Great Question! Asset protection considerations are in my opinion one the first steps in a plan for building wealth. America in general and New Jersey in particular is a very litigious place. The more assets people think you have, the more tempting a target you will become in a lawsuit, particularly an automobile accident case. Remember, attorneys who practice personal injury usually are paid on a contingency basis, typically 1/3 of what they are able collect for their client along with the costs and expenses associated with the case which the attorneys usually pay upfront. This means two things, namely cases that are accepted must involve significant damages to their client and ideally they want cases where there are “deep pockets”, meaning there is the potential for immediately collecting big money at the end of the case, usually from an insurance carrier. When insurance is limited or non-existent and a judgment is obtained collecting against the judgment does have its limitations.
In general, an auto accident judgment holder must first go against the individually-owned debts of the judgment debtor. If those assets cannot satisfy the judgment, they will then try to go after jointly-owned assets. In this case, the judgment holder can only go after the debtor’s portion of jointly-owned assets. In such situations the non-debtor owner will have to establish their percentage of ownership so that it is excluded from collection. If you are married your home is likely to be held as tenants by the entirety, meaning that both you and your spouse own what is called an indivisible interest in the property. If only one of you is named in a suit, creditors cannot force the other spouse to sell his or her interest in the house. Even if jointly-held property, such as real estate, cannot be seized, the judgment can however act as a lien on the asset which can prevent the sale or refinance of the property until the judgment is satisfied.
Can your retirement funds be at risk to pay a judgment? A majority of many people’s assets are held in retirement accounts. The good news is that while some retirement accounts can be subject to a judgment, a majority of retirement accounts are not. Retirement accounts set up under the Employee Benefits Security Administration (ERISA) are protected. A 401(k) plan is an ERISA account. A 401(k) plan takes its name from the section of the Internal Revenue Code of 1978 that created them. A 401(k) plan is funded by employee pre-tax salary contributions and often matching contributions from the employer. Contributions grow tax-free until withdrawn and the funds in these plans are portable, meaning that generally you can take the money with you when you leave your employer, typically by rolling it over into an Individual Retirement Account (IRA) or another 401(k). The exception to this protection from judgments is in the case of divorce decrees or child support orders (QDROs; i.e., qualified domestic relations orders). IRAs like the traditional IRA and the Roth IRA are not covered by ERISA but New Jersey, unlike many other states, does offer protection to these IRA accounts from claims by judgment creditors including garnishments.
Are Social Security and disability benefits at risk? Social Security benefits and most disability benefits in general are also protected from judgments. A judgment-creditor cannot garnish your Social Security benefits except for money owed to the federal government such as student loans. Such an action violates Section 207 of the Social Security Act (42 U.S.C. 407). Social Security benefits that are directly deposited into the account are protected up to a value of two months’ worth of payments. So if benefits have been deposited and have accumulated beyond that amount then they may be seized if the excess sits in the bank account.
Another source that a judgment holder may seek to collect against is your wages. New Jersey law does limit the amount that a judgment holder can take from your wages for payment against an outstanding judgment. A creditor can take money from wages through a wage garnishment which results from an order from a court or a government agency that is sent to your employer. In New Jersey wage garnishments are limited so that only 10% to 25% can be taken from your wages.
So what are some protective measures that a person can take against a possible judgment or liability? Calculate your net worth at least on an annual basis and consider taking the following steps:
- Max out your auto insurance. Don’t settle for the minimum legal liability coverage. Get as much coverage as is affordable to you. As a general rule of thumb, make sure your total liability coverage is at least equal to your total assets.
- Supplement your auto and homeowner’s insurance with Umbrella Insurance. Umbrella insurance is backup insurance that can be used in the instance that your other coverage is inadequate. In the event that your auto, homeowners, or other liability coverages are exhausted, umbrella coverage pays benefits up to the limit of the policy. For example, if you have $500,000 in auto liability and also own an umbrella policy for $1,000,000 and you get hit with a $1,000,000 judgment, your umbrella policy will pick up the additional $500,000 in coverage. Umbrella policies can be underwritten for $1,000,000 to $5,000,000 in face value and this insurance is very affordable. Anyone with any assets to protect should have an umbrella policy.
- Max out Retirement Accounts to protect your assets. As stated before New Jersey and Federal law provide unlimited asset protection to ERISA-qualified retirement plans, and IRAs. Therefore a good strategy, subject to establishing a six month to one year emergency or rainy day fund, is to maximize your contributions to your IRA or 401(k). Note that you will be restricted by annual contribution limits, which vary depending on the type of retirement plan. Retirement accounts are excellent vehicles to protect long-term savings, and provide substantial tax benefits, but need to be thoroughly understood and used with care.
- Review your deed and see how your home and other real estate and property are titled. You should consult with an attorney regarding your potential risks and whether changing the title to assets may be a consideration. Professionals such as doctors, dentists and lawyers should consider this option.
The major caveat to keep in mind is that once you know of a pending suit or liability that may be forthcoming the protective steps that you can take may be limited; therefore it is wise to take steps before a problem arises. A good financial and wealth protection plan established from the beginning when you begin accumulating assets is your best defense. This can be best accomplished by working closely with your attorney, financial advisor and accountant.
Anthony J. Vignier, JD, CFP is an attorney and Certified Financial Planner in Kearny, New Jersey. He helps his clients with legal matters, asset and income protection strategies as well as investment guidance. Please call Anthony at (800) 707-5252 or send him a message through our contact form.