How to Choose the Right Asset Protection Plan For You
What is Asset Protection?
Asset protection is a set of strategies meant to safeguard property from creditor claims. It is used by individuals and businesses to protect their valuables from court seizure. Asset protection exists to help reduce the risk of financial loss from judgments. Asset protection is sometimes referred to as debtor-creditor law.
The liability protection that comes with operating a business as a corporation is only part of the equation. While business liability protection is very important, it only protects personal assets when the business is sued. Whereas it is important to protect yourself from a business lawsuit, it is equally important to protect your assets if you are sued personally. Plus, you’ll want to know how to protect assets of the business, itself.
Who Needs It?
Many people are operating under the false assumption that the only individuals or companies that truly need asset protection are the extremely wealthy. It is true, the more property someone has, the more they need to protect it, but asset protection is something that many different people can benefit from. You should consider an asset protection plan if any of the following scenarios accurately describes you.
- An entrepreneur that wants to mitigate the asset risk associated with a new business venture.
- A retiree that wishing to protect property that their descendants will inherit.
- A terminally ill person wants to protect their holdings when medical bills arrive.
- Anyone that feels they have a high risk of being sued
- Any property held by business a owner
Choosing the Right Plan
As you can see, just about anyone can benefit from some kind of asset protection plan. You have most likely worked hard for what you own. It would be disheartening to have it all taken away as a result of some stroke of bad luck. Besides being a disaster, it would be pretty embarrassing. The key to identifying an effective asset protection protocol for you or your businesses is properly assessing the risks that you are taking in your current situation.
There are many different facets of asset protection. Some are more common than others. Some extremely wealthy individuals have very detailed protection strategies to secure their property and funds for generations to come. It is important to account for all risk scenarios when protecting your assets. There are a few different aspects of asset protection that nearly everyone uses in some form. The most common is insurance.
Individuals who aren’t familiar with asset protection probably don’t realize that they already have some form of it. Liability insurance, for instance, is a form of asset protection that almost every business must carry. There is a minimum amount of insurance that, by law, every business is required to carry and this varies depending on the industry that the business is in. The minimum amount usually isn’t enough to properly cover someone. It is usually recommended to purchase additional coverage to supplement the minimum requirement.
An asset protection specialist can help you determine what the adequate amount of insurance is to have for your business. According to the Insurance Journal, 75% of American businesses are underinsured. They are specialists, analyzing a business’s model and asset profile to determine the exact amount of coverage needed. This ensures that a company doesn’t overpay for insurance while ensuring they have the right amount of coverage. If you have a new business, a professional asset protection consultant will save you considerable time and money when it comes to choosing insurance coverage. Insurance is just the start for many when it comes to feeling secure.
Asset Protection Beyond Insurance
Insurance is an important form of asset protection that everyone should have. There other important aspects of asset protection that every business should consider. Regardless of the industry in which a company operates, they have a chance of being sued. The ASFAP estimates that a new lawsuit is filed every 30 seconds in the United States, a staggering number by anyone’s standards. Often, these lawsuits can be fairly innocuous for large businesses with powerful legal teams. A smaller business could be ruined by a lawsuit if they aren’t prepared for it and fully covered. It is important that any individual or business has their assets structured in a way that they won’t be lost as a result of litigation.
Common Lawsuit Causes
You should be absolutely sure that your asset protection plan is designed to protect your personal assets in the event of any one of these common causes of litigation.
- Medical Malpractice – This is a common lawsuit cause. They can be disastrous for a doctor not properly covered since they usually come with a huge payout. The ASFAP says the average payout for medical malpractice is over $5 million dollars. This could bankrupt any doctor who is unprepared.
- Car Accident – If one of your employees is injured in a car accident while on the job, it can be quite costly to your business. One example of this is if a worker is injured while getting supplies or visiting a client. All companies should be sure to have the correct amount of workmen’s comp to cover a similar event. Any business owner could be held responsible and be in debt for a significant amount of money if an automobile accident occurred.
- Wrongful Termination and Harassment — These are two other common lawsuit sparks that a company of any size may face.
The point of listing all of these scenarios is not to frighten you, but to illustrate the point that you need to be prepared for anything. It is much better to be over-insured than underinsured. Be sure to consider every possible thing that could happen to your business before you purchase insurance coverage for it. So, when you are trying to determine the level of protection needed, don’t leave any stone unturned. This is another reason that is a good idea to hire a consultant to help you with your asset protection coverage choices. Their outside perspective of your business helps them understand the scope of the risks that you are taking, so they will design the perfect asset protection strategy for your business.
