The truth is that your position as a flourishing business owner brings with it a major disadvantage: being a potential target for lawsuits. Although they can be ridiculous and uncalled for, these types of attacks can cause significant problems for your financial wellbeing.
That’s why it’s crucial to take certain steps to begin protecting your hard-earned assets. Failing to do so will become a financial security dilemma not only for your company but also for your family.
Importance of Asset Protection
The concept behind asset protection planning is straightforward. You place protective measures surrounding your assets that make it as hard as possible for creditors, litigators, and others to take assets away from you.
Rather than trying to win a battle in court that could take months or years just to eventually lose, the litigant would only see that the best option for them legally is to settle for a small amount of money or leave empty-handed.
Take note: Asset protection is not a means to hide your money in any form. On the contrary, you want to show anyone who might be interested in taking your assets away that the path toward it is difficult. The goal here is to simply steer them away and motivate them to settle for a negotiation for a smaller amount of money instead or just walk away.
By now, you are probably aware of the threats to the wealth you’ve worked so hard for. The majority of successful business owners are concerned about being a target for unjust lawsuits or being a victim in divorce proceedings.
The bad news is that only about 27% of these business owners have prepared a formal asset protection plan. The percentage is even worse for those who say they are concerned about protecting their assets. With the risks that you and your colleagues face in such litigious culture, the numbers are way too low.
Important: Around half of the successful business owners who are not worried have a formal asset protection plan at the ready. It’s only reasonable to have these plans in place, as it not only provides additional layers of protection but also provides business owners with the confidence knowing that they are well-protected.
Vital Steps to Protect Assets
If you are one of those business owners who does not currently have an asset protection plan or if you’re wondering whether your existing plan is sufficient, consider the following steps.
Acquire Protection Before a Claim Is Made
You can benefit a lot when you decide to protect your hard-earned wealth before a liability occurs. With the concept called “fraudulent conveyance,” you can benefit very little if you do it after.
Just like insurance, the best time to obtain asset protection is well before it is needed.
Cover the Fundamentals
The next step is to begin evaluating what your liabilities are, including other relevant insurances. You want to maximize these as much as possible. The quickest move you can make outright is to obtain a large umbrella policy that safeguards all of your assets.
Another good approach is to name the assets to someone else, such as your spouse. In case of a lawsuit, assets owned by the spouse are usually untouchable.
Ensure that you can trust your spouse as well as the marriage before deciding to transfer asset ownership to them. In case of a divorce, the spouse could possibly acquire all of the assets.
Consider More Advanced Asset Protection Techniques
Really wealthy business owners usually take complex steps to protect their wealth after covering the basics. Options to consider are:
- Equity stripping. Some business owners protect their assets from unjust lawsuits by utilizing bank loans to strip out equity. In concept, one simply has to take out a bank loan and secure it using the assets. In this manner, the creditors need to pay off the loan before they can get to the encumbered assets.
- Captive insurance companies. This type of insurance company is set up to insure the risks of a parent company. The person who owns the parent company also owns the captive. As the business owner, you can also control the operations of the captive insurance agency, which includes handling claim decisions, investment policies, and underwriting.
- Onshore and offshore trusts. At this time, several states allow domestic asset protection trusts. Countries like Belize, The Cook Islands, and the Bahamas are ideal locations to have offshore trusts. Assets that are placed in these places are outside the reach of creditors. However, the rules concerning these trusts depend on the jurisdiction you’ve chosen. It is therefore important to understand the specifics of a jurisdiction before committing to one.
Avoid Mistakes That Can Hinder Asset Protection
The more advanced asset protection techniques are far more complicated and require an in-depth understanding of how they work to be applied effectively. Poorly implemented asset protection strategies are ineffectual once required, with many business owners being in a false sense of security.
Example: Many advisors don’t like protecting business owners both on a personal and professional level. Consider real estate developers who normally put each of their projects within separate limited liability companies (LLCs). In this manner, one project that gets a lawsuit will not affect the others.
The problem here is that these LLCs have already been set up so that the developers own them directly. If they are hit with a personal lawsuit, all of the assets in the LLCs could be taken away.
Next Steps
Asset protection is vital for business owners, as it allows them to stay confident knowing that their assets are in safe hands in case of a lawsuit.
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