Assets are anything you own of value. These assets can increase in value over time, resulting in unrealized gains. Alternatively, they might generate cash flow. Either way, they are appealing targets for creditors, claimants, and even legal opportunists. That’s why it’s important to create a plan to protect them. Learn more about Estate Planning here.
5 Benefits of Creating an Asset Protection Plan
- Limit Loss
- Reduce Lawsuit Risks
- Create a Family Legacy
- End of Life Planning
There are two different types of assets: dangerous assets and safe assets. Dangerous assets include real estate and business property, like tools and vehicles. Safe assets include things like stocks, bonds, and cash. If you’re wondering why some assets are considered safe while others are considered dangerous, it has to do with the amount of exposure each one offers to a potential claimant, creditor, or opportunist.
Take, for example, a rental property you own. A tenant could slip and fall on an icy sidewalk one morning, generating a lawsuit to take the property away from you in order to satisfy medical bills and other damages. Alternatively, a legal opportunist could browse public record and harass you with a frivolous lawsuit for any number of reasons. A creditor might eye the property as collateral to satisfy an unpaid debt.
Dangerous assets can also open the door to your other assets being targeted. For example, if a tenant slipped and fell and the building itself was not of enough value to be liquidated towards a settlement, they then might attempt to target other assets under your name until their monetary demands are satisfied through the sale of other properties.
By contrast, safe assets are not as accessible for lawsuits, although they can get pulled into them eventually. This is because these types of financial records are not public. Nobody knows how much money you have in your checking account, and the bank can’t legally tell them. By contrast, someone cruising for cash can see a zoning law violation on a property, look up the owner, and start creating frivolous lawsuits to make that person’s life difficult or even take their assets.
Keep in mind that safe assets can still be targeted—by creditors, for example. There are certain situations where you relinquish the right to anonymity, like if the creditor is the IRS and you haven’t paid income taxes in five years. Then, they can tap into your assets and garnish your pay to satisfy the debt.
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What is Asset Protection Planning?
There is a way to protect your wealth, and no, it’s not copying the strategy of Scrooge McDuck by having all your cash deposited in a skyscraper-sized safe where you can swim through gold and silver. Rather, it involves creating legal structures around your assets that obscure its ownership. The more obscure this asset ownership is, the easier it is for your assets to rest secure from claimants, creditors, and opportunists.
For example, if your rental property is not in your name, but in the name of an alternative legal entity, like a corporation, then someone who slips and falls on the sidewalk is going to have a much harder time targeting you and your personal wealth.
Perhaps the best thing about asset protection planning is that its bark is often worse than its bite, so to speak. Like a small dog with a loud bark that scares away unknowing criminals, an asset protection plan can make lawyers representing your potential legal nemesis totally disinterested in pursuing legal action. This is because the formula they use to determine a likely settlement will yield a much less compelling number if they have no idea how much you are really worth.
For example, they may tell a tenant that it’s not worth suing you for five million because they don’t even know if you have that amount of money. Meanwhile, you could have a net worth of $10 million, which has been obscured with asset protection.
Who Needs an Asset Protection Plan?
Even if you don’t have a $10 million net worth, an asset protection plan is still a good idea. If you have any kind of income generating property, like real estate rentals or business equipment, it’s a liability waiting to happen. You’d be surprised by the number of opportunistic people who are proactively looking for lawsuits. Then of course, there are well-meaning, honest people who will pursue a lawsuit to rectify actual damages. And if you have any kind of outstanding debts, whether for business or personal use, your assets can also come under attack. For all these reasons, a small business owners and entrepreneurs should proactively put an asset protection plan in place.
If you have personal net worth that is not business related, you should also have an asset protection plan. This is because of a fourth potential threat we have not yet mentioned: when the you want to bequeath your wealth, the IRS will attempt to take a decent portion of that through taxes, like the inheritance tax. Thankfully, there are asset protection strategies to minimize this.
5 Benefits of Creating an Asset Protection Plan.
Now that we’ve gone over what an asset protection plan is and who needs one, let’s talk about a few of the benefits of putting one in place.
