Clients often ask about ways to protect their assets and limit liability in the event of future creditors. Transferring assets to trusts, limited liability companies, or into the names of others (for example, a spouse or child) may work in some instances but all have their drawbacks. Some states allow a grantor to create a self-settled asset protection trust, which safeguards assets from creditors and keeps the assets available to the grantor. However, New Jersey law does not allow such trusts. Limited liability companies provide protection for legitimate business or income-producing endeavors, such as a rental property, but not for personal assets. And spouses may be liable for their partner’s debts in certain circumstances. What, then, can be done?
One option to consider is purchasing umbrella liability insurance. An umbrella policy provides additional coverage beyond the limits of homeowners or auto insurance policies. An umbrella policy typically covers the following:
- Personal injury
- Property damage
- Slander, defamation, or libel
- Legal defense costs
Umbrella insurance kicks in when the limits of your home or auto policies run out. For example, assume you get into a car accident and are sued. A judgment (or settlement) determines you are responsible to pay $1 million. Your auto insurance coverage policy is for $500,000. Once you pay the deductible, the insurance company would pay $500,000. The umbrella policy would cover the remaining $500,000. Without the umbrella policy, you would be personally responsible for that remaining amount.
Typical umbrella policies may be purchased in amount ranging from $1 million to $10 million, and the premiums are relatively inexpensive. The amount you should purchase depends on your total assets and your existing policies’ limits.
Businesses are also eligible to purchase umbrella insurance. Commercial umbrella policies are often purchased for up to $25 million in coverage to protect a business from expenses not covered by general liability and commercial auto policies in the event of a judgment or settlement. This could be the difference between continuing operations or being forced to go out of business.
Umbrella insurance does not cover every situation. Typical exclusions include intentional or criminal acts and liability associated with contracts into which you have entered. It is important to read the terms of the policy to ensure that the protection you are purchasing is adequate for your situation.
Some policies may also provide coverage if you are sued in your capacity as a director of a nonprofit organization or as the executor of an estate or trustee of a trust. Typically, people do not think about this risk when they accept the position of executor of an estate, and that could be a costly mistake. With the rise in blended families and when emotions are already on high alert after the death of a loved one, family squabbles often morph into lawsuits claiming mismanagement or negligence by the fiduciary. Umbrella insurance might offer some protection here, as could other types of insurance specifically designed for these roles.
We recommend you consult your insurance agent and other advisors to determine whether umbrella liability insurance – and how much – is right to protect you and your family.