Protecting Your Down Payment

Q&A on Protecting Your Down Payment

Extract of Question

So how do we keep this money safe and allow it to still bear interest? Based on advice from my tax attorney, we’re thinking of running it through a shell LLC that we’ve set up for other purposes to protect it from lawsuits. If I did that, I could open up a Vanguard account in the name of the LLC and put it in Money Market funds or Treasuries until it’s needed. Any other creative ideas?

Extract of Answer

As far as keeping this money safe, there are two big risks you need to look out for. The first is investment risk. If you invest in risky stuff (like stocks) you might lose a big chunk of the money right when you need it. You keep the money safe from this risk by investing in safer investments- savings accounts, CDs, short term bond funds etc. It’ll earn interest, but probably less than inflation (thanks to the Fed), but with this money the return OF your principal is more important than return ON your principal.

The second risk is from lawsuits. I don’t know the laws in your state, but almost surely money in a typical old taxable brokerage account or bank account is completely exposed to your creditors in the event of a work-related or non-work-related lawsuit. The best protection against these is adequate liability insurance- malpractice and umbrella. I’m not sure I’d go to the trouble of complicated asset protection techniques (such as those you need an attorney for) for an amount as small as a couple of hundred thousand dollars. I’d probably just run the very low risk of a lawsuit for more than your insurance limits. You may feel differently, but keep in mind it’ll likely cost a four figure amount of money (perhaps more) to set-up LLCs/corporations etc to protect this. You say they’re already set up, so perhaps the cost is minimal for you. If it wasn’t, I’d meet with an asset protection attorney in your state to discuss just how much asset protection this would provide (as well as ensure its legality).

Remember also that when you put the money into the LLC, it’s not exposed to your creditors, but it is exposed to the creditors of your LLC. If your LLC also holds a toxic asset like rental real estate, that may not be a good idea.

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