If you own any assets or have any savings, it is important that you make sure you are protected against future claims or lawsuits regardless of whether you own your own business.
There are a number of situations in everyday life that could give rise to potential lawsuits, including driving a car, riding a bike, or simply owning a home or vacation house.
A good tax strategy must take into account asset protection. When determining what structure to use for your business or investments, protection for your assets must also be considered along with the tax and legal implications.
This article gives a brief overview of the key considerations relating to asset protection and why it is imperative that entrepreneurs make sure they are fully protected against any potential claims or judgements against them in the future.
Why is Asset Protection Important?
Aptly named, asset protection is protection for your assets against judgements. As a practical matter, we live in a litigious society and there are countless civil lawsuits filed each day against business owners and individuals with assets or accumulated savings.
The most classic example involves a business owner with a customer who slips and falls on their premises. Customer sues the business owner for an exorbitant amount of money and wins the lawsuit.
Business Owner did not have sufficient insurance to satisfy the claims and the assets of the business are not enough to pay for Customer’s injuries. Customer is able to come after Business Owner’s other assets not related to the business, such as their personal residence, to satisfy the judgment.
Lawyers are quick to take cases where the client is suing someone that is likely to have the means to pay if the case is decided in their client’s favor. Therefore, entrepreneurs must make sure their tax and wealth strategies take into account planning for protection of their assets.
Many believe the risk of a large judgement against you is small; however, the reality is that these types of lawsuits are filed every day with increasing frequency. If you are a successful business owner or a high net worth individual, the chances of having a lawsuit filed against you during your lifetime are quite high.
Why Insurance Alone is Not Sufficient
It is always advisable to have insurance against any potential risks or exposures you may have with respect to your business and investments. Insurance is always the first line of defense against any damage to your property or business.
You should also have insurance to protect against and defend you in connection with any potential lawsuits or judgements against you. Nonetheless, insurance alone is not sufficient to protect you from the potential risks.
Most insurance policies have significant gaps or exclusions that could result in non-coverage. It is quite likely that your current insurance policies would not cover accidents that can occur from activities you engage in on a frequent basis.
Insurance companies are also notorious for finding every reason possible to deny payment for a claim. You may not even be aware that certain exclusions could apply as a result of minor details resulting in you being personally liable for judgements against you.
In some cases, it is not possible to obtain sufficient insurance. Umbrella policies above certain limits are frequently not available. If you have a net worth exceeding $4M, finding umbrella coverage for your assets above $4M may not be possible or economical.
Individuals who engage in certain activities, such as boating, skydiving, or other higher risk activities, may find that their insurance policies do not cover them for accidents that occur while engaging in those activities. In these situations, protecting your assets is necessary to shield you against large claims that exceed the caps on your insurance policies or situations where your insurance policies do not apply.
There are also a number of situations where individuals in a given profession, such as lawyers, doctors, or other licensed professionals, who may not easily be able to avoid having their personal assets at risk against malpractice claims.
Traditional asset protection strategies, such as insurance or use of a Limited Liability Company (LLC), may not be available or may only provide limited protection. In these situations, it is critical that you ensure your other assets which are not connected to your business, including any real estate or stocks or bonds in your name, are fully protected against any potential malpractice claims in the future.
What is an Asset Protection Strategy?
The more assets you have, the more exposure you have to lawsuits. A good asset protection strategy takes into account your specific facts and circumstances. Moreover, you should develop a holistic approach which allows you to accomplish your business and investment objectives for building wealth in a safe manner that does not leave you exposed to the risk of future claims or judgements against you.
A strategic objective of an asset protection strategy will have the added benefit of making you a less attractive subject for potential lawsuits. Attorneys generally only want to take on easy cases where they know they are likely to get paid.
If an attorney sees that you have properly structured your affairs in a way that makes it less likely that your assets are available to satisfy any judgements against you, the attorney will be less inclined to take a case against you.
How to Develop an Approach to Asset Protection
The professionals at Winsmith Tax can help you design a comprehensive wealth and tax strategy for your business operations and investments which takes into account planning for protection of all your assets. Schedule a free consultation today to get started on developing your tax and wealth building strategy.
Please note that Winsmith Tax is not a law firm and is not otherwise authorized to provide legal advice. In connection with setting up your business and developing an approach to asset protection it is highly recommended that you consult with a licensed attorney. The content contained herein represents our opinions and is not intended to constitute legal advice.