Do I need asset protection? How much do I need to plan? When should I consider it?

There’s a gambling saying, “If you want to be a winner, you have to walk away from the table a winner.” One time-honored method of reaching this result is to systematically take your chips off the table as you win them, so that your potential for losses stays small.

So the answers to the questions are simple, “Depends”. You have to consider two main factors: the value of your assets and your risk.

The value of your assets is how much your asset worth minus what you owe. Then consider whether or not the asset is protected, such as your investment, 401(k), real estate, or a homestead exemption on your primary residence.

If this value is positive, then consider the asset protection planning; Asset protection planning is all about taking chips off the table in good times, so that you still can walk away from the table a winner no matter what happens in bad times.

Those who worry the most about asset protection are those who are exposed to the most risks, and the most likely to get sued.

Risk can arise from different sources; it can come from your business, your business partner, driving your car, your children, guests coming to your home, or even strangers walking on the side walk in front of your house etc. Most of us are already exposed to some degree of risk. But most of us are not fully protected from those risks. So, what are the asset protection planning, it is to determine the threshold for what you need to protect.

There are tactics that protect your assets regardless of net worth. A well-crafted asset protection plan will consider the assets, their value or even the potential value in the future. 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, that is a single layer of protection. Should you be at fault in an accident that exceeds your coverage limits, everything you own is exposed.

The same goes with business liability and being a homeowner, or any other avenue of risk. Asset protection is proactive protection for your wealth.

We just spoke with a physician who has a $3 million malpractice policy. The problem? His nurse botched a procedure that caused severe brain damage. The patient’s family is suing him for $28 million. No matter how much insurance you have, someone can always sue you for more.

Go ahead sign up my financial education mailing list, I will occasionally send you blogs and news on investment, retirement, protection, long term care, kids education, tax, asset and estate planning etc…, or click here if you would rather to reach out to me directly or you would like to have a chat with me on how to start your asset protection planning …

How to Calculate Your Asset Protection Needs

Here is the basic information you need to calculate the thresholds you need to secure your wealth:

1.  Do the math.

What is the net worth of the assets that a potential legal opponent can take? 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.

Example

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 of assets.

COST OF YOUR ASSET PROTECTION PLAN

Let’s say 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). Let’s say your CPA says you can write off the cost of the plan. So, that is 36%+9%=45%. 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 0.55 = $13,200

The bottom line

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. Should you spend $2333 to save $97,667?

Not very complicated, right?

Well, if you still want to learn more about asset protection planning, go ahead sign up my financial education mailing list, I will occasionally send you blogs and news on investment, retirement, protection, long term care, kids education, tax, asset and estate planning etc…, or click here if you would rather to reach out to me directly or you’d like to have a chat with me on how to start your asset protection planning …

2.   What are your risks?

Do you live in the United States or elsewhere? The US has 4.4% of the world’s population. It has 80% of the world’s lawyers. The US is where 96% of the world’s lawsuits are filed.

The lawyer doesn’t care if you are a nice guy or gal. You are just a way for him 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. If you have assets and the plan costs less, protect them.

3.   Anticipate future potential net worth.

However, A good protection plan isn’t just to protect what you have now; it is is to protect what you will have potentially 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. Similarly, you need to have your asset protection plan first.

4.   Realize your exposure.

You wouldn’t expose your family to foolish risk.

Thus, you would not want to 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.

If you want to protect them from danger, then you act to prevent exposure.

It is the same as your wealth. Someone right now is looking for some one else to take advantage of.

A lawsuit doesn’t tap you on the shoulder and tell you it’s on the way.

You don’t 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.

You don’t know if someone is going to slam his or her breaks on in front of you (perhaps on purpose) today.  Any of those lawsuits could far exceed insurance coverage limits.

So 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?

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.

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 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.

Ok, I need a plan. Then what should I do?

You can sign up my financial education mailing list to get more financial educations, so you can start to plan for yourself; by signing up my mailing list, I will occasionally send you blogs and news on investment, retirement, protection, long term care, kids education, tax, asset and estate planning etc…, or click here if you would rather to reach out to me directly or you’d like to have a chat with me about your financial status or health…