Asset protection is its own form of legal planning—one that incorporates the other types of legal planning, as well as fields such as risk management.
Business owners engage in asset protection planning to have a viable defense against litigants and creditors. Asset protection is the process of employing risk management products and legally acceptable solutions to ensure a person’s wealth is not unjustly taken.
The importance of asset protection planning becomes all the more important when considering the increasingly litigious nature of society. Compounding the problem is the readiness of juries to side with less affluent plaintiffs against defendants with wealth.
Avoiding litigation is always the preferable objective. Indeed, the best asset protection plans are never even tested in court. When a plaintiff evaluates the way a successful business owner’s assets are structured, he or she should conclude that going to court would be too costly and difficult, and that the logical course of action is to settle.
For an asset protection plan to be effective, timing is a major consideration. While there are “things” that can be done once a lawsuit has been filed, it’s usually necessary to put the plan and strategies in place before they’re needed. A good way to think about asset protection planning is that it’s a form of pre-litigation planning.
The wealthy avoiding paying their legitimate debts is not well received by the courts. That means asset protection strategies employed to protect the assets of the successful business owner have to make economic sense within the context of an overall financial or legal plan.
The successful business owner has to derive more than strict asset protection if the plan and the strategies are to be acceptable to the court system. It’s also important to have the moral high ground.
Successful Business Owners and Asset Protection
Like most wealthy individuals, successful business owners become attuned to protecting their wealth only after they have had their fortunes risked or lost. By then, it’s often too late. As noted, it’s optimal to prepare for unjust legal actions before they occur. About 64.5% of 242 successful business owners surveyed by Prince Associates said they have been involved in unjust personal lawsuits and/or divorce proceedings.
About 89.7% of these business owners said they are concerned about such lawsuits, but only 26.9% have an asset-protection plan.
The principal reason most affluent family business owners do not have asset protection plans is that no one with the expertise has shown them how to create one. (See Figure 1.) For about a quarter of them, the complexity of the planning is the obstacle. A few were concerned about the legality of asset protection solutions. Meanwhile, 2.7% did not see the need for such planning.
Asset Protection Strategies
There are a wide variety of strategies that can be employed by successful business owners. The starting point is high-quality liability insurance. But there are other sophisticated asset protection strategies applicable to successful business owners:
Equity stripping is when the equity in a property such as a business is reduced. By lowering the amount of equity owned by the successful business owner, he or she is increasing the probability that these assets would not be included in a lawsuit. The successful business owner can still use cash flows from the assets.
The wealth taken out of the business, for example, is invested in ways that also keep the moneys out of the hands of creditors and litigants. One example of this is a private placement life insurance policy.
Private placement life insurance is usually where alternative investments are wrapped in a life insurance wrapper. This often provides significant income tax benefits. Depending on the jurisdiction, there can also be meaningful asset protection from litigants and creditors.
Captive insurance companies can be particularly appealing for successful business owners. They’re created so that businesses can insure themselves against selected risks. Aside from the asset protection benefit, captive insurance companies have many other advantages:
• Tax deductions of the insurance premiums.
• Ability to accumulate wealth in a tax-advantaged structure.
• Potential savings due to access to the reinsurance market.
• Insuring otherwise uninsurable risks or risks that otherwise would have been too costly.
Qualified retirement plans can be very effective. The complication is that many successful business owners are unable to amass significant amounts of money in such a plan. This problem can be circumvented by using defined benefit plans, especially cash-balance and benefit-focused plans.
Offshore asset protection trusts can be quite useful, but require experts to make sure they’re established and managed properly. More and more, the effectiveness of these trusts is a function of how arduous it is to get a judgment as well as obtain assets. Selecting the jurisdiction in which these trusts are established is extremely important.
There are other asset protection strategies, such as the use of corporate structures and offshore transference techniques. What’s critical is that these strategies, as noted above, address other financial and legal concerns aside from asset protection and that their use is customized to the needs of the successful business owners.
