The rise in litigation filed by plaintiffs and their lawyers has created a threat to anyone with a positive net worth.
Forbes wrote an article last October, detailing 6 Asset Protection Strategies To Shield Your Wealth, of which a few strategies will be listed here amongst others.
Asset protection consists of a range of strategies that can reduce your risk and offer peace of mind. While asset protection can be very inexpensive, it is often skipped by many in favor of luck, hope, and friendship.
Here are some best practices / strategies we employ for our own asset protection needs:
- Create Business Entities to Shield Assets
- Formalize Informal Partnerships
- Keep Assets Separate
- Use Life Insurance as a Tax and Asset Shelter
- Keep High Liability Limits on Property Insurance / Buy Umbrella Insurance
Let's take a high-level look at each.
Business Entity Formation
First and foremost, businesses, and the assets contained within, need to be held inside a formal entity. Whether they are traditional LLC's or Corporations, keeping your assets locked within the protections of an entity allows a number of benefits.
Entities help you remain free of certain exposures that lawsuits and taxation bring. Depending on your needs, additional tax filings (such as a Sub S Corp filing) can remove you from personal tax exposure that your company may bring to your family.
Tax offsets are a great way to reduce your financial risk and can only legally be obtained via a corporate entity and the proper filings that follow. All of this should be considered whether your business is small or large. Consult your legal team and accounting firm for more information and suggestions.
Because handshake deals can be overridden at the flick of a switch, it's imperative that your attorney draws up the proper documentation to protect each partner's interests in a company.
Even (and perhaps especially) when a company is merely an "idea," it's vital to address these concerns. Think Facebook and the Winklevoss twins on that one. Imagine that happening to you?
Keep Assets Separate
If something tragic were to occur within a family or business, the exposure can be gargantuan.
Assets in many states, especially in marriage, are commingled. In a divorce, assets are split evenly (or unevenly in some cases) and / or sold to help pay mounting legal fees.
In business, it can be just as muddy, even with a formal partnership in place. Lawsuits can tangle up assets for years, and you can still lose as values may drop over time, even if there is a victory in your suit.
Life Insurance Protection
Most people don't understand the unique and powerful benefits of a properly designed life insurance strategy as a financial protection tool.
Buying life insurance to give our families a financial windfall in the case of death is one avenue, but seldom is the most important aspect of life insurance fully revealed.
A properly designed (and funded) life insurance policy holds and protects all your current wealth, allowing you unlimited access to borrow it out to use as you please (education, travel, purchases of any kind), and pay you guaranteed interest at the same time. This same tool can also help reduce your tax exposure.
Umbrellas and High Liability Insurance
Umbrellas and high liability insurance is something that protects your hard assets like virtually no other.
As an example, the average automobile insurance policy has what are known as 100 / 300 / 100 limits. This means that if you were in an "at fault" car accident, the insurance company would pay for the damage you make to others or their property, up to $100,000 per person per incident / $300,000 for everyone involved, and up to $100,000 for damage to property (their car, buildings, signs, etc.).
In this day and age, especially in the Pacific NW, there are many cars on the road worth more than $100K. Furthermore, anyone who has been admitted to hospital, knows $100K doesn't go far, especially with intensive care costs.
Now, imagine this scenario where you own millions of dollars in real estate or have business holdings. You would be exposed in an immense way. This is where higher liability coverages are very important and so versatile. That same scenario with a simple $1MM umbrella would have completely covered you, and saved your assets if you were sued.
Talking to quality professionals is vital to carving out the right asset protection strategy to suit your needs. Feel free to contact us should you require recommendations to the right professionals, all of whom we have used and work with today.
Further Reading: Ten Rules For Asset Protection Planning