facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
Safeguarding Your Entrepreneurial and Personal Wealth Thumbnail

Safeguarding Your Entrepreneurial and Personal Wealth

KEY TAKEAWAYS:

 ■ Business owners can be targets of unfounded lawsuits and other risks to their wealth.

 ■ Most entrepreneurs do not have a formal asset protection plan in place to mitigate risks.

 ■ Stress testing existing protection strategies can be a good step to take.

Think for a moment about how hard you have worked to build your company and your personal wealth over time. It feels great, doesn’t it?

The last thing you want to do is lose that wealth due to the carelessness or maliciousness of other people. That’s why it makes sense to consider putting asset protection planning (APP) strategies in place—or, if you already use them, evaluating whether what you’ve currently got is still capable of doing what you want it to do! 

By thoughtfully and proactively protecting your wealth against catastrophic loss, potential creditors, litigants, children-in-law and perhaps even future ex-spouses, you help ensure that you and your loved ones will be able to achieve serious wealth—and realize your most important goals.

The litigation threat

As a successful business owner, you are potentially a magnet for lawsuits and other threats to your financial health. The good news is that we find most entrepreneurs recognize the threats. In a survey of 616 entrepreneurs, nearly four out of five say they are concerned about becoming part of unjust lawsuits or being victimized in divorce proceedings.

The percentage of concerned entrepreneurs is high in part because many business owners have seen others like them impacted by lawsuits. In fact, of the entrepreneurs expressing concern, more than 75 percent reported they personally knew a business owner who was hit with a lawsuit and financially suffered because of it.

The  potential for litigation-driven losses  can be  exceedingly stressful  and problematic, and the experience can be accompanied by intense anxiety. It is not only the prospect of financial loss, but also the entire process of dealing with the lawsuit. Not surprisingly, we find that most entrepreneurs prefer to avoid these issues and scenarios. 

Asset protection planning 

While  nothing  can  stop  someone  from  suing  you,  asset  protection  planning  can  often mitigate the psychological and financial pain involved. That’s why we strongly recommend entrepreneurs consider making asset protection planning a key part of their overall wealth planning initiatives.

We define asset protection in the following way: 

          Asset protection planning is prelitigation planning intended to deter lawsuits and, if that is not possible, to promote favorable settlements.

The logic of asset protection planning is straightforward. Litigators who have brought unfounded or frivolous lawsuits against an entrepreneur can run into a wall when that business owner has a well-structured formal asset protection plan in place. By legally insulating your wealth, you may deter legal assaults you might otherwise experience. 

The very best asset protection plans motivate litigants to avoid court entirely because they recognize that it is highly probable that the legal system will provide little support—perhaps none—for them. This can allow entrepreneurs to favorably settle out of court and avoid any legal judgments against them. 

But let’s say court is unavoidable and it results in a judgment against you. Asset protection planning can still be useful, as it may limit the creditor’s ability to collect money from you. When getting paid is too arduous, a creditor is usually motivated to settle for less—sometimes substantially less.

The state of entrepreneurs’ protection

As compelling as asset protection planning is, we see a major gap between entrepreneurs’ concerns about litigation and their actions to limit it. 

Example: Just one-third of the 616 business owners surveyed have a formal asset protection plan. And even fewer of the entrepreneurs who said they are concerned have a formal plan set up!

Important: Note  that  nearly  65  percent  of  the  successful  business  owners  who  are  not concerned do have formal asset protection plans in place. This suggests that having such a plan may give entrepreneurs confidence that they are well protected, thereby reducing their concern about being sued unjustly.

Even though many entrepreneurs lack formal asset protection plans, that does not mean they are unprotected. For example, having various types of commercial insurance is a form  of  asset  protection—as  is  setting  up  different  businesses  in  different  corporate entities. Strong legal language indemnifying the entrepreneurs in their business formation documents is another example of asset protection. However, a formal asset protection plan is multifaceted, integrated and, whenever possible, synergistic. The multiple pieces work in concert to achieve bigger results. 

For  formal  asset  protection  planning  to  make  sense  for  entrepreneurs,  it  must  be  cost-effective and adaptable. The costs of asset protection planning are the initial expenses for the planning and implementation. Some asset protection strategies have ongoing costs, too. It is smart to understand all the costs and to make sure that there are no other approaches that will produce comparable results for less.

While some asset protection strategies limit flexibility, the ability to make adjustments to the  strategies  because  of  changing  circumstances  is  preferable  when  possible.  Just  as business situations often shift due to changing circumstances, so too should formal asset protection plans, to the extent possible.

Stress testing asset protection

There  is  no  formal  body  of  law  referred  to  as  asset  protection  law—in  contrast  to,  say, corporate law. It falls under legal risk planning, which itself is a subset of risk management. Therefore, formal asset protection planning can be said to be a bit fluid. There are strategies that  we  see  work  quite  well  in  most  instances.  But  some  strategies  are  less  effective. Moreover, talented legal and financial minds are always looking to devise new and revised solutions to legitimately protect the wealth of entrepreneurs. 

Because of the often-fluid state of formal asset protection planning, it is advisable—whether or not you have a formal asset protection plan—to periodically stress test your situation with respect to insulating your wealth. A stress test is a process of carefully evaluating the actions you have taken to make sure you will likely get the results you expect—and that you are not missing anything that could further benefit you and your wealth. A stress test can be a smart move if you are even just a little unsure that your wealth is sheltered from frivolous and unfounded lawsuits.

Next step: Talk with your financial professional about evaluating your asset protection needs and the effectiveness of solutions you currently have in place.



VFO Inner Circle Special Report By Russ Alan Prince and John J. Bowen Jr.© Copyright 2020 by AES Nation, LLC. All rights reserved.