So what is asset protection? And why might I need it?
Asset protection planning is about protecting your assets from creditors or other predators, BUT it’s not just for the super-wealthy. Before you think, “this doesn’t apply to me,” we encourage you to keep reading…
Anyone can get sued, and in our litigious society, it is thought that at least 1 out of every 3 people will be sued in their lifetime. This risk goes up depending on your profession. For example, small business owners and physicians are at increased risk of lawsuits. Something as common as a carpool for your kids’ school, or coaching a baseball team can open you up to greater risk. And if someone wins a monetary judgement against you, your family could go bankrupt trying to pay it off.
In addition, asset protection can also be about protecting your assets against the high cost of long-term care, or protecting your assets against loss when you pass away. We are exposed, in many ways, to the ongoing risks of losing our assets.
Asset protection is usually provided in layers, starting with basic asset protection and extending up through more sophisticated forms of asset protection. I like to use the analogy of protecting your home to make understanding asset protection easier. This is a common asset that many people have, and most take steps to protect.
Can I have an order of asset protection… please?
Wouldn’t it be nice if creating asset protection was as simple as ordering from a menu? One of the most basic forms of asset protection for your home is the locks on your doors. There may still be places where people don’t lock the doors at night, but most of us engage in this simple practice. It is usually the first layer of asset protection.
After the basic door locks, homeowners might add an alarm system to provide another layer of protection, or perhaps even add remote monitoring to the alarm system. Others might choose to add increased lighting around their home, or perhaps trim back the bushes to make them feel more secure. If one feels they need even more asset protection, then perhaps a homeowner may add another layer with a protective dog. Each of these layers creates additional asset protection for the homeowner and their family.
In many ways, individuals and business owners need to be sure they understand their asset protection alternatives, and then decide how many layers to apply. Like any other decision, it usually becomes a cost/benefit analysis to decide how much asset protection one needs. Many times, individuals don’t even realize the risks they’re exposed to, much less the ways to protect against these risks. Because of this, we thought it would be helpful to outline the different forms asset protection can take. We also want to let you know that we are more than happy to discuss any of these with you in the future.
7 Types of Asset Protection to Consider
1. Basic Insurance Protection — This is probably the most basic form of asset protection. This layer of asset protection can include standard vehicle insurance, home insurance, liability insurance, business insurance, and umbrella liability insurance. There are many other forms of insurance, and we encourage you to fully understand all the insurance policies you own AND what they actually protect for your future.
2. Basic Estate Planning Protection — Today it is estimated that over 60% of individuals have no estate planning in place. The reality is your state has a set of laws, known as intestate laws, which will apply if you have no estate plan. In addition, for those with minor children, no basic estate planning means a probate court will ultimately decide who will raise your most precious assets… your children. Those without an estate plan will have a higher cost after their death, and they create a higher risk of leaving a chaotic mess for their loved ones. Read more about the importance of ongoing estate planning here.
3. Beneficiary Asset Protection — One of the benefits of having an estate plan is you can pass your assets efficiently to your loved ones, AND you can also pass a level of asset protection to them with these assets. An estate plan can manage how assets are distributed to a beneficiary to help them last longer, and a well-designed plan can also pass more assets to your grandchildren. It is also key for individuals to understand how this beneficiary asset protection may work with their retirement assets and beneficiary designations. Read more about that here.
4. Long-Term Care Asset Protection — This can be done in multiple ways, and long-term care insurance is one of the more common ways of protection. Some may find they have sufficient assets to self-insure against the high cost of long-term care, but studies show most of us have not really considered how to protect our assets against the high cost of long-term care. As a client completes their base estate planning, where appropriate, we also encourage them to consider their long-term care plan options within their greater planning.
5. Basic Business Entity Protection — A business entity (Corporation, LLC, or other forms) helps a business owner separate their personal assets from their business assets and business risks. Unfortunately, still today, many small business owners do not have a business entity to separate their assets. As a result, all of their personal assets are also at risk with their business. It is very easy to create a business entity, so all small business owners should review the options available. Read more about why an operating agreement is important for your LLC here.
6. Enhanced Business Entity Protection — Business entities can be created under different state laws with more protective laws to better protect a business owner. Additionally, business entities and business assets can be interwoven in strategic ways to enhance the asset protection for the owner. There are multiple layers of this enhanced business entity protection, so we encourage all business owners to ask about more than the basic business entity when setting up their operations. When multiple business owners are involved it becomes very critical to complete the right operating agreements.
7. Protection of Special Needs Beneficiary’s Benefits — Special needs beneficiaries require additional asset protection to protect their government benefits. Imagine leaving assets to a loved one, and as a result of your poor planning you cost that loved one their Medicaid coverage or their Social Security payments. Additionally, it is critical for estate plans to always include contingency plans for a beneficiary who develops a special needs condition, and goes on government benefits, after your estate plan is completed. Read more about special needs planning here, or download our Guide to Special Needs Planning here.
This is just a short summary of a few types of asset protection one can “order from the menu.” Most people don’t know what is on the asset protection menu when they start their planning process, but we hope we can work with our clients to include all their requested forms of asset protection in their final plans.
Additionally, we hope to keep an ongoing dialogue with these clients so they can continue to update their plans with additional types of asset protection in the future. We believe strongly in asset protection, and we also believe it is a low-cost valuable benefit completely underutilized by many clients.
If you’d like to better understand the forms of asset protection, and apply this discussion to your plan, please contact our office at 913-345-2323. We’ll be glad to discuss this further with you. Although we believe in asset protection, the decision to add layers of asset protection rests with you. For us, step one in our process is helping our clients understand the various forms of asset protection available to them, and then applying those protections to their respective plans in ways that fit their unique needs.