Protecting Assets

How do you protect the assets you have in the case of unexpected events? Learn about different ways you can keep your assets safe and reduce your liability.

Keeping savings safe

To keep your savings safe, make sure you are depositing savings in a bank account that has deposit insurance, which is insurance from the government that protects your money in the case of a bank run, a situation where many people try to withdraw from their accounts at once. Even if everyone took their money out of a bank, you would not lose the value of money in your account.

In the U.S., the Federal Deposit Insurance Commission (FDIC) protects up to $250,000 per account. If you invest money, you should always keep some savings separate from your investments to keep as an emergency fund since your savings will be protected even if your investments lose their value.

Creating a will

If you have not already, start to plan for who or what institutions you wish to receive your assets after you pass away. 

To plan for what will happen to your assets, you should create a will, a document that explains your wishes for your assets. The people who you wish to inherit your assets are called beneficiaries, and the assets you leave behind are called your estate.

If you do not create a will or name beneficiaries called  on your financial accounts, a court will most likely decide who will receive them. Wills are also necessary if you have children who are minors because they state who will become the child’s legal guardian in the case of your death.

Usually in a will, you name an executor of your estate, someone you trust who is willing to take on the responsibility of making sure your wishes are followed. You also usually need to have witnesses to the signing of a will for it to be valid.

Trusts

Trusts are legal agreements that allow a trustor, the person creating the trust, to set aside assets to benefit a trustee, the person receiving the assets in the trust. 

If you create a living trust, you can set aside your assets and grant a trustee the right to manage them on your behalf while you are alive. You can also designate the beneficiaries of your trust who will inherit the assets in it when you pass away.  Having a trust can prevent your estate from going to a probate court. At probate court, a judge will decide how your assets will be distributed after you pass away, which can be a lengthy process and may conflict with your own wishes for your assets.

Types of Trusts

The main types of trusts are revocable and irrevocable trusts. 

A revocable trust means you can take back control of it at any time and change its terms, while an irrevocable trust means that you cede control over your assets to someone else who manages them for you. If you have an irrevocable trust, you still own the assets, but you don’t get to decide whether they are kept in a certain bank account or investments. 

An irrevocable trust can protect your assets if you are sued, but you also don’t have the ability to take back control of your assets if you want to do so later. A reason you might create an irrevocable trust is to reduce the total amount of taxes that can be collected on your estate when you pass away.

Declaring a Homestead

If you own a home and it is the main place that you live, you can protect it from being taken from you or from losing all the equity in the home, the money that you would gain from a sale of the home, by declaring it a homestead. To declare a house your homestead, it must meet certain legal requirements to count as your primary residence, the place you live for most of the year, and you may have to prove you spend a certain number of days per year in it.

Each country and states have their own laws regarding what declaring a homestead protects you from, but usually it means that if you are sued, or if you must declare bankruptcy, not all the equity that you hold in your home can be taken from you. Your home is protected from a forced sale up to a certain limit depending on the law.

Declaring a homestead can also reduce the total amount of property taxes you need to pay on the property.

Homeowners’ or Renter’s insurance

Whether you rent or own a home, you need insurance to help recover from accidental damages or thefts. Homeowner’s insurance is required for mortgages.  Most landlords require renter’s insurance, which covers not only the renter’s liability for damaging their rental unit but also the landlord’s liability for the renter’s belongings.

Homeowner’s insurance and renter’s insurance do not usually cover natural disasters such as floods or earthquakes, which require separate insurance policies, but they do protect the value of the items in your home. If there is a burglary you can file an insurance claim for the stolen items. 

Homeowner’s insurance also can cover personal liability, which protects you if someone sues you if they injure themselves on your property. Homeowner’s insurance can cover either the current value of your home and belongings, the replacement cost, which is how much it would cost to replace your home and belongings when you file the claim, or extended replacement cost, which goes above and beyond the current cost to rebuild your home or replace your valuables.

Other Types of Insurance

Umbrella insurance gives you added extra protection against lawsuits or damages that go beyond what is covered under your home or auto insurance. If you have assets you want to protect, it might make sense to add an umbrella insurance policy so that you are covered in case you are found liable for any reason and you must pay the plaintiffs, or the people suing you, a certain amount in damages. 

Life insurance is a benefit that is paid to beneficiaries of your choosing when you die. You usually pay a premium, a monthly cost, for this insurance and the amount that you are insured for depends on your age and health. If you buy term life insurance, you pay a monthly premium for a certain number of years, and if you die during that period, your beneficiaries receive the insurance benefit. If you buy permanent life insurance, you pay into the insurance policy until you die. People often purchase life insurance to ensure financial protection for their minor children or surviving spouses if they die.

Marriage and Prenuptial Agreements

Depending on where you live, being married can change how your assets are treated. In places that follow common law for marital property, including the UK and most of the U.S., all your assets, whether you acquire them before or after your marriage, are considered your own unless you hold them jointly with your spouse. In places that follow community property, such California and Arizona, any assets you earn or receive after you marry are owned equally by you and your spouse. You can still hold separate property, assets you had before you were married.

If you wish to keep your assets separate during marriage or determine how to divide them in the case of a divorce, you can sign a prenuptial agreement. In these agreements, you can decide which assets you plan to hold jointly or separately and how you would split your assets if you divorce. Pre-nuptial agreements often have a negative stigma, but they can make a separation less contentious and give you peace of mind. 

[1] Julia Kagan, “What Is a Trust?,” Investopedia (Investopedia, July 8, 2022), https://www.investopedia.com/terms/t/trust.asp

[2] Julia Kagan, “What Is a Homestead Exemption?,” Investopedia (Investopedia, August 4, 2022), https://www.investopedia.com/terms/h/homestead-exemption.asp

[3] The Investopedia Team, “Homeowners Insurance Guide: A Beginner’s Overview,” Investopedia (Investopedia, July 29, 2022), https://www.investopedia.com/insurance/homeowners-insurance-guide/

[4] Julia Kagan, “Umbrella Insurance Policy,” Investopedia (Investopedia, August 23, 2021), https://www.investopedia.com/terms/u/umbrella-insurance-policy.asp

[5] “Living Together and Marriage: Legal Differences.” Citizens Advice. Accessed August 20, 2022. https://www.citizensadvice.org.uk/family/living-together-marriage-and-civil-partnership/living-together-and-marriage-legal-differences/

[6] Will Kenton, “Community Property,” Investopedia (Investopedia, July 26, 2022), https://www.investopedia.com/terms/c/communityproperty.asp

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