Besides helping you build wealth, your financial planner ought to also offer ways to help you safeguard it. One key – and often neglected – aspect of comprehensive planning is asset protection.
ERISA Retirement plans and certain other assets are exempt from creditors under federal bankruptcy and ERISA (Employee Retirement Income Security Act of 1974) laws. Individual retirement accounts are protected up to $1 million in assets. Many states also allow exemptions for a specified amount of home equity in a primary residence and other personal property. Business entities such as limited partnerships and limited liability corporations also protect their owners.
Above all, you need adequate liability insurance coverage as your first line of defense. Without it, the ability to avoid any judgment lies with the strength of your asset protection planning.
The most common avenues to losing assets are divorce, bankruptcy and legal judgments against property following a lawsuit. Putting your assets beyond reach of a judgment resulting from a frivolous lawsuit constitutes basic protection. Yet when I suggest asset protection strategies, clients often respond with ambivalence or reluctance.
These reactions may stem from clients’ beliefs, or money scripts, about money and wealth. If you respond negatively to the idea of asset protection, you may want to consider whether you hold some beliefs that may keep you from protecting yourself.
A few common beliefs about asset protection:
1. Liability insurance is all I need. A good start, liability insurance only protects you if the claim doesn’t exceed the coverage of your active policy and your insurer doesn’t deny the claim – or go bankrupt in the middle of a lawsuit. Three of those exceptions happened to me alone.
2. If I’m lucky enough to own a lot, it’s petty and selfish to want to protect it. This protection isn’t just about you, the owner of the asset. It also safeguards others, such as employees, tenants or members of your family.
3. Only the very rich need asset protection. You may hold a relatively miniscule investment portfolio, a rental property or two or a small business. No great wealth – but what you have is all you have. Guard it.
4. Asset protection is shady and unethical. Many people associate these strategies with illegally hiding assets. No reputable financial professional will advise you to do that. Ask advisors to discuss the ethical and the strategic value of approaches.
5. People in general can be trusted. Really? Ask anyone who ever went through a nasty dissolution of a partnership about trust before and after a breakup. A lot can happen where money’s concerned.
6. I won’t be sued unless I do something wrong. True, in an ideal world. In reality, people of perceived wealth often become targets of frivolous lawsuits. Even if most such cases eventually get dismissed or decided in favor of the defendant, it takes a lot of time, energy and money to defend yourself. Plaintiffs often hope for a settlement from a defendant unwilling to go to that trouble and expense.
7. It’s wrong to prevent people from collecting damages if I hurt them. If you genuinely injure someone, of course you’re obliged to make the situation right. Strong asset protection includes provisions, such as adequate liability insurance, that allow you to take care of legitimate obligations without bankrupting yourself.
Ethical protection strategies are not a way for you to avoid responsibility and aren’t intended to protect you from the consequences of your own wrongdoing. They primarily protect you from the wrongdoing of others.
And the first phase of implementing that protection may be to identify and get past your own money scripts about asset protection.
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Rick Kahler, MSFP, ChFC, CFP, is a fee-only planner and author. He is president of Kahler Financial Group in Rapid City, S.D. Find more information at KahlerFinancial.com. Contact him at Rick@KahlerFinancial.com, or 605-343-1400, ext. 111.
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