“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 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.
The answer is asset protection. Many people, including too many attorneys, accountants, and financial planners, don’t understand the components of good asset protection. A common belief is, “Who needs it? 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:
1. Pay your claim rather than find a reason to deny it.
2. Remain solvent and scandal-free.
3. Provide sufficient coverage limits to cover any judgment entered against you.
4. Charge premiums you can afford next year, or in five years.
Obviously, prudent investors need something more than insurance to protect their assets. They need a foundational layer of protection which includes the three basic tenets of good asset protection:
1. Don’t own anything in your name.
2. Use a variety of entities, such as LLCs and trusts, to hold your assets.
3. 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 your assets and how much protection you want.
I tell my clients that protecting your assets is a little like protecting your home. You can leave your door unlocked so you can just walk in—but then so can anyone else. You can lock the door, which means you have to remember to carry your key and it takes you a little longer to get inside. You can install a security alarm system, which means you not only have to remember your key, but learn how to use the system and memorize an access code. The more security you have, the more complicated it is to get in.
At about this point in the discussion, most people will say, “Yes, but I don’t want to bother with all that complicated asset protection stuff.” 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.”
The good news is that 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.
Good asset protection requires starting early, not after you are served with a multi-million-dollar lawsuit. Start today to construct a solid asset protection plan that will help you maintain the wealth you’ve worked so hard to accumulate.