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Asset Protection–An Unfair Advantage?

Among the responses to my recent columns about creating LLCs to own real estate was one from an elected official who was critical of the strategy. The accusation was that LLCs and corporations are not even "paying their fair share" under the present property tax system; he implied that making use of them was somehow not ethical.

None of the lawmakers, attorneys, and government officials I’ve talked with could come up with any scenario to fit this assertion of unfairness. In fact, the evidence would suggest the opposite. Corporations and LLCs typically own commercially classified property and pay the highest possible property taxes.

Such an unsupported assumption is tied to the broader issue of asset protection, which some people regard with suspicion. They seem to believe asset protection is sleazy at best and outright fraud at worst. They assume it means hiding assets in the Cayman Islands or in secret Swiss bank accounts.

Certainly, there are people who do exactly that, despite the fact that it is illegal and immoral as well as unethical. There are people who rob banks, too. Most of them end up in the same place—jail.

Anyone who suggests such strategies as fraudulently transferring assets or failing to pay taxes you owe is asking you to compromise your own integrity. Avoiding financial responsibility, including responsibility for your mistakes, is a clear misuse of asset protection. It is also, in many cases, illegal.

For legitimate financial advisors, asset protection is defensive, not offensive. In today’s world, with the increasing mindset that “somebody must be to blame,” anyone who owns a business or has significant net worth is vulnerable to a frivolous lawsuit. In addition, there are attorneys so lacking in integrity that they make a living filing lawsuits with little or no merit just because the defendant has “deep pockets.” They know someone is likely to write them a check rather than go through the expense and hassle of defending against the suit. Asset protection is intended to protect you from such lawsuits by making your “deep pockets” less obvious to the general public.

Another legitimate use for asset protection strategies is to reduce taxes or to mitigate the impact of ill-conceived laws. To some, this may seem unfair. In a way, perhaps, it is. A wealthier person with easy access to accountants and attorneys can take advantage of complicated strategies much more readily than a poorer person can.

A wealthier person can also travel in first class instead of coach, pay the tuition to send the kids to Harvard, and take advantage of many other benefits that go along with having money. This is "unfair" in the same way it is unfair that a young man who is six foot eleven is more likely to get a basketball scholarship than one who is five foot seven. There are vast differences in people’s circumstances, abilities, and luck of the draw. It is absurd to suggest that those who can use circumstances in their favor shouldn’t do so, just because others aren’t able to do the same.

As a financial planner, one of the things I get excited about is asset protection. It is a way to use my training and skills to save my clients money or help make their futures more secure.

I also enjoy teaching about asset protection. That includes educating those who aren’t wealthy about basic strategies such as buying appropriate insurance, setting up a small business wisely, or keeping savings in a more protected financial institution. Whether you are wealthy or are just starting out, knowing how to protect what you have is part of building prosperity and security.

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