Asset Protection is not just for the super rich!

Many people view asset protection as the playground for the super rich. Some hear the words and cringe with fear. In reality, we should try to emulate the tools the super rich use to not only create wealth, but keep it as well. I mean honestly, do you want to continue to copy what your broke brother-in-law does, or would you rather learn the tips and tricks of the super wealthy? Thought so.

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Asset Protection Tip #1

Start your own business. I know this seems easier said than done, but I am not talking about starting the next Microsoft. Employees are at a disadvantage when it comes to wealth creation and accumulation. They don’t enjoy the tax advantages that entrepreneurs have. The number of deductions available to small business owners is rather large. Things like home office deduction, health insurance, office supplies, cell phone, vehicle expense, etc. I am not here to tell you what kind of business to start, but the opportunities are tremendous right now. Make your path.

Asset Protection Tip #2

For US citizens and residents, structure your business as a US LLC. By saying this, I really mean you need to make sure it is properly structured in the right state with a good operating agreement. I have discussed these things in the past so I won’t rehash them here, but a properly structured LLC is critical. If not done right, you are wasting your time. A US LLC gives you protection from both inside and outside creditors unlike a corporation. This means you are protected from the activity of the business as well as the business being protected from your personal activity.

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Asset Protection Tip #3

I will reiterate here the importance of properly structuring your LLC. If you have significant assets to hold within the LLC, this should not be a do-it-yourself project. You are putting your wealth at risk here. A properly structured LLC registered in the right state will give you charging order protection. For example, if a judgment is issued against you for $1M and the court finds your assets are held within an LLC, the only remedy for the creditors is a charging order. The charging order states that as your LLC pays distributions to the member attached in the judgment, it must pay the creditor to satisfy the judgment. The charging order cannot force the LLC manager to pay a distribution, liquidate assets, or take a membership interest to satisfy the judgment. It is essentially a lien. If the operating agreement is written well, the manager can withhold a distribution thus leaving the creditor with an uncollectable accounts receivable that he will have to pay taxes on.

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Asset Protection Tip #4

Separate your business operations from your investments. For example, if you own several income producing rental properties, you should separate each piece of real estate into its own LLC and form another LLC as the commercial operation for property management. If you own a portfolio of liquid investments like stocks, bonds, options, commodities, etc. you should hold this asset in a completely separate LLC. By segregating your assets, you limit the risk to only that one LLC. If you have a tenant in one of your rental properties that is injured and you are liable for a $1M judgment, the assets held in that one LLC are the only thing at risk.

Asset Protection Tip #5

Don’t forget to properly insure yourself against loss. For example, if you have a net worth of $2M but carry the bare minimum coverage on your auto policy, you are putting yourself at risk. The US is the most litigious society in the world with nearly 1.2M practicing attorneys, many of them are the ambulance chaser variety. A $1-2M umbrella policy is cheap insurance and can cover you the next time you rear-end someone at a stop light. The same goes for your homeowner’s policy. This is cheap insurance in the event that someone leaves your home after the Superbowl party a little inebriated and causes an accident. The ambulance chaser will find out the alcohol was served at your house and you will be attached to the lawsuit.

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August 2, 2010