4 Key Considerations in Asset Protection
Most people put almost daily effort into building their income and future. It is almost at the top of our list of priorities, with only family and possibly spirituality ranking higher for many.
In this discussion, we will address protecting the assets of our labors. It can take years to build these assets, but an attack on them can decimate or remove them in a matter of days, months, or a year or too. “Poof! They’re Gone!”
Attacks on these assets can come from many directions, and some of them can really blindside us. In my life, I have been careful about protecting my assets, but there have been six major blindside attempts to take away my assets. Two IRS audits, two divorces, and two lawsuits. I did not expect any of these things to happen, but they did. Now fortunately, I won both IRS audits, and both lawsuits, and one of the two divorces was not too devastating in the long run. That leaves one out of six, the other divorce, where I tried to be a kind and decent guy, and lost a lot, it took several years to recover and set me back a long way on my life’s financial plan. I hope these articles and the actions of our Tax Hive team can help you not to lose in even a single attack on your assets.
Asset protection does not matter until it does, and then it is too late. So, the considerations mentioned here are not things to be put off.
As we are building assets as a wage earner, contractor, investor, or business owner, each of these “buckets” needs protection, and they also usually need to be separated from each other. Failing to properly structure our various buckets of assets can cause us to lose our protections, especially with the government. Let us now discuss the various considerations for our buckets of assets.
Trusts—Most commonly, trusts are the accepted vehicle for protecting personal assets and facilitating the transfer to your intended heirs. When well put together, trusts allow for tax planning benefits, but also create a pre-arranged guidance and control over where assets go in the event of a major life transaction, such as a marriage, divorce, or death. Trusts can be of a general nature, encompassing all personal assets, or they can be specific as in the case of a Real Estate Trust. Since the beneficiaries are already clearly designated, trusts can prevent a lot of issues among designated heirs.
Insurance—There are a wide variety of insurances that can protect us with major or catastrophic events, as well as insuring our businesses and contractual obligations in the event of misfortune. Categories of insurance include life insurance, health insurance, disability insurance, homeowner’s insurance, automotive insurance, property, and casualty insurance, plus many special insurances for contractual performance, umbrella liability, and insurances for owners and officers in business entities. Regular review of insurance is highly recommended, with a quick yearly review once per year, plus a comprehensive review every three to five years, or whenever there is a major change in your life.
Entities—Business entities such as corporations, Limited Liability Companies (LLC’s) and partnerships are designed to separate business assets from personal assets, and to protect those assets from lawsuit and tax liability. While many rules exist to properly own and manage an entity, they not only help in building and maintaining the assets of the company, but also provide for transfer of control and assets in the event of a major life change, or in the event of a dissolution of the entity. Some personal/family assets can also be managed through the formation of a Family Limited Partnership (FLP).
Exempt Assets/Deductions—While this consideration is a little different than the other three, we wanted to point out that just creating the structures or items above is not enough. It is critical that they be properly managed. Claiming exemptions or deductions for assets can get a person into trouble if done improperly or can keep a lot of assets in your buckets if done properly. Work with professionals—accountants, asset and investment advisors, and select those who understand how you earn money and fill your buckets. I work a lot with Real Estate, and the advisors I employ to assist me understand the Real Estate industry. You need people whose approach to risk mirrors your own. If you are extremely conservative, an extremely aggressive accountant can literally cause you to have a nervous breakdown.
If you are new to the process of asset protection, we encourage that you schedule an opportunity to meet with a professional who can ask you salient questions about your current assets and structure. If you have taken multiple steps to protect your assets, we would encourage you to meet with your current advisors, and to possibly get a second opinion. No matter how good these professionals are at their job, another person may be able to provide additional insights. Then make sure that you schedule regular reviews to keep on top of changes to your full picture.