You’ve worked hard all your life to accumulate a little personal wealth and, sadly, just one frivolous lawsuit could wipe it all out.

In today’s litigious culture, a good number of people have to take steps to protect their assets from lawsuits and illegitimate creditor claims.

The good news is, you don’t have to be extremely rich to take some action.

There are some steps you can take which include ensuring that you have enough liability coverage on your homeowners’ and auto insurance policies, and purchasing an umbrella policy providing additional coverage above the limits on your primary policies.

But you shouldn’t wait until trouble is at your door to take action. If you do, trying to protect your assets from a claim would do more harm than good.

Michael Busch, a certified financial planner, said “It is imperative that asset protection strategies be implemented before there is a problem,” Busch said. “Once a creditor has a claim or is likely to have a claim, any subsequent transfer may be deemed fraudulent. If a court believes a transfer was made with the intent to defraud legitimate creditors, the transfer will not be upheld.”

Protecting your personal assets from litigation can become quite complicated. So, if you have a lot to protect, it’s strongly advised that you should hire a lawyer and financial adviser.

But before doing so, you need to be sure that you have enough assets to make the effort worthwhile.

“Most people, if they don’t have a sizable portfolio or net worth to protect, it’s not feasible to take the extra steps to protect it,” Busch said. “Generally, someone’s not going to bother filing a lawsuit against someone who they know has few assets.”

Let’s begin with the basics.

If you own a home, your homeowners’ insurance protects you against financial loss if you’re found responsible for someone injured on your property or for property damage. Your auto insurance will do the same thing in relation to your automobiles. Liability insurance will pay for bodily injury, property damage and some additional expenses of other drivers, their passengers and your passengers should you or a driver covered by your policy causes an accident.

However, liability insurance doesn’t pay for damage to your own vehicle. So, if you want more liability coverage than provided by your primary insurance policies, you can buy a separate personal umbrella policy.

Umbrella coverage applies only to losses over a large dollar amount, but the terms of coverage are at times broader than those of underlying policies. Because umbrella policies vary, you should ensure that the insurance agent or company fully explains the coverage.

You have some built-in protection under the law. Wages may be garnished only to pay child support, back taxes and defaulted student loans, while retirement plans, such as individual retirement accounts, 401(k)s, 403(b)s, profit-sharing plans and pensions can’t be seized by creditors. Creditors are also unable to seize the cash value of a life insurance policy or death benefits from the policy.

Mr. Busch said if you’re worried about future litigation, you could always use part of your money to pay down your mortgage. Doing so transfers your money into the protected asset, i.e., your home. “If you had that same money in a bank account, a lawsuit could get to it, but if it’s in your house, it’s protected,” he said. “You’re taking exposed assets and converting them into assets that are creditor-protected.”

You should consult an attorney for more complicated financial situations. This is especially true if you’re already in financial trouble.

“If you’re already in financial trouble, there is no surefire method to protect your assets from rightful creditor claims,” said Bill Wallander, a partner at Vinson & Elkins LLP in Dallas. “In that situation, it’s a matter of whether you can restructure things with your creditors through negotiations, and if you can’t restructure your financial challenges with creditors, then the individual needs to consider whether bankruptcy is appropriate solution.”

Bear in mind that the new bankruptcy law, which will become effective in October, will make it harder to file for bankruptcy.

“If you know that you’re already insolvent or if you’ve already been sued and you start to take steps to protect your assets — transfer your assets into a trust or family partnership or try to convert your assets into exempt property — that may raise questions as to your intent ,” Wallander said.

Beyond homeowners’ and auto insurance, here are three general scenarios of consumers and what they can do to protect themselves.

If you reside in an apartment, you should consider renters’ insurance. There are several benefits to renters’ insurance.

First, a landlord’s insurance will not cover a renter’s personal property. Second, having renters’ insurance will cover your belongings and pay you extra living expenses if a fire or other disaster forces you to move temporarily from your rented home.

Renter’s insurance also provides liability protection. Should someone slips and falls in your apartment and sustains a serious injury, he could sue you for financial damages.

Policies for renters’ insurance vary, so be sure to inquire with the insurance company about liability limits.

It should be noted that a young apartment dweller that doesn’t have much in the way of assets probably doesn’t need an umbrella policy.

For a small-business owner, “The structure of the entity is going to be the solution,” said Michael Wald, an estate planning lawyer in Texas. What is needed to be done is to separate your personal assets from the assets of your business. That can be accomplished by how your company is set up under the law.

“They ought to think about making sure they incorporate their business and put in an entity that’s creditor-protected like a C corporation and an S corporation,” Busch said.

In those two corporate structures, shareholders have limited liability and can only lose what they’ve invested in the business, while personal assets aren’t subject to liability. This contrasts sharply with a sole proprietorship structure which leaves you wide open because the owner has unlimited personal liability for all business’ debts.

“You’re indistinguishable from your business, so they can go after your personal assets and business assets,” Busch said.

Anyone who is in the latter situation would be well advised to keep their umbrella liability policy up to date.

A controversial tool is the family limited partnership (FLP) A family limited partnership offers extra asset protection to wealthy families. The FLP is a separate legal entity requiring its own tax return.

“In the typical scenario, family savings, investments and titles to business and real estate interests are transferred into the FLP, which if properly structured, protects those assets from potential claims and lawsuits,” said California attorney Robert J. Mintz.

But the IRS, which has recently won a series of court cases involving FLPs, say they’re tax-avoidance tools.

The most recent case involved a family limited partnership of Texas millionaire Albert Strangi.

The U.S. Court of Appeals for the 5th Circuit affirmed an earlier tax court ruling that found that assets transferred into the partnership should be included in Strangi’s estate and thereby are subject to estate taxes.

However, Wald said that family limited partnerships are still a valid asset-protection tool. However, they must be more carefully constructed.

“ … go to great lengths to make sure that you form it (properly) and that you operate it as an FLP. You certainly can’t treat it as your own bank account,” said Wald.

If you would like more information regarding asset protection, trusts, family limited partnerships or the subject of this article please call or email our office.