Of course most of these risk strategies are associated with owning a business. Individual assets are just as important to protect. In fact, a lot of asset protection plans are designed to protect individual property from a lawsuit or other issue brought against the business they own. Of course, not everyone is a business owner. They still need to protect their hard-earned property. This is primarily something that people will want to utilize as they get into retirement age.
Retirement and Asset Protection
This is the most common time for a person to consider asset protection for their individual property. This makes sense since as in their younger years they may not have acquired enough wealth to make it worth protecting. Once you stop earning income, it is even more important to conserve what you have. There are two common methods in which people protect their assets when they retire: through trusts and through powers of attorney.
Asset Protection Trusts
A trust is the most popular way for people, including retirees, to protect themselves. When a person starts a trust, they are basically giving a third party the legal right to manage their assets. The trustee usually manages the trust. They are then tasked with the responsibility of bequeathing the property to the individual’s benefactors. An asset protection trust can be a great method of protecting your financial portfolio from creditors. It is important to understand that, when you start a trust, you are giving the trustee full power over your property and funds.
Many people use a trust because it lessens the tax burden for their heirs. This depends on what kind of trust it is, and there are many different kinds. Trusts are also good for retirees because they protect what they have and allow them to qualify for Medicare/Medicaid. This reduces the financial blow of their medical care as they age. The cost of living can escalate significantly as one ages. It is important to conserve as much as possible so that you can support yourself long after you stop receiving an income, especially if you have to move to a retirement home or assisted living facility.
Power of Attorney
Power of attorney is similar to a trust. The difference is that it gives one person the legal right to make decisions for you and your assets if you are incapacitated or unable to do so. In this case, a close family member is usually granted power of attorney rights. They will make all decisions surrounding the person’s assets when that person is unable to do so. This is a good plan for people who are very elderly and unable to make good decisions for themselves anymore.
Asset Protection Tips
These are some of the more basic components of asset protection. Everyone should be properly insured. Retirement is the most important part of your life when it comes to protecting assets. Here are a few general rules that you should follow.
- Balance – This is probably the most important aspect of a well-managed asset protection plan. You want to have a balance of control and ownership of your assets so that they don’t vanish in a lawsuit. If there isn’t enough separation between you and your property, lawyers and creditors will be able to make a case that your assets are not satisfactorily secured, allowing these predators to come after them. The key is maintain enough control so that you can decide what to do with your property but not so much that a judge could decide for you.
- Insurance is just supplemental – Insurance is not a replacement for a sound asset protection plan and the proper legal tools. Insurance is just a part of asset management overall. It should be used to supplement the legal tools such as the LLCs and trusts that you have, and to help ward off small claims. Insurance most often won’t protect you against lawsuits and it won’t pay your legal fees. There are far too many clauses written in today’s policies that allow the insurance companies to squirm out of paying a claim. This is why a protection plan is needed to supplement normal insurance.
- The earlier you do it the better it is – It can be done but it is not as effective to create an asset protection plan after you have been sued or are in danger of being sued. There is an old saying that goes “An ounce of prevention is worth a pound of cure.” Most forms of protection are more effective if they are implemented before a claim arises. There are a few that are effective if they are enacted after a claim, but it’s best to close the barn door before the horse gets loose. Do it early in the game.
Hire an Advisor
This is just an overview of what is involved in asset protection. If you are considering designing a plan you should hire an asset protection consultant. Many people are under the false impression that a lawyer or an accountant are all they need to create a proper plan. This is not true. There are aspects of it that only someone who is dedicated to asset protection will understand. In fact, according to the APS, it is something that is not usually taught in law school. If you are unsure about your advisor’s level of knowledge or ability – study up on the subject and then question them to see what they know. Protecting the wealth and property that you have worked diligently throughout your entire life for is vital, so you want to make sure you are working with an experienced expert.
Without proper asset protection, your retirement years and the viability of business could be in danger. There are many aspects of this protection that you can get for yourself. You should hire an advisor to design a protocol for you. They will leave no stone unturned when it comes to protecting assets from your creditors and lawsuits.
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Nicholas Gerlach, Copywriter and Consultant