What Is an Asset Protection Plan?
Simply put, an asset protection plan is a blueprint that legally secures your assets from creditors and preserves them your use and enjoyment as well as that of your intended beneficiaries. It’s important to note that a truly effective and efficient asset protection plan cannot exist in a vacuum. Ideally, it should be a part of an integrated estate planning strategy that includes your short-term and long-term financial goals.
It’s equally important to be aware that when it comes to asset protection planning, there is no one-size-fits-all technique or shortcut that can be implemented to facilitate the process. Each asset protection plan should be crafted according to your individual needs and circumstances. Any professional planner or other professional who tells you otherwise would be doing you a disservice.
While the main goal of asset protection is clear, to safeguard your assets, there are added benefits as well. An effective plan can deter litigation, present you with legal options and provide an incentive for an early and cost-effective settlement in your favor. It also takes tax planning into consideration.
Asset Protection Insurance Has Big Drawbacks
A home or business limited liability insurance policy is the most basic type of asset protection. If a guest, or even a complete stranger, or a worker meets with an accident on a personal or business property you own, liability insurance mitigates the extent and amount of your legal responsibility. Liability insurance is a good first step and should be a part of well-drawn asset protection plan. It can help protect your assets from lawsuits, but it does have its drawbacks. It fact is has several major drawbacks.
Insurance Drawback #1 – Emboldens Predators
In some cases, this type of insurance can actually embolden predatory creditors since insurance money is often seen as a low-hanging fruit. The thought is, “Well at least we can get something. And once we get the insurance we can go after the person for the rest.”
Insurance Drawback #2 – Policy Exceptions
Ever try to make a claim? Liability insurance policies are written to protect the insurance company. There is intense competition to keep premiums down. As such there are much more extensive policy exclusions and restrictions outlining when they do not have to pay a claim. This can be especially true if you work in a field that carries a high risk for lawsuits, such as obstetrics or construction.
Insurance Drawback #3 – Doesn’t Cover (False) Fraud Claims
A high percentage of civil lawsuits, rightly or wrongly, contain the word “fraud” in them. This is because the attorney may be able to collect three times the damages from you. Plus, your opponent getting a fraud ruling means you may be forced to pay your opponent’s attorney fees. The problem is, when fraud is claimed, many insurance companies point to the fraud exclusion and tuck tail and run.
Insurance Drawback #4 – Policy Limits
This is a big one. Many lawsuits are for far beyond the limits of coverage. Having a $1 million policy is fine. However, if you are being sued for $5 million the plaintiff’s attorney will look to you for the other $4 million. No matter how much your coverage is, you can always be sued for more.
Additionally, there are instances when an insurance carrier becomes insolvent and you’re left high and dry – and vulnerable to frivolous claims.
So, it’s a good idea to carry liability insurance on all your personal and business properties. But an effective asset protection plan has to go beyond the security that this type of insurance provides.
Asset Protection Planning
Before you can decide on what asset protection instruments to use, it’s good to first be aware of and realistic about your short-term and long-term financial goals. How much do you need to maintain your current lifestyle until you retire? What are your current and future sources of income? Are your current assets already protected from creditors by virtue of your state’s exemption laws? If you plan to acquire future assets, will these still be protected under the same laws? Keep in mind that assets can refer to real estate, savings, stocks and bonds and other similar financial instruments. It can also refer to your business or businesses as well as your professional practice.
When you have a clear and complete financial picture, you can then structure an estate plan, which will deal with the assets that will be left to your heirs and beneficiaries. Who will take care of your minor children, spouse and other dependents if you die unexpectedly? An estate plan should also provide you with options regarding your future care should you need it.
If you don’t have the extremely expensive extended care insurance, how can you protect your assets from nursing home costs? Should you do a Medicaid spend down and pass them down to your beneficiaries? Or should you set up a Medicaid trust instead, so you can actually use your assets? With a Medicaid trust you don’t have to worry about your kids losing the assets when they are sued or run into tax problems. It is only within a realistic financial framework and pragmatic approach to estate planning that you can craft a truly effective and comprehensive asset protection plan.
Custom-Made Asset Protection Strategy
Ever-changing theories of liability have placed asset protection security at the forefront of asset planning. This is especially true for individuals who work in professions that carry a high-risk for litigation and who have assets they wish to secure from lawsuits. There are several asset protection instruments that are available today, certainly a great deal more than even just a decade ago.
However, there is no single asset protection vehicle that can promise, much less deliver, complete protection all the time. A good planner works with you to assess your individual circumstances, your personal and professional risks and exposure, as well as the actual assets you possess. Your financial goals for yourself, your business and your beneficiaries should be seriously considered to come up with an asset protection plan that is tailored-made for you. If a planner whips up an asset planning template, run, don’t walk to the nearest exit and don’t look back.
It’s also a good idea to monitor your asset protection plan regularly to make sure it continues to reflect and support your current situation and future financial goals. As you acquire more assets, whether for your business or for your own personal enjoyment, as your family and business grow or contract – each major change in your life should be a reason to assess the strength and relevance of your asset protection strategy.
Asset Protection Strategies for Business Owners
As a business owner, you have to make sure your personal assets are separate and distinct from your business assets. Doing so prevents an especially determined creditor from going after both sets of assets. There are a number of ways you can build that wall between your business and personal assets. You can set up a limited liability company (LLC), an S or a C corporation. A sole proprietorship, personal DBA or general partnership is a recipe for disaster because a business lawsuit can result in the seizure of personal assets. An LLC has a more flexible structure than a corporation. It is also simpler and less expensive to set up and maintain, while providing the same level of protection, if not more in certain aspects. For these reasons, an LLC is fast becoming the favored option over a corporation.
You can also ‘house’ your company within a trust to add another layer of protection. Again, make sure the asset protection plan you craft for your business is customized for your needs and can stand up to the risks your business faces each day.
The type of asset protection vehicle you need as a business owner largely depends on the kinds of assets your business owns. It also depends on the most likely creditors who will pursue claims against your business. Some assets are considered dangerous assets, such as rental properties, commercial real estate, vehicles, and business equipment such as heavy machinery or tools. Dangerous assets carry an inherent high risk and can present a substantial liability for your company.
On the other hand, some assets, like bank accounts, stocks and bonds, are considered safe assets since, by their very nature, they present a low liability risk. You must choose the appropriate asset protection vehicle for each type of asset and take care not to commingle dangerous assets with safe assets. Keeping dangerous assets separate limits your exposure and decreases the risk of losing your safe assets when a liability arises from your dangerous assets.
Strongest Asset Protection Tool
The strongest asset protection tool, especially for liquid assets, is the offshore asset protection trust. When your local judge demands payment from the trust, the international trustee is not under the judge’s jurisdiction. So, the strategy is to set up an international trust with funds held in a safe international institution. The international bank should not have corresponding branches located where you live. This strategy has proven to be the most bulletproof asset protection solution.
Asset Protection Benefits
In addition to living up to its name, that is protecting your assets, an asset protection plan provides a few added benefits as well. It can be a lawsuit deterrent. Some plaintiffs or creditors are truly predatory. They are simply after someone with ‘deep pockets,’ hoping to hit pay dirt as quickly and easily as possible. Because most people would go to almost any lengths to avoid a costly and protracted court trial, these types of creditors think that the threat of a lawsuit alone will force people to settle. The opposite is usually true when they learn you have a strong asset protection plan in place. Creditors know it will not be easy to pierce the protection you have and will likely look for an easier mark.
In case a lawsuit has already been lodged against you, a solid asset protection plan may provide the right inducement for an early settlement, and for a much lower amount than originally demanded. If you’re willing to settle for cents on the dollar, a creditor might just take your low-ball offer rather than fight it out in court. Although this might be seen as a loss by some, in the end it may just save you not only money, but aggravation and stress as well. If a creditor lodged a $5 million lawsuit against your assets worth $20 million, but settled for a mere fraction of the original demand amount rather than try to pierce your asset protection plan in court, that sounds like a win.
At the very least, a good asset protection plan enhances your bargaining power and levels the legal playing field a bit. It may even tilt the odds in your favor during an all-out court battle if you did things right and your asset protection plan proves to be impenetrable.
Asset Protection Plan Conclusion
Asset protection planning works best when it’s part of a comprehensive and integrated estate planning strategy that includes your short- and long-term financial goals. When working with a planner, insist the he or she helps you devise an asset protection plan that addresses and supports your specific professional and personal concerns and goals. You will find that a well-crafted asset protection strategy can be a powerful lawsuit deterrent and, if it comes to that, it may just help you win your day in court.