Common Asset Protection Errors and How to Fix Them

Video Transcript:

[Music] Hello folks. Well, welcome once again to Smarter Money Matters with me uh the wealth doctor Jeff Camarda aided by my smarter brother Jonathan Camarda, our chief investment officer at Camarda and super CFP Anna Wonderlick. Thanks so much for watching. Today’s topic is common estate protection errors and how to fix them. Uh, in this video, we’ll cover the most common asset protection mistakes and how to fix them. Whether you’re protecting your wealth, businesses, planning for retirement, um, or a real estate or business owner worried about lawsuits, these asset protection strategies can really help and and be solid gold for you. So, protecting your wealth requires more than just good investing. It requires smart asset protection strategies. Too often, successful families and business owners make these common financial mistakes that leave their nest eggs and the rest of their wealth exposed to lawsuits, creditors, divorce risk, and and all kinds of things. So, uh we’ll be talking about some really, really common asset protection errors to avoid and again how you can fix them. The the first thing I guess is wealth protection really requires more than just investing, right? People think that wealth planning, I’m investing with my advisor, my I’m investing in real estate and so forth, but it’s really a big puzzle and all the pieces that that need to be fit together. Um, and common mistakes can expose families and business owners to lawsuits and creditor attack and and unwanted publicity. Um, so let’s talk about some of the common errors. Would you like to begin? I know that one of your pet peeves is using the spouse as the plan. and uh tell me why you don’t like that. Yeah. So, sometimes if one of the spouses, right, is in a is a doctor, maybe a lawyer, some sort of industry where they’re open to to lawsuits, they’ll want to title everything in their other spouse’s name. And there can be a lot of risks to that. Um if that spouse got sued, then those assets are exposed. Um, also if if there’s a divorce or some other situation, you know, that spouse could potentially claim those assets all as their own. So, there’s definitely some risks there. Um, I don’t know if you you have any other feedback about No, I think that’s the big one is, you know, you know, and I’ve seen that a lot in my in my practice over the years, you know, particularly doctors and a doctor says, we’ll say she is afraid of being sued, so I put everything in my husband’s name. Well, what if the husband gets sued or what if he’s she’s driving his car? There’s a lot of paths to that wealth. So, it, you know, it has the the veneer of protection, but it really is a fallacy. Um, and so what are some of the the more effective ways to protect wealth in a situation like they’re using the spousal option? Jonathan, you have any thoughts on that? Yeah. Well, certainly depending on the type of accounts, uh I think one of the more underutilized asset protection strategy and some of the common mistakes you see is not using a qualified plan effectively, which are great asset protection tools. And then also, Jeff, if they do have an LLC, making a mistake, especially in Florida, of making it a sole member versus a dual member. Uh because while uh you know, property casualty insurance uh is effective and a great tool of risk management, there are some caveats and some gaps there that should be uh should be shored up though with other instruments. So, for example, if you had a brokerage account with you and your wife uh within a trust and a dual member LLC would be a great way on top of your uh you know, your liability. Yeah. So, we’ll get into some of the uh um the the nuances of of using LLC as asset protection um tools, but again, so so you want to really again the big picture fitting the puzzle piece together, you know, using trust and LLC’s and legal tools, you know, to to to make things as seamless and as bulletproof as possible. And when you mention qualified plans, of course, you mean things like IRA, which technically are not qualified plans, but close enough, and 401ks and and profit share and defined benefit plans. Qualified retirement plans by their nature in most states are immune from credit attack. Now, the limits vary by state, I think, and you’d have to check state law, but it’s pretty potent way to protect assets to the extent you’re able to shovel money in there. Um, but just remember once it comes out because you want to spend it or have to take an RMD, then it’s on the table. So, what are some of the other, you know, common errors that that we see um that maybe inadequate divorce protection, Anna? Yeah, I mean, comingling of of, you know, non-marital assets, right? So if you know a couple is married and one of them inherits you know assets from a family member you you want to have those properly titled to be separate from marital assets in case of a divorce. That’s something that you know I’ve encountered a couple times in my practice. Um and again simple you know working with professionals to make sure that your things are set up the way they should can protect assets in those types of situations. Yeah. And a good example is, you know, say brother Jonathan inherits $2 million uh from our dad. He didn’t and neither did I, but just say it’d be nice to just it’s a nice notion for a moment, right? Um and uh so that is