Asset protection utilizes various legal tools to ensure your assets and wealth are kept safe and secure.
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Asset protection is about making your assets harder for potential creditors to access.
Without asset protection, creditors can seize your business assets and even go after personal assets.
For business owners and entrepreneurs, protecting your assets from legal threats is critical to survive and thrive in today’s high-liability environment. Lawsuits, creditors, and other risks can quickly devastate companies and personal finances without proper safeguards. This comprehensive guide will explore what asset protection entails, reasons it’s vital for owners, strategies to utilize, and mistakes to avoid.
Asset protection refers to proactively utilizing legal tools and strategies to shield your assets and wealth from potential harm. The main goals include:
Asset protection can potentially safeguard many types of valuable assets, including cash, bank accounts, stock investments, bonds, mutual funds, real estate, brick and mortar business locations, ownership shares in private companies, retirement accounts, insurance policies, precious metals, art, collectibles, trust deed investments, and other personal possessions.
Some of the common legal strategies and tools used in asset protection planning involve:
Despite the range of available strategies, a 2021 survey by AdvisorSmith found that 46% of small business owners lack even basic asset protection structures and plans in place. However, taking proactive steps to implement the right planning makes a major difference in preserving wealth, even if aggressive lawsuits arise. For example, a simple initial step like forming a Limited Liability Company (LLC) for operating a business can add a strong layer of early protection before more advanced strategies are put in place.
At its core, prudent asset protection is about removing assets from easy access by future potential creditors and litigants. This is accomplished by transferring ownership and control of assets using carefully crafted legal structures and jurisdictions that provide protection by the applicable laws.
For example, if you personally own substantial business assets or real estate holdings and you are later sued in a lawsuit, those assets could be prime targets for aggressive creditors to attempt to seize quickly to satisfy a judgment. However, if those same assets are held by an offshore trust or an entity that you do not own or control as an individual, they are much more protected and untouchable by legal actions.
Effective asset protection integrates legal strategies like Limited Liability Companies (LLCs), Protective Asset Vehicles, irrevocable trusts and offshore accounts and entities to remove direct ownership and control over assets from the business owner – making future seizure much more difficult and realistically impossible in some cases.
According to recent data from law firm Hunton Andrews Kurth LLP, the average cost of outside legal counsel to defend a professional liability lawsuit is over $61,000 for a small or midsize business defendant. Average settlement amounts requested by plaintiffs exceed $200,000. With legal costs steadily rising each year, proper asset protection is more vital than ever for business owners aiming to preserve their hard-earned wealth for the future.
There are several compelling reasons business owners need to prioritize and invest in protecting their assets proactively:
By nature, owning and operating a business inherently comes with substantial liability risks from a wide range of directions – customers/clients, employees, vendors, competitors, regulators, the general public or other parties. Even diligent and responsible business owners can face the specter of lawsuits and claims due to negative circumstances entirely outside of their control. The litigation environment today is also fraught with overly-aggressive attorneys and increasingly frivolous lawsuits being filed against business owners and professionals in many sectors.
Without proper protection measures in place ahead of time, both business assets and personal assets are at risk when a lawsuit or claim arises. Years of hard work building a successful enterprise and accumulating personal wealth for family needs can be wiped out quickly when legal actions are filed.
For example, a minor customer slip-and-fall accident at a retail store could not only threaten and undermine the future viability of the business itself, but aggressive plaintiff attorneys may also choose to target the CEO or owner’s personal real estate, retirement accounts, inherited wealth and other unrelated assets to satisfy any potential judgements. This can financially devastate entrepreneurs who fail to protect their assets ahead of time.
According to a 2022 litigation trends survey conducted by specialty insurer Hiscox, over 30% of small businesses experienced at least one liability lawsuit or claim filed against them in the previous 5 year period. The average claim amount exceeded $20,000. Of businesses experiencing claims, 63% reported having higher insurance premiums afterward which can hinder profitability.
Perhaps most importantly, proper asset protection techniques establish legal firewalls between personal assets and any business activities, creating separation. This keeps personal wealth, real estate, investments, retirement funds and other assets secure even in worst-case scenarios where the business itself faces oppressive legal actions or bankruptcy.
With sufficient time and effective strategies implemented by knowledgeable professionals, the business owner’s personal home, rental properties, stock portfolio, cash accounts, Country Club membership, vacation condos and other assets can remain completely protected and undisturbed, despite what happens with the company. This ensures complete peace of mind knowing your family will be provided for going forward.
Unfortunately, without separating business liabilities from personal assets ahead of time, a single lawsuit can instantly wipe out decades of hard work building a career, saving wisely and accumulating wealth for family needs. Even in cases where the business owner ultimately wins a lawsuit, the legal fees alone over months or years can still bankrupt the owner’s finances and forever change lives for the worse. Proper advanced planning ensures your personal wealth resources remain intact so you can continue living well and providing for loved ones.
If legal judgements and other assessed damages resulting from a lawsuit, claim or regulatory issue become severe enough, an entire business could be shut down or severely damaged. This leads to loss of income for the owner, layoffs for employees, destruction of supplier relationships and the demise of a career’s work in building up a company.
Thoughtful asset protection helps ensure that the business itself can continue operating, rebuilding and moving forward after even worst-case legal scenarios or other events. It also allows the business owner to retain as much control as possible – critical for entrepreneurs whose business represents their true passion and life’s work.
According to U.S. Bureau of Labor Statistics data, approximately 20% of all small businesses in the United States fail during the first year of operations alone, and only around half survive past the five year mark. However, a major contributing cause of failure is lack of access to capital to sustain and grow operations. With effective protection, more capital resources remain available internally to help businesses navigate challenges. Proper planning can help dramatically boost long-term survival rates for new companies.
Knowing assets are sensibly protected and preserved provides immense confidence for entrepreneurs and business owners to keep pushing forward. Protection provides more freedom to consider intelligent risks, invest in new growth opportunities, and creatively disrupt outdated industries – without constantly living in fear of losing everything overnight over a minor lawsuit.
Business owners face enormous pressures and responsibilities each day trying to build successful companies. Asset protection planning can help reduce financial stress that can negatively impact mental and emotional health over the long run. With protection in place, entrepreneurs can focus more time and energy on developing great products and serving customers.
According to clinical psychologists, prolonged financial and legal-related stress commonly produces increased anxiety, insomnia, high blood pressure, cardiovascular issues, ulcers, depression and migraines in human subjects. By reducing money-related worries substantially, properly crafted asset protection provides a profound sense of relief and peace of mind for business leaders and owners.
While comprehensive asset protection is a crucial pillar for successful business owners, there are some common mistakes to avoid when designing and implementing asset protection programs:
In today’s challenging legal environment, forward-thinking business owners recognize the wisdom in taking proactive steps earlier to properly protect their assets and hard work. Failing to adequately separate business liabilities from personal wealth can spell potential financial disaster for both companies and families when unexpected lawsuits, claims and other issues inevitably arise.
With the right asset protection foundation in place ahead of time, entrepreneurs can operate with greater confidence, smarter risk-taking, and far less financial stress. They can focus energy on developing great products and services rather than worrying about losing everything overnight.
Although asset protection can be a complex area, partnering with knowledgeable and ethical legal professionals is the smart path to take. Don’t wait to protect your hard-earned assets – start taking simple steps today and secure your future. Your peace of mind is worth the effort.
