Asset Protection

What Is Asset Protection?

Most asset protection "gurus" believe asset protection revolves around helping clients who have money protect that money from your "typical" creditor from a negligence suit. A few examples of a typical creditor are someone injured by someone negligently driving a car, a patient who sues a physician for malpractice, or someone who slips and falls on property and sues the owner.

While it is true that clients with money do need to protect themselves from the "typical" creditor, there are many other creditors out there clients need to be protected from.

Asset protection can be done domestically or offshore. Domestic asset protection revolves around the use of LLCs and FLPs.

Who are other common creditors clients don't think of as a "typical" creditor?

The IRS and state government (if you have a state income tax). The IRS is everyone's number one guaranteed creditor every year. Every year high-income clients pay taxes to this creditor. Would you like to pay $15,000, $50,000, $100,000+ less in income taxes this year? Absolutely. That's what our firm may be able to help you accomplish.

The stock market. You know this is the case if you had money invested from 2000-2002 when the stock market lost nearly 40% of its value and again when the stock market crashed between 2007 and March of 2009 when it lost 59% of its value (numbers from Yahoo Finance). Would you like to position your money in wealth-building tools with good potential for growth and still principally protect all or the majority of your money? Would you like to learn about a wealth-building tool that comes with an Income Account Value* (not walk away value) that could provide a guaranteed lifetime income* you can never outlive?

*Any guarantees mentioned are backed by the financial strength and claims-paying ability of the issuing insurance company and may be subject to caps, restrictions, fees, and surrender charges as described in the annuity contract.

Estate taxes. Clients with wealth all worry about the estate taxes that will be paid upon their death. Other advisors may not be familiar with estate planning and the various ways to mitigate estate taxes. Our firm has helped many clients with "advanced planning" strategies that may not be well known by other advisors.

Long-term care (LTC) expenses. The most likely expense for clients over the age of 65 is LTC expenses (drug costs, home health care, nursing home, surgeries, etc.). It is vitally important for clients to protect themselves from this guaranteed expense. Most clients do not like the idea of paying LTC insurance expenses because it is seen as a waste of money if you don't use it. Our firm has experience using products such as FIAs and single premium life policies that have wealth-building or transfer features, including an LTC benefit.

*Any guarantees mentioned are backed by the financial strength and claims-paying ability of the issuing insurance company and may be subject to caps, restrictions, fees, and surrender charges as described in the annuity contract.

Is a Lawsuit Lying in Wait for You?

What could someone sue you for that could potentially bankrupt you?

Answer: Almost anything.

Lawsuits are just one of the multiple assaults that could make mincemeat of your lifetime of savings and hard work. The ability to be sued has nothing to do with the merit of the case but has more to do with the offended party finding a lawyer to take their case.

It could be about almost anything — from someone claiming they tripped and hurt themselves on your property to results from a minor automobile accident. And even if you think you have little to protect, you are still at risk.

You can be perfectly in the right, but the jury could rule against you. Or the cost of defending yourself against the lawsuit could be so prohibitive it would be cheaper to settle out of court. Nothing is certain, and a lot depends upon the lawyers on each side, the judge, and the jury.

In our very litigious society, protecting one's assets is no longer just the province of the very wealthy. Anyone who has set a nest egg away for retirement, or has experienced home appreciation, could see their lifetime of hard work and savings end up in someone else's bank account.

If you own a business, lawsuits can come, not just from offended people, but from government organizations who feel you are in violation of their rules, or groups like environmental organizations who've decided to target you for alleged pollution issues or other environmental sins.

Professionals Have Unique Liability

If you're a professional (doctor, lawyer, CPA, engineer, etc.), you probably already know the risks. You can be personally sued for any action you take as part of your profession, regardless of your business structure. In other words, professionals can't hide behind the limited liability of work performed through corporations, P.C.s, or LLCs — all of your personal assets that are not protected are at risk.

Protecting Your Assets

Whether you work for a corporation or have your own business (or both), it is truly a legal minefield out there. Proper asset protection helps you navigate that minefield safely and come out on the other side with your wealth intact.

You want an asset protection plan so solid that an opposing attorney can see exactly what you have set up and then walk away shaking his head, saying, "It's not even worth trying." Since no two situations are the same, we offer a variety of strategies to protect your assets.