Jonathan’s property. Now the to the typical rule in most states about divorce is that assets that are accumulated during the marriage are marital property. And you have to look at um the um at other states like California uh that don’t have common law provisions but you know for the most part um assets that are accumulated during the marriage are marital property um so absent a prenup or or other planning but stuff that that is you had before the marriage or things that come to you apart from the marital partnership like the inheritance that Johnny wish he got for a million dollars. that is that stays Jonathan’s money unless he does what? How what’s a good way for him to afford that asset protection and divorce protection? I mean, um, protective trusts, right? What’s what’s a, you know, but say that I’m Jonathan’s husband just for the moment, you know, as as enticing as that is, right? I said, “Jonathan, if you love me, I didn’t grow this.” Why won’t you put that in our Why can’t we put that in joint names, you know, if you love me, we should we have everything together, you know, or or maybe just it’s something that is natural to do that because it everything else is joint. As soon as that happens, now husband Jeffrey owns half of it and it’s becomes marital property and that really is typically not a wise idea. So, you want to maintain that segregation. I think that’s where you’re going, right, Anna? Yes. you know, so there’s a risk or assets can be lost in in divorce settlements, you know, and a solution is protective trusts and structured uh the pre and postnuptual planning. Um so, you know, getting back to something that you meant earlier about insurance gaps, Jonathan, when property casualty insurance and liability insurance, right? And that’s if somebody sues you and there’s a claim against you, the liability insurance would cover you. And again, that doesn’t always happen, right? Sometimes the insurance company, they’re going to try to avoid paying that claim and if they’re successful, you’re left holding the bag or the the claim could be for more than the amount of insurance. So, so what are some of the risks I see that we have here in the outline improper titling of boats, cars, and real estate? You know, what’s an application of what that pitfall could be? Anybody? I mean, yeah. So, you know, if if there’s a spouse who primarily drives one vehicle and the other spouse’s name is on that vehicle um and they’re in an accident, right? That other spouse whose name is on the title could be liable in a lawsuit um if you know they hit a NFL player or somebody else that’s very wealthy and wants to go after their assets. Yeah. and actually had a case this past week where um the couple um the and I think they probably had maybe five or six million dollars um and about three million of it was nonqualified, not in a retirement plan or otherwise protected. Um and the daughter is driving who’s got a horrible driving record and it’s a big risk actually is driving a car that’s titled in the mother’s name, you know. So tell me tell me about that disaster waiting to happen, Jonathan. what could happen there? Yeah. So, in a situation like that, then the mom will be on the hook for whatever uh nefarious acts on the road that happened with her uh you know, very carefully driving daughter there. And that’s a big problem as well as you talk to a lot of people on a daily basis that they’ll have, as you mentioned, even if they don’t have a terrible uh driving record, they will have children or maybe even family members that are either titled. you’ll see jointly a joint title right um of a parent and their child on a brokerage account which definitely opens up the door beyond just the typical like you said property casualty uh titling which should be delineated to help uh to mitigate the unnecessary Yeah. So, I mean, just to just to, you know, to pull things back into focus there. So, that if the, you know, if the daughter got in a wreck driving her mother’s car, that’s her mother’s responsibility, the $3 million that’s in a non-qualified account is on the table to satisfy the judgment, right? Or as you point out, if there’s a brokerage account that’s titled with the child and which is very common, I’ll put my daughter on, I die, goes to her. You know, we do a joint tent survivorship. Um and uh but then if the daughter is sued, right, because that’s her account, that entire account is exposed. So much better, you know, to use asset protection structures like the LLC’s that you suggested earlier. And let’s talk a little bit about LLC’s maybe um because LLC’s as uh um probably most people don’t know, these are state um uh um entities. They’re created at the state level. Taxation is different. this IRS check form tell them how you want taxed but it’s like setting up a corporation in fact it is a kind of corporation and it has to follow the form and the rules of whatever state the incorporation happens in so in Florida um the rules are different than Maryland or Texas or you know Oklahoma whatever so we have a couple of you know things that are really really important the first is that you want to use an LLC in a state that has strong asset protection laws right Florida has one so long as you follow the form. So does Texas. Who can think of a state that maybe doesn’t have a good asset protection law? I think maybe California. California. Yeah. Most of the Northeast, Illinois, you