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Financial Planning: Protecting Your Assets Through Proper Estate Planning

Many Americans think that the key to financial planning revolves around the quality and quantity of assets they acquire during their lifetime. What many people forget, however, is that while making wise investment decisions is a good start to ensuring financial success, the most important, and oftentimes, most difficult and neglected aspect of financial planning centers on protecting and maintaining the assets one has already acquired, which is a difficult and daunting task for most Americans to understand and face alone.

Fear not! With the help and guidance of a qualified Estate Planning Attorney, there are numerous ways people can ensure that their investments are protected and yield the highest returns. The following four actions are just some of the many actions that investors should take to protect their assets.

Personal liability insurance protects you against the financial consequences of lawsuits from individuals who may be injured while on your property or during a car accident in which you are at fault. Although home and auto insurance policies typically include some personal liability coverage, it's often not enough.

It is smart to have at least enough coverage to match your personal net worth. Many Americans are finding that acquiring "umbrella" liability insurance is the best way to get the necessary liability protection above and beyond the limits on homeowners and auto insurance policies. Umbrella liability insurance is designed to "kick-in" when the liability on other policies have been exhausted. Depending on the insurance company, an umbrella policy can add an additional 1-5 million of personal liability protection above your homeowners and auto insurance protection.

The best news about umbrella liability policies is that they are actually relatively inexpensive. This comes as a relief to many as much more money is being awarded in today's lawsuits, therefore, it is more imperative than ever to have an umbrella policy to use in the case of a lawsuit, as the cost to maintain umbrella coverage is small compared to the enormous risk and potential loss that may be suffered if you do not have umbrella coverage.

Example: If your net worth is $700,000. and your homeowner's policy provides only $100,000. in liability coverage, a $600,000. umbrella personal liability policy will cover the difference between what your homeowner's policy will cover and your net worth, thus, if you are sued and a judgment is entered against you for $700,000., your umbrella liability insurance will kick in and you should be completely covered.

One of the most important aspects of liability insurance is that the insurance company will cover your attorney fees and costs to defend you, which can be very expensive.

Additionally, the law in California requires that the insurance company covers uninsured motorist coverage for at least the minimum amount of $15,000. If you opt for the minimum amount and are later involved in an accident, you would be uninsured for some of the damages.

Example: You have coverage for bodily injury of $250,000. You are involved in an automobile accident with an uninsured motorist. Your uninsured motorist coverage is limited to $15,000. - not $250,000. You will be personally liable for all costs above and beyond $15,000., which in most automobile accident cases, will likely be significant and financially detrimental. You should make sure that your uninsured motorist coverage is the same as your bodily injury coverage to avoid the potentially drastic financial consequences of this type of situation.

Personal liability policies don't cover work related lawsuits, so if you're a lawyer, accountant, or other professional with your own practice, you should also consider professional liability coverage for potential malpractice disputes.

Businesses with storefront locations and employees need to consider a host of liability issues, including accidents and personal injury, defective product sales, and wrongful discharge, to name a few. If you are a small business owner, you should consult with a lawyer to make sure you have covered yourself from potentially disastrous financial complications that result from having a large money judgment entered against you.

How you structure your business can have an impact on your personal liability. If your business is a corporation, your personal assets generally cannot be seized to pay for the debts of the business. If your business is unincorporated, your personal assets may be subject to liens or seizure in the event of Bankruptcy or a legal settlement against it.

The trend in real estate rental property is that individuals are taking ownership in a limited liability company (LLC). The belief is that an LLC provides protection against liability for other assets held outside the LLC (most notably, the family home).

The notion that owners of rental property are protected in an LLC is simply not true.

You can be sued individually if you manage real property.

Recommendation: Have adequate liability insurance with Umbrella Coverage.

How you title your assets (home, car, brokerage account, etc.) is crucial to implementing an effective Estate Plan. There are numerous titling options one can choose from, such as sole ownership, joint tenancy, community property, tenants in common, etc., which all carry differing advantages and disadvantages depending on the particular circumstance. Titling options range from state to state and since there are potential benefits and drawbacks to each option, it is imperative that you consult with a qualified Real Estate Attorney to make sure you pick the right option for you.

In addition to creating a will, you should create a Revocable Living Trust to help minimize the impact of estate taxes. Creating a funded Revocable Living Trust during one's lifetime is one way that you can bypass the probate process when you die. A trust is a form of ownership whereby one person (trustee) holds title to an asset or piece of property for the benefit of another. You can establish a trust for a family member, friend, or anyone else you choose.

Consulting with an Estate Planning Attorney is a critical step in establishing an effective Estate Plan because there are many different types of plans that need to be tailored for each particular person. This is not an area of law where "one size fits all". Among other things, an Estate Planning Attorney can create a plan that maximizes tax advantages, while helping to protect you from creditors.

Another way to bypass the Probate process is to list your child as a joint tenant with rights of survivorship on the deed to your home. There are disadvantages in going this route, however, because when you list someone as a joint tenant, the asset in question may be subject to the joint tenant's personal liabilities, such as unpaid bills or contract disputes.

Your Estate Planning Attorney can explain the full range of advantages and disadvantages of each asset titling option, as well as help to create an estate plan that works best for you.

Reducing taxes helps protect your income, while potentially allowing you to keep more of what you earn. Looking for ways to reduce your income taxes is a smart strategy at every income level, it becomes even more important as your income level rises.

One of the easiest ways to reduce taxes on earned income is to take full advantage of retirement account contributions, including 401(k) or 403(b) plans and IRAs. Contributions to a 401(k) plan reduces your taxable income in the year the contribution is made. Contributions to an IRA may or may not be tax deductible, depending on one's income level. The contribution limits were increased in 2010 to $16,500. for those under the age of 50 and an additional $5,500. for people that are 50 years old or over. You can also reduce your taxable income by making contributions to other employer-sponsored programs that allow you to purchase goods and services with pre-tax dollars, such as flexible spending, health savings, and transportation savings accounts.

You should review your investments with an Estate Planning Attorney to help you determine the best way to reduce taxes on your investment income generated in taxable accounts. Your estate planning attorney can advise of you of what types of investments to hold in taxable versus tax-advantaged accounts, such as your 401(k) or IRA, as well as the tax efficiency of individual mutual funds. Depending on your tax bracket and investment objectives, your estate planning attorney may recommend increasing your exposure to tax-efficient investments, such as municipal bonds and tax-efficiently equity funds, in your taxable accounts.

It may be necessary to employ a CPA to deal with the tax ramifications of your proposed estate plan if your situation is complex. Other than forming the correct estate plan for you, one of the reasons hiring an Estate Planning Attorney is a wise decision is that estate planning attorneys often work with CPA'S and other professionals to create plans for their clients and thus they are in a good position to get the right people involved in planning how to best protect your assets.

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