Negligence Lawsuits — Dangers to Your Wealth

The following are a few real-world examples of lawsuits that could happen to you and, in turn, take your wealth. These are meant to motivate you to act now to protect your wealth.

Boats, Automobiles, Snowmobiles, Planes (Other Toys)

If you own a boat or Wave Runner, an automobile, snowmobile, plane, or other toys, then you have the normal liability problems that go along with negligent driving of each.

Drunk Driving. While we all know it is not right to drink and drive, many people do it. With blood-alcohol legal limits going down each year, it does not take much to be seen as legally drunk in the eyes of the law. If you drink and drive and have an accident, you will more than likely be sued personally and your assets will all be at risk. If you simply drive negligently and cause harm to another, you will more than likely be sued and your assets will be at risk. This is not typically an issue for someone with a net worth of less than $50,000 — negligent actions are a problem for clients with wealth.

Teenage Driver. If your teenage dependent is driving in a negligent manner and causes harm to another person, the owner and driver of the automobile, boat, Wave Runner, or snowmobile is more than likely going to get sued with the same damage potential and shortfall of insurance problems illustrated above. Roccy DeFrancesco, JD, author of Retiring Without Risk, had a very wealthy family friend whose teenage child took a friend out for a ride on a snowmobile, hit a tree, and killed the friend. The parent had the typical $1,000,000 commercial liability coverage, but the lawsuit was for multi-millions. The parent ultimately had to dip into his own pocket and pay an additional $2,000,000 to settle the lawsuit and keep it from going to trial, where a jury verdict could have been much higher.

Homeowner Liability

Most people with wealth who have asset protection worries own their own home. Homes cause unique liability problems that many clients are not aware of.

As a homeowner, you will typically throw a few parties for your friends each year. If you serve alcohol at those parties and one of your guests leaves the party after drinking too much, gets into a car accident, and kills the three passengers (or worse turns them into quadriplegics), guess who is going to get sued for negligence? You, the homeowner. Most people think that an umbrella liability policy of one million dollars will protect them; but if you can be linked to a death or serious injury via negligence, your one-million-dollar umbrella is not going to go very far. After your insurance pays one million of the three-million-dollar verdict, the attorney for the plaintiff is going to go after all your personal assets.

While most homeowners think their property is in good repair, many times it is not. If you have guests over to your home, you have a "duty" to keep the premises in "good repair." This duty is heightened if you run a business out of your home. If you have a faulty handrail or other defects that could cause harm to a visitor, you have personal liability that is real and could put all of your assets at risk from a negligence suit.

Vacation Rentals

It seems to be in vogue today to diversify one's portfolio into real estate. When the stock market goes flat, investors look to real estate (many times rental property) as a way to spread out their investments.

Vacation rentals are nice to have, but they create a significant liability problem for the owners. When property is commercial in nature (operating a business in a building or owning a rental property), there is an increased duty of the property owner to keep the property in good repair. Most clients own (title) their rental property in their own name, and if there is an injury to a tenant or someone visiting a tenant, the lawsuit will be against the client personally, which will put all of the client's personal assets at risk.

Teenage Children

If you have teenage children, chances are at some point you will go out of town and leave your teenagers at home — and they may have friends over. What happens when a party of fifty teenagers gets out of hand, everyone has been drinking, and drunk teenagers pile into their cars to drive home? If those teenagers hit another driver — say, a cardiologist who can no longer practice medicine for the next 30 years due to injuries — who is liable? The teenage driver's parents may be poor with no auto insurance. But the homeowner where the party was held and whose alcohol was consumed is absolutely going to get sued, and the personal injury attorney is going to go after everything the homeowner owns, including their personal residence. A $1,000,000 umbrella liability policy is not going to go very far against a $10,000,000+ verdict.

Summary

The previous examples should put all readers on notice that the threat of a lawsuit is very real in this increasingly litigious society. You can take the attitude that it won't happen to you, or you can choose to be proactive to protect your wealth by contacting our firm to start down the road of becoming asset protected.

Domestic Strategies — What Is "Domestic" Asset Protection?

