excess of the $100,000 policy limit would be the insurance company's problem.

        Conclusion: If you have liability insurance for about half the amount the plaintiff and their attorney could reasonably expect to collect if the case went to trial, most clients are going to take the bird in the hand. 

         However, there are 3 other ways some people seek to protect their assets:

  1. Limited Liability Corporations (LLC)
    Many small businesses are organized as an LLC while bigger business are in the form of regular corporations. In both cases, the protection is the "corporate shield." This means the business owner is not liable for the negligence of an employee, only their own personal negligence. So the CEO of Walmart can't be sued if a Walmart truck goes out of control and runs over a bunch of people. The problem with small businesses is that the owner usually has his or her fingerprints all over the operation. So, for example, you own two rental homes and you hire a guy off the Home Depot lot to fix a staircase and your tenant is hurt when the staircase collapses; you are liable for personally hiring a non-licensed contractor who did an inadequate job. This is why we think insurance is the better answer. Also, the LLC requires annual filings which is either a hassle for you or an annual legal expense. Limited Liability Corporations or other corporations are advisable for many business activities.
  2. Asset Protection Trusts
    We don't offer these. Lawyers who do generally charge at least $5,000 to set them up and you cannot be your own trustee so this is a very complicated way of doing business. For more information please see Using Trusts to Protect Assets.
  3. Corporate Maze
    A whole bunch of different corporations are set up within corporations so that it is a legal maze for a plaintiff's lawyer to try and get to assets. We don't offer this service.