Besides helping you build wealth, your financial planner should also offer ways to help you protect it. Yet one aspect of comprehensive financial planning that doesn’t always get a lot of attention is asset protection.
The most common ways to lose assets are divorce, bankruptcy, and judgments filed against property as the result of a lawsuit. Putting assets beyond reach of a judgment resulting from a frivolous lawsuit is a basic asset protection strategy. It includes owning assets in trusts, LLCs, or corporations that are located in multiple jurisdictions.
Yet when I suggest asset protection strategies to clients, they often respond with ambivalence or reluctance. I now realize these reactions may be tied to the beliefs clients hold about money and wealth. If you respond negatively to the idea of asset protection, you may want to consider whether you hold some beliefs that may keep you from protecting yourself.
Here are a few common beliefs, or money scripts, around asset protection:
1. “Liability insurance is all you need.” While it’s a good start, liability insurance only protects you if the claim doesn’t exceed your insurance coverage, your policy is in force, your company doesn’t deny the claim, and your company doesn’t go bankrupt in the middle of a lawsuit. Three of those four exceptions have happened to me.
2. “If you are ‘lucky’ enough to have a lot, it’s petty and selfish to want to protect it.” Asset protection isn’t just about the owner of the asset. It also safeguards others, such as employees, tenants, or family members.
3. “Asset protection is only for the very rich.” You may have a small investment portfolio, some rental property, or a small business. That may not represent great wealth, but whatever you have is all you have. For that very reason, asset protection may be especially important for those without a lot of wealth.
4. “Asset protection is shady and unethical.” Many people associate asset protection with hiding assets illegally. This is not what any reputable professional will advise you to do. Ask advisors to discuss the ethics as well as the strategic value of the approaches they suggest.
5. “People in general can be trusted, so asset protection isn’t necessary.” Just ask anyone who’s ever been through a nasty dissolution of a partnership if they fully trusted their partner when they went into business and how strong that trust was at the time of the breakup.
6. “You won’t be sued unless you do something wrong.” In an ideal world, this would be true. In the world we live in, it’s surprising how often people of perceived wealth are the targets of frivolous lawsuits. Most cases are without merit and are eventually dismissed or decided in favor of the defendant, but it takes a lot of time, energy, and money to defend against them. Plaintiffs hope to gain a settlement from a defendant unwilling to go to that trouble and expense.
7. “It’s wrong to prevent people from collecting damages if they have been hurt.” If you have genuinely injured someone, of course you have an obligation to make that right. Strong asset protection includes provisions, like adequate liability insurance, that allow you to take care of legitimate obligations without bankrupting yourself.
Ethical asset protection strategies are not a way of avoiding responsibility. Asset protection is not intended to protect you from the consequences of your own wrongdoing. Its primary purpose is to protect you from the wrongdoing of others.
And the first phase of implementing that protection may be to identify and get past your own money scripts about asset protection.