How to Protect Your Assets From Lawsuits and Creditors

A man stands holding a puzzle. He's got most of the pieces — estate planning, long-term care, tax planning, life insurance, annuities, investments, market protection. The one piece still in his hand is asset protection, and he doesn't know what it is. Roccy DeFrancesco's point is that he doesn't know because nobody around him knows either — not his attorney, CPA, financial planner, or insurance agent. Most people Roccy meets have no asset protection plan at all. This is pillar one of five, drawn from his book 5-Pillar Asset Protection: lawsuit and negligence protection. The other four pillars — the IRS, market downturns, long-term care costs, and estate planning — get their own episodes. Why you need it even if you're not a doctor: Roccy's headline stat: texting and driving is six times more dangerous than drunk driving — and almost nobody thinks twice about it. If you have a cell phone and a car, he says, you are a negligence lawsuit waiting to happen. Professionals can't hide behind a corporate entity. Physicians, attorneys, CPAs, financial planners, insurance agents, stockbrokers, architects — all carry personal liability. A manufacturer can hide behind its LLC. A professional cannot. Everyone else still has exposure: slip-and-falls on your property, bad handrails, teenage drivers in your cars, boats, wave runners, snowmobiles. You cannot hide assets — and anyone selling you that is selling a scam. Roccy is blunt. Land trusts pitched as anonymity tools he calls total nonsense. When you lose a lawsuit, you go back into court and the judge hands you a blank sheet of paper and asks you to list all your assets — including the hidden ones. Good planning isn't concealment. It's putting legal barriers in front of a creditor to discourage them, using laws that already exist. It cannot stop you from being sued; anyone can sue anyone for anything. What your state gives you for free (and it usually isn't much): Homestead: Florida, Texas and a few others offer unlimited protection, subject to caveats like a three-year residency requirement. Pennsylvania and New Jersey offer essentially nothing. Most states land between $5,000 and $50,000 — against an average home price of $300,000 to $500,000. The home is the hardest asset to protect. Roccy's counterintuitive advice: in a state with weak homestead protection, debt on the home is your friend. It makes the house an ugly asset. Don't rush to pay off that 30-year mortgage. Note that some claims — mechanic's liens, spousal support — pierce homestead protection anyway. Cash value life insurance: full protection in Texas and Florida. South Carolina protects $6,400. If you've got $250,000 of cash value in an IUL, that difference matters. Annuities: 100% protected in Texas and Florida, much less elsewhere. One move available only with annuities — annuitize it. The cash value vanishes and becomes a lifetime income stream, so a creditor can't demand the million dollars that no longer exists. Chasing an income stream across your remaining lifetime is close to impossible for a creditor. Retirement accounts — where most people guess wrong: ERISA plans are 100% federally protected. 401(k)s, profit sharing, money purchase, new comparability, defined benefit, even 412(e)(3) plans. SEPs are not, in Roccy's view. A SEP isn't technically ERISA-governed, so in a state that doesn't protect IRAs you may have a problem. He says CPAs recommend them because they're cheap to administer, and he tells clients to convert out of them. His rule: he won't recommend a structure that only works if a judge has a good day. IRAs: only about 26 to 28 states protect them. A 2005 bankruptcy case protects them in bankruptcy — but you don't want to file bankruptcy to save your IRA, because you've just liquidated everything else. The fix if your state doesn't protect IRAs: form a family limited liability company, create a profit sharing plan or 401(k) under it, and roll the unprotected IRA into the new ERISA-qualified plan. A couple thousand dollars of setup to make a seven-figure IRA creditor-proof. The two slides Roccy says put you ahead of 99% of advisors: Inside creditor. A defective part sends a car off the road. The injured party sues the manufacturer — and can only reach what's inside that company. The sole shareholder's million-dollar personal brokerage account is untouchable. That's the point of limited liability, and why smart business owners keep valuable equipment in a separate company and lease it back. Outside creditor. You're in a car crash. You're a doctor sued by a patient. Now the creditor is coming at you personally and can reach your house, your brokerage account, your vacation condo, the watch, the painting — everything. These are the assets pillar one is about protecting. The bread-and-butter tool: a multi-member LLC or family limited partnership. It's a pass-through for tax purposes — no double taxation for adding protection. It must be multi-member. Courts have disregarded single-member LLCs for asset protection the same way they're disregarded for taxes. Roccy says CPAs default to single-member because it avoids a tax return, and that convenience can cost you the protection. A second member can be a spouse, a child, an irrevocable trust, or a charity — 50/50 or 95/5, it just needs two. It must be formed in the correct state, and set up for legitimate reasons — family governance, growing assets. Roccy's line: if your attorney writes you a letter saying the entity exists purely for asset protection, your attorney is a moron. Why the charging order is where creditors give up: Set up correctly, the only remedy a judge can hand the creditor is a charging order: if you ever take a distribution from the entity, it goes to the creditor. The creditor cannot force a sale, cannot force a distribution, and cannot vote your interest. Then comes the part Roccy thinks almost no advisor understands. Say the LLC holds a brokerage account. You sell the growth positions and buy dividend-paying stock. You never take a distribution. At year end the LLC issues a K-1 for that dividend income — and the creditor with the charging order gets the K-1. They owe tax on income they never received and never will. Roccy calls it phantom income, and says it's why in 25 years he's personally never seen a charging order on an LLC. What actually belongs inside the entity: Real estate, especially rentals. Tenants create liability, and a cheap rental owned in your own name can put a million-dollar brokerage account at risk. Even a low-value property belongs in an LLC to wall off the rest of the estate. Brokerage accounts. No bright line, but Roccy uses roughly $250,000. Below that, a lawsuit takes two to four years and the account can be spent down on legitimate expenses. At $500,000 or a million, that isn't realistic — or necessary, if it's already titled correctly. Boats, planes, toys — less about value, more about liability. Done properly, each asset class gets its own box rather than one entity holding everything. He closes on the thermometer: most people sit at I don't know how. The job is to move you up to I did it. Resources mentioned: Roccy points to a link at the bottom of the video several times. For audio listeners: sign up to read 5-Pillar Asset Protection for free. It’s also on Amazon as 5-Pillar Asset Protection: Taking Steps to Protect Your Wealth from All Known & Unknown Creditors, though he notes he makes about $7 a copy there and would rather you read it free. Sign up for the free asset protection checkup he offers at the end. He says it takes five minutes, he only needs to know what you own and how it’s titled, and it covers all five pillars — not just lawsuit protection. Sign up for Roccy’s newsletter. The 50-state asset protection chart he references — homestead, life insurance, annuity and IRA exemptions by state — can be requested at [email protected] or 269-216-9978. This is video one of a five-part series. Pillars two through five — taxes, market protection, long-term care, and estate planning — follow in later episodes. Disclosure: Roccy is an attorney, financial planner and insurance agent, and a co-founder of an insurance marketing organization that earns money when independent agents sell life insurance and annuities — both of which are discussed in this episode. His characterizations of land trust promoters, SEP plans, single-member LLCs, CPAs' recommendations, and Ken Fisher's position on annuities are his own stated opinions. Nothing here is legal, tax or investment advice; state exemption laws vary and change, and asset protection planning must be done before a claim arises, with counsel licensed in your state. Questions, or a topic you want covered? Reach out.