know, you probably may not pick on that area. It’s worth checking, you know, but California for sure has, you know, a lot relatively weak protections, you know, to protect, you know, affluent or successful people in many cases. So you want to make sure you have a state with a strong law. And as you mentioned earlier, Florida, not Texas, but Florida requires in order for an LLC to work as an asset protection structure, it has to have more than one owner. And owners in LLC’s are referred to as members, not shareholders, but members. Weird name, right? But that’s what it is. So, it’s got to be a multimember LLC. And the reason for that is the basis of the asset protection stretches back to partnership law. And you can’t have a partnership just with one person, but Texas doesn’t. Taxes, a single member LLC would work. So, it’s really important to make sure that the LLC is in a strong state and that the LLC follows that the operating agreement, which is the primary governing document of the LLC. The operating agreement is written by an attorney that knows what they’re doing to activate the asset protection opportunities. And I can tell you this isn’t often isn’t done. any idiot, you know, even me could set up an LLC. I’ve been to law school, but I’m not a practicing attorney. Um, can set up an LLC, you know, it’s simple, it pay to state, there’s a form, but it have the nuance so it actually functions properly. You want somebody who knows what they’re doing and is prepared to go into the court and explain to the judge why, I’m sorry, judge, but I know you issued a charging order for that judgment, but this entity is charging order protected, which is a term. Let me tell you why. Um, all right. So uh you know we talked you talked a bit a little bit earlier about you know underusing qualified retirement plans Jonathan you know as asset protection vehicles. Please expand a bit on that. Well, yeah. Well, especially 401ks, uh, which and many, you know, obviously it could delineate based upon the company, uh, but are even stronger than IAS for legal protection in some cases. And so, sometimes you will see, this is why you want to work with fiduciary, Jeff, is because some folks will encourage people to automatically roll something over, but someone who has a li high probability of being sued, um, it may be the best advice as a fiduciary that we use that word around a lot around here, uh, to keep that money in a 401k, uh, because it might many times, not all the time, you have to check, but would have a even a increased level of legal protection, especially at a high probability uh someone could get sued. So, so stuff like that, IAS as well up to a certain amount, Jeff said based upon the state, but 401ks in some case could be even stronger. So, that’s where again it ties into what kind of advisor you’re working with, not only their knowledge, but their incentives where advisors like us, you know, uh you know, we can manage money at the 401ks, etc. So, we’re always in a position to really just look at what’s best. So therefore, we’d still suggest you leave it there. But that’s another thing you want to look at, especially high probability lawsuits. Again, where your monies are located, where your dollars are located, and who’s advising you and why they’re asking you or maybe instructing you to move things. It really is a good point, and again, it’s to false state law. The protections for IAS and 401ks are different as you wisely point out. Uh but it really depends on what state you’re in and that that’s one of many factors that you might want to consider to see if it’s really in your best interest to move from a 401k to an IRA or something like that. But another thing is that if you’re a business owner or if you’re, you know, if you’re an employee and you have the opportunity to defer more money into um your qualified plan like a 401k, if you’re underutilizing your contribution opportunities, um you might want to shovel more money in there. And if you don’t need the tax deduction, use a Roth feature. Most 401ks now have, you know, Roth um accounts. You don’t get the tax deduction, but it grows taxfree. Um which is really, you know, kind of a wonderful opportunity. So again, using, you know, qualified p plans like 401ks as an asset protection vehicle, you kind of have, you know, you kind of have your choice of tax treatment if your 401k has a Roth Future, and most of them do these days. So, if you have spare cash and you know and you haven’t hit the contribution limits, shovel more into whatever your tax advisor says is the best place to do it and you will get asset protection on that money. You can’t get everything in there obviously, but you know, it’s it’s one of many tools that you have. You know, another thing really uh to look at is especially for business owners, and this is really a pet peeve of mine. If you own a business, in many cases your most valuable asset is your business. And a good way to kind of, you know, get a a beat on this is if you uh if you could sell the business without you working in it. If there’s cash flow, you know, that doesn’t require your personal involvement. Some business is just a job and if you if you you know, if you go if you stop working in it, there’s no value. Others are worth millions and millions of dollars that you could sell. That you know that better than us. But if you have valuable a valuable business, there are