At the level of individual assets, you need to make sure each one is in the right place. By considering the type of asset, its risk potential, and how it can affect your other assets, you can lay the foundation for a solid asset protection structure. Your goal should be to achieve the following:
- Protect business assets from personal liability
- Protect personal assets from business liability
- Protect assets from each other
A good analogy is a refrigerator. There are many types of food inside, but they don’t all go in the same spot. Some have their own compartment. Others have to be separated into individual containers. This way, if an item goes bad, it won’t contaminate the other food. The same is true for asset protection. Each asset needs to be in the right compartment or container to not only minimize risk to that asset, but also to protect other assets from contamination.
Personal assets should be kept separate from business assets. If not structured properly, business liabilities can threaten your personal assets. For example, let’s say someone owns a small business in his name, like a restaurant, and he is sued by an ex-employee over an employment dispute. If he loses the case or has to settle, and business assets are not enough to satisfy the judgment, then his personal assets are at risk to make up the difference.
What he should have done is formed a business entity to own the restaurant. If done properly, the judgment creditor would be limited to entity-owned assets, keeping the restaurant owner’s personal assets safe.
Additionally, if an asset is not used for business purposes, then a business entity is not the right place to put it. Using a business entity for non-business purposes means a court may disregard the entity altogether and allow creditors to access the assets as if you owned them personally. For personal assets like your home or cash accounts, a living trust is often a better choice.
Business and investment assets
Just as your personal assets should be shielded from your business liabilities, so too should your business assets be protected from your personal liabilities.
Continuing with the example of the restaurant owner above, let’s say this time he incurs personal liability. He forgets to put his parking brake on, and his car rolls out of the driveway and hits and injures his neighbor. If the neighbor obtains a personal injury judgment, and the restaurant owner’s insurance does not cover the whole amount, she can go after the restaurant to satisfy the judgment. Likewise, if the restaurant owner also owns an apartment building, that investment property could be at risk as well. (Incidentally, this is why a good umbrella insurance policy is a wise asset protection investment.)
Once again, forming a business entity for both the restaurant and the rental property can provide protection from personal liability. Of course, in this case, 2 separate entities should be formed, one for the restaurant and one for the rental property. Not only does that insulate them from each other, but depending on the circumstances, you may need two different types of business entity.
Separating risky assets
Safe assets, like a bank account, do not carry inherent risk. Safe assets can often be held individually (or in a living trust) or by the same entity, as they do not pose a danger to each other.
Risky assets are those that, by their very nature, create the potential for liability. Some examples are planes, rental properties, or industrial equipment. A boat, for instance, is a risky asset because you could hurt someone or damage property with it, thereby creating liability.
Risky assets should be kept separate from safe assets, but they also need to be kept separate from each other. For instance, your rental property will most likely be owned by a limited liability company (LLC). If you purchase a second rental property, you will need to form a separate LLC for the new property. The LLC structure serves to contain the liability of each property, preventing contamination of other assets.
Accumulating wealth involves acquiring assets, but not all assets are the same. Some are for personal use while others are for business use. Some generate income while others just sit there. And some are riskier than others. Asset protection planning involves a careful consideration of your assets and making sure each one is put in the right place.
Sollertis can help with asset protection
The Sollertis Master Asset Protection Plan™ is the framework for protecting all of the individual assets that contribute to financial success. Based on an analysis of your needs, each plan is a customized blueprint outlining the types and mix of legal structures needed to best meet your specific goals and objectives.
Once a MAPP™ is designed, you have a plan in place to protect your assets and to guide business, personal and investment decisions. Unlike traditional asset protection plans that take a “one-size-fits-all” approach, a MAPP™ adapts to changing circumstances. Whether implemented all at once or over time, you will create greater financial freedom knowing you’ve legally protected the wealth you have earned.
Contact us today to learn more about the Sollertis MAPP™ and our unique approach to managing all of your legal needs.