Here are common errors we see nearly every week, and some simple thoughts on how to correct them.
- Using the spouse as the asset protection “plan.” We see this a lot, particularly with doctors concerned about malpractice exposure. While this does offer scant protection, it ignores the risk of losing the assets if the “safe” spouse dies first or is themselves sued for some reason—like getting in a car wreck. The “technique” also introduces both perceived and real asset control issues that may prove unpalatable—like if the loving spouse refuses to write a check out of the “protected” account, or argues in divorce proceedings that the assets transferred were a bona fide gift, and hence no longer marital property. Shite!
- Inadequate divorce protection not properly segregating non-marital assets—inheritances, wealth acquired before marriage, etc.—can put into play assets that would have been impervious to the divorce tax. This applies as much to your kids as to you, and not using the right kinds of trusts, with protectors, can lay your treasure bare to the attacks of your children’s’ soon-to-be-ex spouses, who you always knew to be soulless barbarians anyway. The right trusts can often also function as very elegant pre- and post-nup devices, without souring the romance the way traditional prenups can.
- Titling errors risk assets—cars, boats, planes, non-homestead real estate, etc. should be titled to an encapsulating entity like an LLC, or at least in the name of the principal operator: his car in his name, and so on. Joint titling or other mistakes can engender needless and expensive liability.
- Property & Casualty insurance gaps in any asset protection plan, liability insurance is the very first line of defense. Not having adequate insurance for vehicles, toys, business and real estate exposures, as well as proper levels of business and personal umbrellas, is a problem we see all the time. While this area is complicated and exposing gaps takes some work, the insurance is usually cheap and well worth exploring. It’s the first line because marauding plaintiffs’ attorneys can often be placated (get a nice percentage fee without much work) instead of going after your real assets . . . and in today’s hyper-Google world, it won’t take them long to find out where your treasure is buried.
- Underutilized qualified plan opportunities business owners particularly leave a lot on the table here. Not only do they often fail to maximize the tax shelter offered by the right kind of tax-deductible plan, but fail to appreciate the extremely strong asset protection properties for them in such plans.
- Personally-held business stock if you own an incorporated business, know that the stock (your business) is on the table if you are successfully sued. You may need to hand it over in a judgment. Having it just in your name (or with a piece to you and a piece to your spouse) is needlessly risky; TbyE (see #2) is better, but a multi-member LLC is, by far, superior.
- Not using an LLC (or LLP, or LLLP). Limited Liability Companies (and their cousins, the Limited Liability Partnership, and the Limited Liability Limited Partnership). These have been around for a long while, but are still poorly understood. Let’s face it, you want limited liability, don’t you? You wouldn’t be reading this otherwise. What an LLC does is protect your personal assets from claims against your business or real estate (yes, I know a corporation does that, too) AND protects you from losing your business if claims are successfully pressed against you (which a corp can never do—get a judgment, hand over the stock). An LLC seals both ends—and that’s a very big deal.
- Single member LLC. For the LLC technique discussed in #8 to work, there needs to be more than one owner (LLC owners are called “members”) in some states such as Florida. So make sure your wife or daughter or girlfriend or grandson has a small stake (that has no control or rights to compel income). And remember, this separate interest must be in their name alone, not joint with you.
- Waiting until you’re fired upon. Too many people with lots to lose don’t get serious about asset protection planning until they smell a lawsuit, or have already been filed on. All of this stuff works really great if you take the time to plan your defenses in the happy sunshine, before the hordes gather for a dawn attack. Once potential liability appears, all the planning in the world may be deemed a “fraudulent conveyance” sham, and much less effective, or entirely so. “Not so fast!” Says the judge! “You only put it in your daughter’s name cause you got sued! Get it back or to the hoosegow you go!” So be smart—build that brick house, while the wolf is still at the other pigs’ places.
Complete your asset protection plan before you are sued!
Let you have ears, hear. Be smart. Get your fortress built now, while the sun is shining. Get started today, while it is fresh on your mind, and before some financial predator starts to huff, and puff. With all the other dangers and threats that are circling round your head right now, not spending nominal time and expense on making your fortune bulletproof makes no sense. Integrate it with your estate and tax control planning, get ‘er done, and sleep easy! And again, those that want more can pick up free asset protection classes at fweibook.org.