Asset Protection Planning—Here’s What You Need to Know
Updated: Jun 26
Recent changes in the world, the most obvious being COVID-19 with its social, economic, and political ramifications, have inspired people to look seriously at their current situations. There are so many unknowns now and with headlines of increased litigation risk, more than ever, successful entrepreneurs want to be sure they’re fully protected.
Business owners can be targets of unfounded lawsuits and other risks to their wealth.
Most entrepreneurs do not have a formal asset protection plan in place to mitigate risks.
Performing stress tests on existing protection strategies can be a good step to take.
Think for a moment about how hard you’ve worked to build your company and your personal wealth over time. It feels great, doesn’t it?
The last thing you want to do is lose that wealth due to the carelessness or maliciousness of other people. That’s why it makes sense to consider putting asset protection planning (APP) strategies in place—or, if you already use them, to consider evaluating whether those strategies are still capable of doing what you want them to do.
In this Forbes article I contributed to, we discuss the need to have the appropriate amount of coverage as your business grows and your wealth increases.
By thoughtfully and proactively protecting your wealth against catastrophic loss, potential creditors, litigants, children-in-law and perhaps even future ex-spouses, you help ensure that you and your loved ones will be able to achieve serious wealth—and realize your most important goals.
The Litigation Threat
As a successful business owner, you are potentially a magnet for lawsuits and other threats to your financial health. The good news is that we find most entrepreneurs recognize the threats.
In a survey of 616 entrepreneurs, nearly four out of five say they are concerned about becoming part of unjust lawsuits or being victimized in divorce proceedings (see Exhibit 3).
The percentage of concerned entrepreneurs is high in part because many business owners have seen others like them impacted by lawsuits.
In fact, of the entrepreneurs expressing concern, more than 75 percent reported they personally knew a business owner who was hit with a lawsuit and financially suffered because of it (see Exhibit 4).
The potential for litigation-driven losses can be exceedingly stressful and problematic. Entrepreneurs often experience intense anxiety—not only at the prospect of financial loss, but also the entire process of dealing with a lawsuit. Not surprisingly, we find that most of them prefer to avoid these issues and scenarios altogether.
Asset Protection Planning
In my book, Liquidity and You, I touch on elements of asset protection and why it’s important.
While nothing can stop someone from suing you, asset protection planning can often mitigate the psychological and financial pain involved. That’s why we strongly recommend that entrepreneurs consider making asset protection planning a key part of their overall wealth planning initiatives.
We define asset protection in the following way:
Asset protection planning is prelitigation planning intended to deter lawsuits and, if that is not possible, to promote favorable settlements.
The logic of asset protection planning is straightforward. Litigators who’ve brought unfounded or frivolous lawsuits against an entrepreneur can run into a wall when that business owner has a well-structured formal asset protection plan in place. By legally insulating your wealth, you may deter legal assaults.
The very best asset protection plans motivate litigants to avoid court entirely because they recognize that it’s highly probable the legal system will provide little support—perhaps none—for them. This can allow entrepreneurs to favorably settle out of court and avoid any legal judgments against them.
But let’s say court is unavoidable and it results in a judgment against you. Asset protection planning can still be useful, as it may limit the creditor’s ability to collect money from you. When getting paid is too arduous, a creditor is usually motivated to settle for less—sometimes substantially less.
The State of Entrepreneurs’ Protection
As compelling as asset protection planning is, we see a major gap between entrepreneurs’ concerns about litigation and their actions to limit it. For example, just one-third of 616 business owners surveyed have a formal asset protection plan. Of those who said they were concerned about lawsuits, even fewer have a formal plan set up (see Exhibit 5)!
Important: Note that nearly 65 percent of the successful business owners who are not concerned do have formal asset protection plans in place. This suggests that having such a plan may give entrepreneurs confidence that they are well protected, thereby reducing their concern about being sued unjustly.
Even though many entrepreneurs lack formal asset protection plans, that does not mean they’re unprotected. For example, having various types of commercial insurance is a form of asset protection—as is setting up different businesses in different corporate entities. Strong legal language indemnifying the entrepreneurs in their business formation documents is another example of asset protection.
However, a formal asset protection plan is multifaceted, integrated and, whenever possible, synergistic. The multiple pieces work in concert to achieve bigger results. Here’s where we can help. Contact us at AG Asset Advisory to start the conversation.
For formal asset protection planning to make sense for entrepreneurs, it must be cost-effective and adaptable. The costs of asset protection planning are the initial expenses for the planning and implementation. Some asset protection strategies have ongoing costs, too. It’s smart to understand all the costs and to make sure that there are no other approaches that will produce comparable results for less.
While some asset protection strategies limit flexibility, the ability to make adjustments to the strategies because of changing circumstances is preferable when possible. Just as business situations often shift due to changing circumstances, so too should formal asset protection plans, to the extent possible.
Blake Christian, a Tax CPA with Los-Angeles based HCVT, notes two valuable tax strategies that can offer an extra layer of asset protection for business owners.
First, depending on the legal structure of the business and its employee make-up, the owners should evaluate the benefits of maximizing tax-deductible pension and profit-sharing contributions for the key employees, including the owners. These programs defer taxable income and provide asset protection under the ERISA provisions. Annual contributions can be as high as the $300,000 range for highly compensated employees and owners.
Second, setting aside college funds for children, grandchildren, or others via an IRC Section 529 Plan does not offer an up-front tax deduction, though earnings in the account will generally be tax-free. These assets are still under the control of the grantor, but not includable in their estate and, depending on the state in which the account is established, can be beyond the reach of third-parties to the tune of hundreds of thousands of dollars for each account.
Stress Testing Asset Protection
There is no formal body of law referred to as asset protection law—in contrast to, say, corporate law. It falls under legal risk planning, which itself is a subset of risk management.
Therefore, formal asset protection planning can be said to be a bit fluid. There are strategies that we see work quite well in most instances, while others are less effective. Moreover, talented legal and financial minds are always looking to devise new and revised solutions to legitimately protect the wealth of entrepreneurs.
Because of the often-fluid state of formal asset protection planning, it’s advisable—whether or not you have a formal asset protection plan—to periodically stress test your situation. A stress test is a process of carefully evaluating the actions you have taken to make sure you will likely get the results you expect—and that you are not missing anything that could further benefit you and your wealth.
A stress test can be a smart move even if you’re just a little unsure that your wealth is sheltered from frivolous and unfounded lawsuits.
If you don’t have an asset protection plan in place or need to evaluate your current plan, reach out us. AG Asset Advisory can help you identify effective solutions for your personal situation or stress test the plan you have in place.
Anthony Glomski is Founder and Principal of AG Asset Advisory (AGAA), an SEC-registered family office. Some of the information, data, and opinions contained herein were not authored by AGAA and do not constitute investment advice. Content is provided solely for informational purposes only and therefore is not an offer to buy or sell securities, and is not warranted to be correct, complete, or accurate. Additionally, neither the author nor AGAA are engaged in rendering legal, medical, accounting, financial, consulting, coaching, or other professional service or advice in specific situations. This publication should not be utilized as a substitute for professional advice in specific situations. Neither the author nor AGAA may be held liable in any way for any interpretation or use of the information in this publication. Investing carries an inherent element of risk, including the risk of losing invested principal. Past performance is not indicative of future results.
Portions of this article came courtesy of my friends and colleagues at AES Nation, LLC.
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