“It isn’t how much money you make that matters; it’s how much you get to keep.” Recent years have shown most investors that an unfavorable stock market or global financial crisis can threaten their nest eggs. A potentially greater threat, however, is less obvious. Stock-market losses won’t ever wipe out a diversified portfolio. A lawsuit could.
Most people believe they would have to do something terribly illegal to actually lose their assets. Sadly, that is not the case. Even a frivolous or questionable lawsuit can result in the filing of a judgment or an unreasonable damage award from a runaway jury. In addition, a person can be found innocent of any wrongdoing and still be financially devastated by the legal expenses or business consequences of a lawsuit.
Liability Insurance May Not Be Enough
Many people, including too many attorneys, accountants, and financial planners, don’t understand the components of good asset protection. The first reaction from both professionals and clients is often, “Who needs asset protection? I’ve got liability insurance.”
However, liability insurance provides only a first thin layer of asset protection. You have no guarantees that your insurance company will:
Pay your claim rather than find a reason to deny it.
Remain solvent and scandal-free.
Provide sufficient coverage limits to cover any judgment entered against you.
Charge premiums you can afford next year, or in five years.
Prudent investors need more than insurance to protect their assets. They need a foundational layer of asset protection based on three strategies.
The Three Basic Tenets of Good Asset Protection:
Don’t own anything in your name.
Use a variety of entities, such as LLCs and trusts, to hold your assets.
Place the jurisdiction of the entities in a variety of states.
While these fundamental principles are simple, designing and implementing an effective asset protection plan can be complex, depending on the types of assets you have and how much protection you want.
If you own one or two rental properties, for example, a relatively straightforward strategy is to place each one in a separate LLC. A small business can be incorporated rather than held as a sole proprietorship. More extensive real estate holdings can be held in land trusts formed in different states.
A Little More Paperwork, a Lot More Protection
Protecting your assets is a little like protecting your home. You can leave your door unlocked so you—and anyone else—can just walk in. You can lock the door, so you have to have your key to get in. You can install a security alarm system, so you have to carry a key and memorize an access code. The more security you have, the more complicated it is to get in.
Good asset protection will demand some additional paperwork and, in most cases, initial help from attorneys or accountants. Still, the increase in complexity may be less than you might anticipate. A properly designed plan will be just complicated enough to protect your assets, but not so convoluted as to be “complication for complication’s sake.”
Taking steps to place your assets beyond the reach of a frivolous lawsuit or judgment creditors can cost less than some insurance premiums and far less than defending against a lawsuit. Even more, a properly designed asset protection plan acts as a buffer between your wealth and any claims. It will stop most frivolous lawsuits from ever being filed or create sufficient leverage from which to negotiate a reasonable settlement.
The Best Asset Protection Begins Early
Good asset protection requires starting early, not after you are served with a multi-million-dollar lawsuit. Mark A Stimpson & Associates, Inc. has helped clients with their asset protection planning for many years. We can help you construct a solid asset protection plan that will help you maintain the wealth you’ve worked so hard to accumulate.
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