How to Protect Assets from a Lawsuit
Research state and federal tax law., Avoid fraudulent transfers., Draft the appropriate contracts., Sign and register your deed or title.
Step-by-Step Guide
-
Step 1: Research state and federal tax law.
Even if you're simply giving title to a family member, you may owe federal and state gift tax on your transfers.The gift tax applies to any transfer of property ownership where you don't receive fair market value in return for the property.IRS rules allow you to transfer up to $14,000 of property without paying the gift tax.
However, there are no limits on the amount of property you can transfer to your spouse.
This means you can freely put property of any value in your spouse's name without having to pay the federal gift tax.However, when transferring property to your spouse you should keep in mind that your state tax laws may be different.
Additionally, transferring property to your spouse could become problematic if you end up getting divorced.
If the transfer you're planning is large or complicated, you might consider seeking advice from a tax attorney or an accountant.
You also may need to hire an appraiser or surveyor to value your property. -
Step 2: Avoid fraudulent transfers.
Each state has laws that allow someone suing you to come after assets you've transferred if you only transferred the property to protect it from the lawsuit.
To prove you made a fraudulent transfer, the creditor must prove that you transferred your property to someone else, that you received less than the fair market value for that property, and that as a result you are unable to satisfy the judgment against you.By definition, if you gift assets to a friend or family member, you're receiving less than fair market value.
The same would be true if, for example, you "sold" your car to your nephew for $5.
Courts also look to various traits that legally are considered signs of a fraudulent transfer.For example, if you transfer title of your car over to your son who lives two states away, but you keep the car and continue driving it, the court would probably determine the transfer was fraudulent.
Generally speaking, if you try to move your assets after you've already been sued, the court probably will determine that the transfer was an attempt to defraud the person who has a legitimate claim to money from you by making it look as though you have fewer assets than you actually do.For this reason, it is crucial to have an asset-protection plan in place long before anyone sues you.How far in advance you must transfer your property to avoid the presumption that the transfer was fraudulent varies among states.
Typically transfers that took place more than four years before you were sued will be okay.With bankruptcy, courts closely scrutinize any transfers made within one year of the date you filed for bankruptcy.
If the court determines any of these transfers was fraudulent, it may refuse to discharge some or all of your debts.If you've already been sued, typically a transfer will be considered fraudulent unless you can prove it occurred in the ordinary course of business.
Essentially, you must be able to prove that the transfer would have been completed anyway, regardless of the lawsuit, and was not motivated by the lawsuit., Depending on the type of property you transfer, you may need to record a written contract to make the transfer legally official.
You can transfer ownership of any asset to family members – not just real estate.
Assets you can transfer include securities, partnership interests, or even family heirlooms or antiques.In cases where no ownership document exists, you may want to draft a brief contract describing the conveyance and its character – whether sale or gift – to have an official record of the date the ownership was transferred.
For example, if you transfer the ownership of antique furniture in your home to your spouse, but continue to live there, no one knows it's not really your furniture absent a contract to that effect.
Ownership also can be held in an LLC or family limited partnership (FLP), which protects your assets by transferring ownership from you individually to the company or partnership.Creating an LLC or an FLP allows you to transfer legal ownership of your assets while continuing to maintain control over the partnership and the assets themselves., If you're transferring real property or the title of a vehicle, you must execute transfer documents and record the transfer with the appropriate government agency or department in your state. -
Step 3: Draft the appropriate contracts.
-
Step 4: Sign and register your deed or title.
Detailed Guide
Even if you're simply giving title to a family member, you may owe federal and state gift tax on your transfers.The gift tax applies to any transfer of property ownership where you don't receive fair market value in return for the property.IRS rules allow you to transfer up to $14,000 of property without paying the gift tax.
However, there are no limits on the amount of property you can transfer to your spouse.
This means you can freely put property of any value in your spouse's name without having to pay the federal gift tax.However, when transferring property to your spouse you should keep in mind that your state tax laws may be different.
Additionally, transferring property to your spouse could become problematic if you end up getting divorced.
If the transfer you're planning is large or complicated, you might consider seeking advice from a tax attorney or an accountant.
You also may need to hire an appraiser or surveyor to value your property.
Each state has laws that allow someone suing you to come after assets you've transferred if you only transferred the property to protect it from the lawsuit.
To prove you made a fraudulent transfer, the creditor must prove that you transferred your property to someone else, that you received less than the fair market value for that property, and that as a result you are unable to satisfy the judgment against you.By definition, if you gift assets to a friend or family member, you're receiving less than fair market value.
The same would be true if, for example, you "sold" your car to your nephew for $5.
Courts also look to various traits that legally are considered signs of a fraudulent transfer.For example, if you transfer title of your car over to your son who lives two states away, but you keep the car and continue driving it, the court would probably determine the transfer was fraudulent.
Generally speaking, if you try to move your assets after you've already been sued, the court probably will determine that the transfer was an attempt to defraud the person who has a legitimate claim to money from you by making it look as though you have fewer assets than you actually do.For this reason, it is crucial to have an asset-protection plan in place long before anyone sues you.How far in advance you must transfer your property to avoid the presumption that the transfer was fraudulent varies among states.
Typically transfers that took place more than four years before you were sued will be okay.With bankruptcy, courts closely scrutinize any transfers made within one year of the date you filed for bankruptcy.
If the court determines any of these transfers was fraudulent, it may refuse to discharge some or all of your debts.If you've already been sued, typically a transfer will be considered fraudulent unless you can prove it occurred in the ordinary course of business.
Essentially, you must be able to prove that the transfer would have been completed anyway, regardless of the lawsuit, and was not motivated by the lawsuit., Depending on the type of property you transfer, you may need to record a written contract to make the transfer legally official.
You can transfer ownership of any asset to family members – not just real estate.
Assets you can transfer include securities, partnership interests, or even family heirlooms or antiques.In cases where no ownership document exists, you may want to draft a brief contract describing the conveyance and its character – whether sale or gift – to have an official record of the date the ownership was transferred.
For example, if you transfer the ownership of antique furniture in your home to your spouse, but continue to live there, no one knows it's not really your furniture absent a contract to that effect.
Ownership also can be held in an LLC or family limited partnership (FLP), which protects your assets by transferring ownership from you individually to the company or partnership.Creating an LLC or an FLP allows you to transfer legal ownership of your assets while continuing to maintain control over the partnership and the assets themselves., If you're transferring real property or the title of a vehicle, you must execute transfer documents and record the transfer with the appropriate government agency or department in your state.
About the Author
Dennis Jordan
Experienced content creator specializing in organization guides and tutorials.
Rate This Guide
How helpful was this guide? Click to rate: