Written and legally reviewed by Bryson Stephen, Attorney at Law
Do I need asset protection? How much do I need before I enact a plan? When should I consider it? The answers are different for everybody. Weigh the two main factors: the value of your assets and your risk. The value of the assets consists of what they are worth minus what you owe. Next, consider whether the asset is already protected — such as a 401(k) retirement plan or a homestead exemption on your primary residence. Then map out the asset protection planning steps you need to take. Finally, take action. We’ve seen people “head scratch” themselves into the poor house by delaying. Get the information you need quickly, and act before it’s too late.
Risks can stem from your business, your business partner, driving your car, your children, your home, and more. Most of us are already exposed to some degree of risk — but most of us are not fully protected from it. So what are the asset protection planning the thresholds that determine what I need?
Insurance Is not Nearly Enough
There are tactics that protect your assets regardless of net worth. A well-crafted asset protection plan considers both the assets and their value — it assesses the types of assets you have and the risks attached to them. If you own and drive a car with a standard liability policy, that’s only a single layer of protection. Should you be at fault in an accident that exceeds your coverage limits (a very common occurrence), everything you own is exposed. The same is true for business liability, homeownership, or any other avenue of risk. Asset protection, by design, is proactive protection for your wealth.
We recently spoke with a physician carrying a $3 million malpractice policy. The problem: his nurse botched a procedure that caused a patient severe brain damage. The patient’s family is now suing him for $28 million. No matter how much insurance you carry, someone can always sue you for more.
How to Calculate Your Asset Protection Needs
Here is the asset protection information you need to calculate the thresholds required to secure your wealth:
1. Do the math.
What is the net worth of the assets a potential legal opponent can take? Then, how much does the asset protection plan cost?
Net Worth − Cost of Asset Protection Plan = ?
If that number is positive — especially a large positive number — it’s time to set up a plan. Otherwise, scale it down to size.
Example
You live in California with a $1.2 million home and a $500,000 mortgage — $700,000 in equity. You’re married, with (at the time of this writing) a $100,000 homestead exemption, leaving $600,000 of equity exposed.
You own three rental properties with $100,000 equity each. This equity is fully exposed, since the homestead exemption only applies to your primary residence — one home per married couple. That’s $300,000 of exposure.
You hold $700,000 in cash and stocks. Of this, $150,000 sits in a 401(k), which is protected. That leaves $550,000 a lawsuit could take from you.
You own two paid-off cars, worth $60,000 and $40,000 — $100,000 combined.
Value of Your Assets: $600,000 + $300,000 + $550,000 + $100,000 = $1,550,000
COST OF YOUR PLAN
Say a plan for the structure above costs $24,000. You’re in the 36% federal tax bracket with a 9% state rate (36% + 9% = 45%, rounded for simplicity), and your CPA confirms you can
So, you write off
the cost. You end up paying for only 55% of it — $24,000 × .55 = $13,200.
The Bottom Line
| Value of Your Assets | Cost of the Plan | Total |
|---|---|---|
| $1,550,000 | − $13,200 | = $1,536,800 |
Keep in mind, this is just one example. If your exposed net worth is $100,000 and a lawsuit could take all of it, you’ll likely need fewer, lower-cost legal tools. Say the plan costs $3,500, and you can deduct a third of it — the real cost drops to $2,333. Your upside? $97,667. Should you spend $2,333 to save $97,667? Many would say the answer speaks for itself.
2. What are your risks?
Do you live in the United States or elsewhere? The US holds roughly 4.4% of the world’s population — and, remarkably, about 80% of the world’s lawyers. The US is where 96% of the world’s lawsuits are filed. The lawyer suing you doesn’t care whether you’re a good person; you’re simply how he puts food on the table. None of us are the exception. If you have assets, and the cost of protecting them is reasonable, protect them.
3. Anticipate future net worth.
It’s not just what you have now — it’s what you’ll have in the future. You don’t build a house and then pour the foundation later; the foundation goes in first. The same logic applies here: install your asset protection plan first, and let your wealth grow inside of it.
4. Realize your exposure.
You wouldn’t walk your family through a dark alley at night just because you don’t see any muggers in that moment — you anticipate the danger and act to prevent exposure. It’s the same with your wealth. Someone, right now, is looking for someone else to sue.
A lawsuit doesn’t tap you on the shoulder first. You won’t know in advance that a former employee is filing a false harassment claim, that someone is about to feign an injury, or that another driver is about to brake suddenly in front of you — sometimes on purpose. Any of these could exceed your insurance limits. Don’t assume you’re the exception. The lawyer suing you won’t assume it either.
Do I Need Asset Protection?
Consider what you stand to lose if a legal storm hits: equity in your home, investments, vehicles, bank accounts. The right level of planning depends on how much accumulated wealth you have to protect. Less than $100,000 might not warrant offshore legal structuring. Whether you’re under or over $1 million, there are ways to build a tailor-made plan you’re comfortable with — and for higher net worth individuals, there are structures with case law histories of proven success.
Planning asset protection isn’t important just for millionaires — it’s important for anyone who has worked hard to build what they have.
About the Author & Legal Reviewer
This article was written and reviewed for accuracy by Bryson Stephen, Attorney at Law. While every effort has been made to ensure accuracy, no guarantee is made that this content is complete or error-free, and laws are subject to change. This content is for informational purposes only, does not constitute legal advice, and does not create an attorney-client relationship. For guidance specific to your situation, consult with a licensed attorney.
