For entrepreneurs, frivolous and unfounded lawsuits are a matter of when not if. Thus, if you have no asset protection plan in place, you’re very likely planning to have your assets unfairly taken from you at some point in the future.
All asset protection strategies aren’t created equal, though. “Asset protection can be approached from multiple angles,” says P. J. DiNuzzo, Founder and Lead Consultant of DiNuzzo Middle-Market Family Office and author of the Wall Street Journal bestselling book, The DiNuzzo Middle-Market Family Office™ Breakthrough: Creating Strategic Tax, Risk Cash-Flow and Lifestyle Options for Successful Privately-Held Business Owners and Affluent Families. “The first is the legal side. This includes estate planning, litigation, and corporate structuring. Asset protection here means pulling various parts of the legal world together into a cohesive strategy. The individual leverages different legal technologies to gain this protection.”
“There’s also the insurance side, ideally working in harmony with the legal side.” PJ added, “This includes the policies needed for the protection of personal assets like homes and cars, or even the assets in a retirement plan. This is also where umbrella coverage comes into play.”
Lastly, asset protection should also be approached from a broad wealth planning perspective. On this, P. J. noted, “Asset protection should fit into a larger, overall wealth planning strategy for the individual. This strategy of course includes budgeting for insurance and litigious expenses, but also anticipates and plans for needs years down the road.”
Buyer Beware
An obvious mistake people make with asset protection? Not paying attention to it until it’s too late. The proverb that people often lock the barn door after the horses escape, not before, applies here. For example, you can’t protect your assets by moving them to safer positions after you’ve been served legal papers. That’s referred to as a fraudulent conveyance.
Additionally, sometimes affluent people think they have done something for their asset protection, but they’re just doing the bare minimum and utterly unprepared for real liabilities. This means adopting solutions that act as a placebo in their mind, but in reality, they’re not relevant or sufficient. For example, they may buy an umbrella policy just to check the box without doing the proper calculation for the right level of coverage.
Furthermore, there are many vendors and service providers in this area who don’t sell useful products. Affluent people should be cautious to avoid getting taken advantage of in this area.
“Principles of asset protection apply to anyone with significant assets and a desire to hold onto them,” says Mike DiNuzzo, Senior Vice President, Principal, and Risk Management Team Leader at DiNuzzo Wealth Management. “This is especially true of middle-market business owners with a long-term financial plan, or business owners who want one. If you don’t want to have your financial picture destroyed by a frivolous lawsuit or other liability, this can be worth its weight in gold.”
This especially applies to public figures or influential people who may be even bigger targets of frivolous litigation. “We live in a very litigious society. Anyone with a high chance of being sued, such as entrepreneurs, real estate developers, YouTube or other social media personalities, or people in high-litigation industries, such as the medical professions, should revisit their asset protection strategy on a regular basis,” added Mike.
Making A Decision
According to Mike, one needs to “understand the rules of their primary state of residence. Different states can have materially different laws and ways that they handle asset protection, lawsuits, and insurance. Additionally, you should work with a professional who understands the legal tests and precedents that have occurred regarding the assets you need to protect to make sure you’re truly as protected as you think you are.”
As Mike and P. J. note, working with professionals who do not only understand the rules but know how it fits into the big picture of your goals is critical. With such an important topic, you might consider working with a Middle-Market Family Office or another integrated group of professionals who understand asset protection and work together to make sure your plan is optimized and all of your professionals are on the same page.
Russ Alan Prince is the executive director of Private Wealth magazine and chief content officer for High-Net-Worth Genius. He consults with family offices, the wealthy, fast-tracking entrepreneurs, and select professionals.