The obvious answer is asset protection that is not done "offshore." Domestic asset protection comes in many flavors — you will get a different answer to your asset protection questions depending on whom you talk with:

• If you ask insurance agents about asset protection (in many states), their answer is to put your money into life insurance and annuities.
• If you ask pension consultants, their answer is to put as much money as possible in an ERISA-qualified plan.
• If you ask the typical CPA/accountant or attorney, they will tell you that they don't really understand the question.
• If you ask our firm this question, you will be asked a number of important questions, followed by a client questionnaire and then a detailed summary of your problems and solutions.

As a general statement, domestic asset protection revolves around the use of family limited partnerships (FLPs) and limited liability companies (LLCs).

Why Not a C- or S-Corporation?

Because of the remedy a creditor can obtain when asking a judge to make a debtor pay off a judgment or settlement. If assets are owned by a properly set up LLC or FLP, a creditor asking the courts to have those assets turned over can only obtain a "charging order" from the court — the court can't invade the LLC or FLP and give those assets to the creditor.

What a creditor cannot get with a charging order:

• A charging order does not transfer the interest in the LLC to the creditor or force the debtor to sell his/her interest and turn over the sale proceeds.
• A creditor cannot force the LLC to sell assets.
• A creditor cannot force an LLC to distribute income.

What does a creditor get with a charging order? The right to pay income taxes on income generated in the LLC or FLP but NOT distributed. A 1977 revenue ruling (77-173) states that a creditor who obtains a charging order can be treated as a partner for federal income tax purposes.

If assets are owned by an individual or by a C- or S-Corporation, the judge can direct the debtor to hand over assets in their own name directly to the creditor — no asset protection. With an S- or C-Corporation, the judge can make you liquidate your interest and give the proceeds to the creditor, make you transfer your interest in the corporation to the creditor, or let the creditor vote your interest in the company.

A C- or S-Corporation is generally NOT a good tool when trying to protect personal assets such as a family home or condominium, rental or non-rental property, an IRA, stocks or mutual funds, life insurance, bank accounts or CDs, planes, boats, automobiles, or other business entities. If you have anything of wealth that you own in your own name (or that of your spouse, or co-owned with your spouse), it is at risk from creditors.

Summary

Many people in this country do not have their assets protected correctly. While an FLP or LLC is not a magic pill to be used as a cure-all, it is the foundation for any domestic asset protection plan and something that can start all clients on their way to protecting themselves from business creditors and personal creditors.

Stock Market Protection

For readers who lost 40%+ when the stock market crashed in 2000-2002 and 40-50-60% when it crashed in 2007-March of 2009, the idea of protecting wealth from stock market losses with Fixed Indexed Annuities (FIAs) will be a real eye-opener.

Why FIAs?

Because they can have the following characteristics:

• 100% principal protection (your money will never go backward due to negative returns in the stock market).
• Positive gains in a stock index are locked in every year.
• An Income Account Value* (not walk away value) that could provide a guaranteed lifetime income* you can never outlive.

*Any guarantees mentioned are backed by the financial strength and claims-paying ability of the issuing insurance company and may be subject to caps, restrictions, fees, and surrender charges as described in the annuity contract.

Why Don't You Know About This Product?

Some Broker-Dealers (the entity who license advisors to sell their stock and mutual funds through) forbid advisors from selling or discussing FIAs with clients — and most of these advisors do not disclose that to the clients they are supposedly helping build wealth. We believe FIAs can play a vital role for people looking to grow wealth in a secure manner, knowing their money will never go backward.

Index or fixed annuities are not designed for short-term investments and may be subject to caps, restrictions, fees, and surrender charges as described in the annuity contract. Guarantees are backed by the financial strength and claims-paying ability of the issuer.

There are a number of different FIAs with guaranteed income riders in the marketplace, and these products change periodically — the goal here is simply to make you aware that they exist and how they work.

Is Your Plan Up to Date? A Quick Checkup

The following statistics, provided by the Wealth Preservation Institute, describe a general public looking at a group of ten:

• 1-2 will NOT have a Simple Will
• 5-6 will NOT have Durable Powers of Attorney
• 5-6 will NOT have Marital Living Trusts
• 9-10 will NOT have a Family Limited Partnership (FLP)
• 7-8 will NOT have an Irrevocable Life Insurance Trust (ILIT)

Many people know their plans are NOT in order but believe they are too busy and that they will get to it "when they have the time." If that sounds familiar, please act now to put your plan in order.

Frequently Asked Questions