A Five-Step Defense Strategy to Protect Your Assets

If you’re socking away plenty of money in retirement funds and other investments, you’re definitely ahead of the game. However, if you haven’t taken measures to protect those assets you’ve worked so hard to accumulate, your work isn’t quite finished.

Shielding your assets is a critical part of smart investing. Of course, you can start by protecting your car, house and health with insurance coverage. You should also take steps to protect your family should anything happen to you—and that means purchasing the appropriate amount of life insurance. However, as your net worth grows, you should consider other defense strategies to protect your income. Here are five defense tactics to help you shield your assets and ensure a bright financial future:

Defense Tactic #1: Title your property wisely

The way you title your assets, including your home, car and investments, can greatly impact the amount of inheritance your beneficiaries receive. There are many ways to title assets. You can own property jointly with another person or you can own property individually. However, if you don’t title the deed to your home properly, your beneficiaries could get caught up in a long, drawn-up probate process and be subject to countless taxes.

Here’s one example of strategic titling: Let’s say you list your adult daughter as a Joint Tenant with the Rights of Survivorship (JTWROS) on the deed to your home. Therefore, the home is still included as part of your estate for tax purposes, but your daughter may be able to bypass the probate process altogether when you die.

There are many different ways to title your assets, and your options vary depending on your state. Your attorney can walk you through the advantages and disadvantages of each titling option and help you come up with a strong strategy.

Defense Tactic #2: Liability insurance

Let’s say someone is injured on your property or during a car accident in which you are at fault. If that person brings a lawsuit against you, the financial consequences could be severe. Fortunately, personal liability insurance can help cover much of the costs.

Although your home and auto insurance policy may include some liability insurance, it may not be enough to cover the costs of a major lawsuit. A good rule of thumb is to have liability insurance coverage equal to your personal net worth. Therefore, if your net worth is $400,000 and your homeowner’s insurance provides $100,000 in liability coverage, you should consider purchasing an additional $300,000 of coverage in the form of an “umbrella” personal liability policy.

It’s important to understand that personal liability insurance does not cover work-related lawsuits. Therefore, if you are a lawyer, doctor, accountant or another professional with your own practice, you should consider buying professional liability insurance to cover potential lawsuits. Meet with an insurance agent to discuss the type and amount of coverage you need.

Defense Tactic #3: Shelter income from taxes

There are many strategies for reducing taxes on the money you earn and invest. This becomes even more important as your income increases.

One way you can easily cut down on income taxes is simply by making maximum contributions to a 401(k) or another retirement account. Any contributions you make to a 401(k) will reduce your taxable income for that year. In 2009, investors under the age of 50 can contribute up to $16,500 to a 401(k), and people age 50 and older can contribute up to $22,000. Depending on your income level, your contributions to an IRA may also be tax deductible. You can also decrease your taxable income by contributing to other employer-sponsored programs, such as a flexible spending, health savings or transportation savings accounts.

As far as shielding your investments from taxes, you may consider moving your funds into more tax-efficient accounts. Talk to your financial advisor about the various ways you can cut down on your taxable income and protect your investments from taxes.

Defense Tactic #4: Set up a trust

If you want to minimize the estate taxes your family will face after you die, you may consider creating a family trust. This legal arrangement allows you to transfer control of a specific asset or piece of property to the trust, which is managed by a trustee. You can designate a friend, family member or anyone else as the trustee. Depending on the type of trust you set up, your beneficiaries may enjoy many tax advantages as well as protection from creditors.

There are several types of trusts available, including irrevocable trusts, revocable living trusts and family-limited partnerships. Discuss your various options with an attorney before establishing a trust.

Defense Tactic #5: Don’t put all your eggs in one basket

When it comes to protecting your assets, diversification is key. If you invest all of your funds in the stock market for example, your portfolio will suffer severely when equities underperform. However, if you spread your investment funds across a variety of different assets you will greatly decrease your risk.

Talk to your financial advisor about how you can diversify your portfolio and lower your overall investment risk.

About Brian Hendricks

Brian Hendricks is the President of Fidelity Insurance Group. Brian started Fidelity in 2003 with 0 clients. Today Fidelity Insurance Group is a Premier Independent Insurance Agency in Florida with over 3,000 families and businesses insured. Brian currently serves on advisory boards for 2 of the largest property insurance companies in Florida. Knowlege, Integrity, and Committment are his and his agency's guiding principles.
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