December 2, 2023

Regardless of where you are in the development and implementation of your business and personal wealth-building plan, you need to be thinking about asset protection. That means whether you have nothing, a little, or a lot, you should have a plan to protect your wealth. And that plan should be in place before you need it–because there is no doubt that you will need it at some point.

When you hear “asset protection,” you might think first about lawsuits. That’s understandable, because statistically you’re likely to be sued between one and five times during your life. Thanks to a combination of high-dollar punitive awards and the willingness of defendants to settle to avoid trial, people have come to view the legal process as a lottery where they can win anything from a few thousand to millions of dollars. But lawsuits are just one of four primary threats to your wealth. The other three are income taxes, capital gains taxes, and probate and estate taxes. Protecting your wealth from these four threats is the foundation of an effective asset protection strategy.

Shielding Yourself from the Threats

Let’s take a look at the basic methods you can use to protect yourself from threats to your wealth. When it comes to lawsuits, you want to remove the economic incentive to litigate. You do this by keeping your assets out of your name so that the litigant must go after the business entity and not you personally. Then, with your assets housed in different entities, you apply additional strategies to make those entities unattractive targets.

When a plaintiff’s attorney considers taking on a case, the first thing he does is an asset search to see if the entity that is potentially liable is worth suing. By owning your investments and other assets in appropriate business entities, you can restrict the options a plaintiff’s attorney has. You may not be able to totally protect the asset itself, but you can make sure that you are not held personally responsible and that your other assets are shielded.

And what if you are sued for something personal? Regardless of whether your assets are real estate, stocks, businesses, or something else, you want to own them in a way so they are not at risk if you get sued personally for something that is independent of the business. For example, let’s say you’re involved in a car crash, you are sued, and the plaintiff wins. That has absolutely nothing to do with your investment real estate, and you don’t want those assets used to satisfy the judgment. You want to protect the assets that are unrelated to the lawsuit.

Of course, you may or may not have to deal with a lawsuit at some point–but you can count on that fact that you will have to deal with taxes. Your goal when it comes to taxes is not about tax avoidance, which is illegal. It’s about minimizing your tax liability legally.

For example, you can reduce your income taxes by spending pre-tax dollars, splitting income into lower tax brackets, and taking advantage of all available tax deductions. You can reduce or eliminate capital gains taxes by moving money into tax-free or tax-deferred entities. And you can use entities such as a living trust to avoid probate and maximize your estate’s value.

One business entity alone will not achieve all of your objectives–it’s a case of “united you fall, divided you stand.” You need strategic entity planning, so you know exactly when and how to use specific entities such as corporations, partnerships, LLCs (Limited Liability Companies), various trusts, and even sole proprietorship. For example, many investors use a corporation as their tax planning and liability protection entity and LLCs for asset protection.

Do it Now

If you do not have an asset protection plan in place, the time to create one is now, when things are going smoothly and there are no threats on the horizon. When you transfer assets to hinder or delay a known creditor, that’s considered a fraudulent transfer, it can be undone, and you can face other consequences. Also, tax laws are specific about when you must take certain actions to qualify for deductions and other tax breaks. Don’t wait until you are facing a massive tax bill to start thinking about tax reduction strategies.

One final word: Do not use asset protection strategies to avoid legitimate debts. If you incur an obligation, honor it. If there’s a dispute, address it with integrity. Just don’t let someone who is not entitled to what you have worked so hard to earn take it from you without your permission.