Do I need asset protection? How much do I need before I enact a plan? When should I consider it? The answers are different for everybody. Weigh the two main factors: the value of your assets and your risk. The value of the assets consist of what they are worth minus what you owe. Next, consider whether or not the asset is protected, such as a 401(k) retirement plan or a homestead exemption on your primary residence. Then consider the asset protection planning steps you need to take. Finally, take action. We have seen people “head scratch” themselves into the poor house by delaying. So, get the information you need quickly and act before it’s too late.
Risks can stem from your business, your business partner, driving your car, your children, your home, etc. As you know, most of us are already exposed to some degree of risk. But most of are not fully protected from that risk. So, what are the asset protection planning the thresholds that determine what I need?
Insurance is not Nearly Enough
There are tactics that protect your assets regardless of net worth. A well-crafted asset protection plan will consider the assets and their value. That is, it will assess the types of assets that you have and your risks. If you own and drive a car and have a standard liability insurance policy, for instance, that is only a single layer of protection. Therefore, should you be at fault in an accident that exceeds your coverage limits (a very common occurrence), everything you own is exposed. The same goes with business liability and being a homeowner, or any other avenue of risk. Asset protection, as such, is proactive protection for your wealth.
We just spoke with a physician who has a $3 million malpractice policy. The problem? Tragically for his patient, his nurse botched a procedure that caused severe brain damage. Tragically for him, the patient’s family is suing him for $28 million. As you well know, no matter how much insurance you have, someone can always sue you for more.
How to Calculate Your Asset Protection Needs
Here is the asset protection information you need to calculate the thresholds you need to secure your wealth:
Do the math.
What is the net worth of the assets that a potential legal opponent can take? Then, how much does the asset protection plan cost?
Networth – Cost of Asset Protection Plan = ?
If that is a positive number, especially a large positive number then set up an asset protection plan. Otherwise, scale it down to size.
For example, you live in California with a $1.2 million home. You have a $500,000 mortgage. That is $700,000 equity. You are married and have (at the time of this writing) a $100,000 homestead exemption. So, $600,000 of equity is exposed.
You have three rental properties with $100,000 equity each. This equity is fully exposed because the homestead exemption only applies to the primary residence. One home combined per married couple (sorry, you only get one). So that is $300,000 of exposure.
You have $700,000 in cash and stocks. Of this, $150,000 is in a 401(k), which is protected. So, that leaves $550,000 that a lawsuit can take away from you.
You have two cars; both paid off. One is worth $60,000 and the other $40,000. That is $100,000.
Value of Your Assets
Okay, so we have $600,000 + $300,000 + $550,000 + $100,000 = $1,550,000.
COST OF YOUR PLAN
Cost of the plan. Let’s say, for example, an asset protection plan for the above structure costs $24,000. Suppose you are in the 36% federal tax bracket and have a 9% state tax rate (rounding for simplicity). Moreover, let’s say your CPA says you can write off the cost of the plan. So, that is 36%+9%=45%. So, you write off 45% of the plan, so really end up paying for only 55% of it. The plan really ends up costing you $24,000 X .55 = $13,200
The bottom line
Value of Your Assets Cost of the Plan Total $1,550,000 – $13,200 = $1,536,800
Keep in mind, this is only one example. If your exposed net worth is $100,000 and a lawsuit can take all of it, what do you do? You will likely need fewer and lower cost legal tools. Suppose the plan costs only $3500. If you can deduct 1/3 of this from your taxes, the plan really only costs $2333. Your upside? $97,667. So, should you spend $2,333 to save $97,667? Many would say the answer speaks for itself.
What are your risks?
Do you live in the United States or elsewhere? The US, for example, has 4.4% of the world’s population. Amazingly, it has 80% of the world’s lawyers. As a matter of fact, the US is where 96% of the world’s lawsuits are filed. When you think about it, the lawyer suing you doesn’t care if you are a nice guy or gal. This is because you are just a way to put food on his own table. If he doesn’t sue, he doesn’t eat. The pride of lions doesn’t care if the baby gazelle is cute, right? To them it’s kill or die. Same for the lawyer correct? None of us are the special exceptions. So, do the math. That is, if you have assets and the plan costs less, protect them.
Anticipate future net worth.
It’s not just what you have now. It is what you will have in the future. You don’t build a house and then build its foundation when you get around to it. In anticipation of the construction of the house, the builder will first pour a foundation. You install your asset protection plan first. Then, your wealth will grow inside of it.
Realize your exposure.
You wouldn’t expose your family to foolish risk. Thus, you would not walk them through a dark alley at night on the bad side of town just because you don’t see any muggers at that moment. You anticipate danger. Then you act to prevent exposure. It is the same with your wealth. Someone right now is looking for someone else to sue.
A lawsuit doesn’t tap you on the shoulder and tell you it’s on the way. So, you don’t necessarily know a former employee is filing a false sexual harassment lawsuit against you; that someone will falsely feign an injury or someone will slip and fall in your front lawn. Likewise, you don’t know if someone is going to suddenly slam his or her breaks on in front of you (perhaps on purpose) today. Any of those lawsuits could far exceed insurance coverage limits. Don’t fall into the false notion that you are somehow the special exception. The lawyer suing you won’t.
Do I Need Asset Protection?
You should consider what you stand to lose if you are ever threatened with a legal storm. Equity in your home, investments, vehicles, bank accounts. Depending on how much accumulated wealth you have to protect, the levels of planning vary. Less than $100,000 might not warrant offshore legal structuring. Whether under or over $1 million, there are a number of ways to secure your assets into a tailor-made plan that you are comfortable with. There are plans for those of higher net worth that, accordingly, have case law histories of proven success.
Planning asset protection isn’t important just for millionaires, it’s important for anyone that has worked hard to have what they have accumulated.