Are All Your Assets at Risk?

This article is not intended to alarm or frighten you, but to emphasize the importance of having a "system for doing business and making investments."

For those of us who invest, have employees, or deal with the public, it is never too soon to take steps to protect our assets and our future. It is better to be four years too early than one day too late.

Most people are fair in their dealings and think they can defend their actions in court, should the need arise. When I was young and financially successful, I felt that way. Now, I know different. I have seen the financial, and sometimes mental, destruction of people who failed to take steps to protect their assets—some of whom I did business with. Over the years, I have had several frightening, close calls of my own. When the need for asset protection occurs, you will either thank heaven you have it—or deeply regret not doing anything before it was too late.

I'm not referring to legitimate claims, most of which can be covered by liability insurance. I'm referring to those who would use the law in an attempt to take assets from honest, hard-working people, based on some occurrence or something someone else has or has not done. In conjunction with their attorney, these people will often make outlandish claims in an attempt to settle out of court, knowing that it may be less expensive than going to court. While not as serious, these extortion attempts can be worrisome and very annoying.

While we may carry liability insurance, it is not always enough. There are numerous risks that are not covered by liability insurance—or the amount of coverage may be insufficient. And, there is always the possibility that the insurance company will not be able to pay in times of need.

With only five percent of the world’s population, America has seventy percent of the world’s lawyers. With nearly 500,000 civil damage lawsuits filed in state courts each year, the odds are that you will be sued four or five times during your adult life. Needless to say, it only takes one lawsuit to destroy any net worth you have been able to accumulate.

It is a lot easier to lose money than it is to earn it. Most of us know people who have inherited wealth only to end up losing it. All of us know people who have spent their lives working to provide for members of their family, accumulating assets they could enjoy in later years. What a tragedy it is when a family loses their life’s savings in a lawsuit or bankruptcy because they failed to plan while their assets were being acquired.

Asset protection and estate planning are subjects that most of us don’t like to think about. We are too busy trying to make money. And, besides, the subjects bring up thoughts of lawsuits or death. We fail to appreciate how much good planning can improve our lives today. So, we decide to wait and do our planning at a later date. In doing so, we overlook the fact that no one can be financially secure without taking steps to protect their assets.

Let's look at a common scenario: Some person that you may or may not have done business with has a problem. Their problem may be financial, health, or simply wanting to break an agreement they have made. They are advised to see an attorney. They remember seeing the TV ads of Shady Bunch, an attorney with the law firm of Dilly, Dally, Delay and Stall, and decide to contact him.

Mr. Bunch, the kind of lawyer that gives the profession a bad name, "does a little research” and discovers that you have cash in the bank, stocks, bonds, automobiles, real estate, or other assets that could be turned into cash. Mr. Bunch agrees to “take the case on a contingency basis.” All the troubled person has to do is to agree to give Shady Bunch 35% to 40% of whatever the attorney might recover. It's easy to conclude that, by suing you, he has everything to gain and nothing to lose.

On the other hand, if the lawyer's research doesn't uncover any assets that he feels would be worth going after, he advises the client that it may be difficult to win a lawsuit or to collect. However, if they want to pursue the case, he will be happy to handle it for $150 per hour. Realizing that he could spend a lot of money for nothing, the client becomes discouraged, loses interest, and a lawsuit is avoided.

While earning your fortune, it is important that you take steps to protect it. I have spent several months researching the subject of asset protection—both for my own family and for my readers. I have attended many seminars on the subject, read numerous books and newsletters, listened to tapes, and had lengthy discussions with some of the country's foremost experts on asset protection.

By combining some of their best ideas and adding a few strategies of my own, I now believe that my family’s personal assets are about as secure as they can be.

Corporations, trusts, limited-liability companies (usually referred to as LLCs), and family limited partnerships, can each play an important role in protecting your assets, providing confidentiality, and reducing taxes. However, there is no single entity that will protect your assets from all the serious threats: lawsuits, excessive taxes, probate, and government seizures. To protect your assets from all of these threats, it becomes necessary to use a "combination of vehicles." Designing the right combination can be the key to success.

Let me emphasize that no asset protection plan is completely fail-safe. Nor, will any plan fit everyone. When the legal system is used by one party in an attempt to take another party’s assets by force, the presiding judge has a great deal of latitude. A judge will often ignore or throw out your written agreements. From the court’s perspective, the fact that a defendant even has an asset protection plan presupposes that it is for the purpose of defrauding creditors.

Instead of an asset protection plan, we should have a system for doing business—one that incorporates asset protection into the way we do business. The asset protection aspects of our system should be incidental—and not too obvious. And, certainly, the term “asset protection” should not be used in our documents or in a court of law.

When challenged, the attorney who defends us against a liability claim will want to be able to show the court that there are legitimate business reasons for what we do. We may also want to show that the entities were chosen partly for estate planning purposes and to minimize taxes. We will not want to give the impression that asset protection played a significant role in the way we conduct business. One exception might be that we use a corporation or limited-liability company in order to limit personal liability when dealing with the public.

On the other hand, if we are challenged by the IRS, we will want to be able to show that there are legitimate business reasons for what we do. And, we may want to show that asset protection played a part in our decisions. However, we would want to avoid or minimize any role that tax shelter played in our decisions. A good plan will, of course, include all these benefits.

Often, under the threat of a lawsuit, people will sell assets at a low price to a friend or relative in an attempt to keep the assets from being lost. Usually, this will not work because the plaintiff’s attorney will be looking for such transactions and the judges will set them aside, ordering the buyer to return the assets. Nor, will it work to form a trust (which requires gifting) at a time when a client is economically troubled and shouldn't be making gifts to anyone. The plan will not make economic sense, and even if you don't admit it in so many words, it will be obvious that you are trying to defeat your creditors.

Plaintiffs and their attorneys usually want to acquire cash or assets that can be converted to cash. These may include stocks, bonds, mortgages, automobiles, and real estate with large equities. They do not find real estate or automobiles with large liens very attractive. Therefore, a good asset protection system might involve having large liens on such assets prior to any threat of a lawsuit. With a little creativity, the lender could be a “friendly” creditor under your influence or control.

For example, you may want to use a family limited partnership or family limited-liability company as your "safe haven" and a corporation or limited-liability company for dealing with the public. Handled correctly, a Roth IRA could be a safe place to build tax-free income for your retirement. Because there is a great deal of risk for any entity that deals with the public (such as buying, selling, or renting property, employing workers etc.), you should not allow it to accumulate any significant net worth. The company could operate on money borrowed from the family limited partnership or family LLC which serves as your private bank, charging very high interest rates.

With the correct use of corporations or LLCs, Roth IRAs, trusts, and family limited partnerships, it is possible to have a high degree of protection from all these threats. How these vehicles are used in combination with each other and the wording of the documents is of the utmost importance.

If you set up a well-planned system for doing business and making investments, you will indeed be able to prevent most lawsuits, cut taxes, and maintain greater privacy.