two ways you can be attacked. You know about the first one. you know, you your business can be sued um because of some liability, one of your employees went crazy and hurt somebody or you know, a crane fell on somebody, whatever. I call it a bottom up attack. But a top down attack, and I bet you haven’t thought much about this, is if somebody sues you and that business is in your name or you and your husband’s name, um and um then you and you get a law and you get a judgment against you, that business is on the table to satisfy the judgment just like your other assets. It’s a top down attack, you know, and there are ways you can protect against that. Um, back to LLC’s in Florida, you know, having a properly structured LLC that’s charging order protected, which basically means that if the judge issues a judgment, they can’t get out charging order protected assets. And these can be your business or your non-qualified investment accounts or your bank accounts or your investment real estate and a bunch of other stuff. So, that really really is something that business owners, please pay attention uh to that. Um, and and probably the last thing really that you don’t want to do with asset protection planning is waiting until you’re sued. When that happens, your options diminish significantly. In Florida, if you try to move assets after a threat appears, it’s called a fraudulent conveyance, and there’s a good chance that the jud the judge will insist that that that plenty be undone so you can pay what he thinks you owe. So, you want to do this before the clouds appear on the horizon. Really, really important to consider that. Do you have any other concluding thoughts, Jonathan or or Anna, before we wrap up this scintillatingly exciting topic on asset protection? Yeah. Well, I would just say that we see it every day in practice that these are generally uh very glossed over. Uh and so if you’re not really dealing with an expert uh dealing in the granularity of these topics, it definitely behooves you to talk to someone who is well versed in these areas. And so like here we are pretty well healed credential wise in those areas. And a lot of clients find value. And it regardless of their net worth, it’s amazing how many times a lot of these proverbial pinball flippers are a little slow uh as far as their planning goes. So definitely take the time to make sure everything is set. You worked hard to earn it. You earned you worked hard to earn it and you don’t want it to uh to be taken away. Yeah. And and not to overpromote us. You know, we think we’re really really good at this stuff and and we’re not aware of many other firms in the country, but you want to certainly use somebody that knows what they’re doing. And you might ask, you know, if it’s a lawyer, CPA, you know, what’s your what do you think about charging order protection? What’s that? You know, make believe you don’t know much about it. And see if they can, you know, give you the information we just have in the in the podcast. If not, you might want to consider it to somebody else. I think that we’ll try to get Megan to put a link or some kind of a response mechanism into the podcast so you can get the transcript of this and the long blog post that I wrote on it and actually some information from my last book. um and um and some other you know planning points that could help you with your asset protection. Do you have you have the final word for Anna? Anything else? I’ll just add you know working with clients over the years um you know a lot of them probably would have told me if I would have asked is asset protection a concern for you they would have said no um at the time and then months or maybe years later it does come up whether it’s a lawsuit whether it’s a a divorce or something like that that they weren’t expecting. Um, let’s take, you know, take the time now to work with your experts such as ourselves and make sure that the way that your your wealth is set up is the best most protected way it can now before these threats materialize later. Yeah. And and the odds that that happen in pretty pretty remote, but if your number comes up, you’re probably going to be screwed. I mean, there’s a lot a lot that’s on the table. Uh, so that that’s a really good point. So, let’s finish with that. you know, very frequently, you know, if it, you know, advisors in my experience are very rare that even get into issues like this asset protection planning. Um, but if it’s clearly laid out as we go through our wealth 360 processes, which something we do free for everybody, kind of as an example of our work, and I’d say, “Okay, Megan, I see that you’ve got an account at at the bank with your uh uh with your husband that’s worth about $800,000. if somebody sued you, um, they could take that away. It’s exposed. Do you care about that? Would you like to look at some strategies to maybe protect it and and keep it, you know, from being lost to a lawsuit? Everybody always says, “Heck yeah.” But that question is not asked nearly enough. So, ask yourself that. And if you’re in that category, please, if you don’t get help from us, get help somewhere. Thank you so much for watching. And and that will wrap up this week’s edition of Smarter Money Matters with uh the wealth doctor Jeff Camarda, my smarter brother Jonathan Camarda, CFA and other letters and super CFP at a wonder. Thanks so much for watching. See you next week. [Music]