Asset Protection: Why It’s More Important Than Ever for Your Personal and Business Finances

“Own nothing, but control everything,” said John D. Rockefeller, the 20th century’s wealthiest American and widely considered the world’s richest man.

Because he was so rich (and everybody knew it), he understood the importance of taking his assets out of his own name and placing them in a protected plan that let him maintain control over them — this to safeguard himself from legal wranglings with those who might seek a chunk of his fortune.

But asset protection is not just for the super-wealthy anymore. With today’s “litigation explosion” virtually anybody with decent home equity, retirement funds, real estate holdings, and/or a business could be at risk of being sued. Why? Because it’s become harder for lawyers to make money off the big guns such as banks, corporations, and insurance companies.

For example, it used to be that insurance companies would routinely settle a serious accident case at about six times the cost of the actual damages. But due to the massive increase in lawsuits, today those companies are not apt to settle at all, fighting every claim in court and making it difficult for attorneys to get any money out of them. To make up for those financial losses, lawyers are now going after a new set of “deep pockets” — “average” consumers with real estate, businesses, or retirement savings that can be tapped.

According to Robert J. Mintz, a California-based asset protection attorney, “as long as a lawyer can find a potential defendant with even modest assets, he will attempt to make a case using clever liability theories.” Mintz asserts that there are nearly 1 million aggressive, motivated lawyers in the U.S. and not enough “good” cases to go around, so if you’ve got something to lose, attorneys will be looking for you. “Remember, in today’s litigious society, people are named as defendants in lawsuits not due to their degree of fault, but due to their ability to pay.”

Fight Back by Removing the Incentive to Sue

First of all, understand that you can’t count on property, business, or malpractice insurance to go to battle for you and completely win the war. Insurance serves its purpose, but it will only cover so much and then attorneys will go after your personal assets. If you have real estate or own a business, you are a prime candidate for a lawsuit, and no matter how much insurance you carry, it will never be enough.

Second, set a goal to successfully discourage lawsuits by determining the best way to hold your assets in a protected manner. Meet with a competent estate planning attorney to do this. Remember, all an attorney has to do to name you in a lawsuit is show your ability to pay. Following is a basic list of asset protection methods that can help increase your defense against litigation.

Basic Asset Protection Methods

1. Ownership by spouse: this requires that you create a Family Limited Partnership (FLP) or a Limited Liability Company (LLC). Assets are placed in the FLP or LLC and owned by your spouse. If you are a business owner, for example, and are named in a lawsuit, no one can claim your personal property since it’s in the name of your spouse.

2. Ownership by children: you can gift your assets to your children to take them out of your name. Bear in mind that there will be gift-tax to pay.

3. Set up an Equity Reduction Plan (ERP) to protect real estate or business assets. A trust is formed and a contract developed on the assets in an LLC or FLP held in the trust. The contract is supported by a lien or mortgage and the mortgage “equity” is then gifted or “sold” to the trust. Equity can then be borrowed against for business purposes. If you are sued, the ERP is superior to the claim on you.

4. While corporations are usually considered the best way to provide liability protection, the “corporate veil” can be pierced by the legal system. An LLC can provide the most flexibility with outstanding asset protection for new start-ups.

5. Explore the world of trusts. Such things as Privacy Trusts can conceal ownership of bank and brokerage accounts, personal residence, rental properties, etc. To provide complete privacy and asset protection, set up an FLP or LLC and put into a Privacy Trust.

These are only a few of the options available for asset protection. Be sure to consult with your attorney to set up a plan suited to your particular circumstance.

To learn more about organizing finances to protect against litigation and taxes, visit www.moneymastery.com.

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