1. Limit Loss
We have already touched on a few different potential iterations of this idea, but the basic premise to this component of asset protection is that you will limit your losses in the event that you face a lawsuit.
If a corporation or trust obscures your personal name associated with an asset, you won’t have to face the music of having your nest egg or your personal residence attacked in a lawsuit. If you can compartmentalize your business, such as putting each property in a different corporation, you can also reduce losses as well.
If you’re a business owner with a real estate portfolio, for instance, creating a separate limited liability company for each and every piece of property can obscure them from a disgruntled tenant, future creditors, or even a family member. Some states are particularly conducive to forming these types of legal structures that afford anonymity, like the Wyoming LLC.
2. Reduce Lawsuit Risks
Asset protection plans prevent lawsuits from happening in the first place because disgruntled or opportunistic parties will have no idea how much you or your business personally owns. The prospect of putting in a lot of time and effort to earn a paltry settlement will motivate the lawyer to guide their client down a different path, or focus on areas that do less damage—for example, suing to recover damages for the value of one property, instead of your entire portfolio.
If you hide assets from public record, you are going to drastically reduce your exposure to legal complications.
3. Create a Family Legacy
Compartmentalizing assets from your personal net worth is also a way to create a family legacy. You can use something like a land trust or trust fund to create a third-party entity that holds your assets under its name, to be administered by a responsible fiduciary, like a lawyer. This can prevent unscrupulous or opportunistic people within the family from seizing these assets during personal conflict, like a death or divorce.
A lawyer specializing in the creation of dynasty trusts can also facilitate the transfer of wealth without it getting chipped away by federal and state inheritance taxes. In this regard, an asset protection technique that works to protect net worth in one state may not work in another, so it’s important to work with a lawyer who understands local nuances and how they affect inheritance.
4. End of Life Planning
Asset protection planning also offers peace of mind for end of life planning. Remember that the transfer of wealth from one generation to another can trigger taxes and fees that eat away at its value.
Then, as mentioned above, there can be disgruntled parties and legal opportunists within the family who take the opportunity afforded by adverse events, such as a death, to contest your final wishes. Asset planning can make sure your last will and testament are carried out. Contact us for a free strategy session to learn how easy it can be to get this peace of mind.
Asset planning gives you a great degree of control around your assets, not only for the legal and risk reduction reasons mentioned above, but also financially.
For example, asset planning can provide certain tax advantages that you otherwise wouldn’t be able to take advantage of. One example involves safe assets, like stocks and bonds. If held under your name, you cannot take advantage of certain tax write-offs, such as money invested in the curation and maintenance of your stock portfolio (seminars, newsletters, training, software, accounting services). If you form your trading activity as a business, you can start writing some of these expenses off your tax return.
How Do I Protect My Assets?
Creating an asset protection strategy can be complicated, because in addition to the inherent complexities to effectively protecting personal assets and achieving wealth preservation, laws vary from state to state. For these reasons, an estate planning attorney is a good resource for estate planning. Such an attorney will help you navigate the confluence of family law, charitable planning, creating an estate plan, reducing personal liability, and the tax implications of all the above.
Though you might think meeting with such legal counsel is only necessary for end of life planning as you approach retirement, it might actually behoove you to meet sooner than that. This is because protecting one’s assets is not just a matter of transferring wealth to a family member, but also an ongoing strategy for mitigating the power of potential litigation and creditor claims.
To this end, an attorney can help you create a Retirement Plan with something like a family limited partnership or a trust, particularly a revocable trust. Since a revocable trust is changeable within in your lifetime, and you can certainly elect to be a beneficiary of the said trust to enjoy the benefit of your property during your lifetime.
Asset Protection Planning Guards Your Wealth from a Potential Creditor or Lawsuit
Asset protection is something that anyone with net worth can benefit from. While the sole proprietor of a business can benefit from business succession planning, an asset protection trust is a legal strategy that can also be of immense benefit in regard to your personal assets, like your home, cash, and investments.
In addition to the protection it affords, asset protection can also provide tax advantages. You can learn more about these strategies by signing up for our Tax and Asset Protection Workshop.
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