Common misconceptions about Asset Protection

by Bobby Casey, Managing Director

asset protectionAsset protection can sometimes be a confusing and often misunderstood topic. In today’s newsletter I will attempt to dispel many of the myths surrounding asset protection.

An excellent definition of asset protection comes from Investopedia;

The concept of and strategies for guarding one’s wealth. Asset protection is a type of planning intended to protect one’s assets from creditor claims. Individuals and business entities use asset protection techniques to limit creditors’ access to certain valuable assets, while operating within the bounds of debtor-creditor law.

Asset protection helps insulate assets in a legal manner – without engaging in the illegal practices of concealment (hiding of the assets), contempt, fraudulent transfer (as defined in the 1984 Uniform Fraudulent Transfer Act), tax evasion or bankruptcy fraud. Experts advise that effective asset protection begins before a claim or liability occurs, since it is usually too late to initiate any worthwhile protection after the fact. Some common methods for asset protection include asset protection trusts, accounts-receivable financing and family limited partnerships.

I would like to take it a bit further as we at Global Wealth Protection consider risks in a far broader sense than just potential creditors. Clearly future potential creditors are a huge risk, especially if you live in a litigious country like the United States, but in reality asset protection should be a very real consideration no matter where you call home.

In today’s world, we have out of control governments spending money like tomorrow doesn’t exist and in the US and Europe (and other parts of the world too) society has essentially devolved into a police-state where outright asset seizure makes asset protection a requirement for anyone serious about protecting their wealth.

Myth #1: I don’t need asset protection because I am not at risk.

This one is mentioned first because it is the most amusing. The idea that you have any amount of wealth and yet are not at risk is ludicrous. I have heard dozens of stories with variations about people losing their entire net worth, but here are a few examples:

  • Man arrested and thrown in jail for non-payment of taxes, but he was a victim of identity theft and wasn’t the responsible person – never got his money back
  • Partners bought property with undisclosed environmental liabilities. Lost property plus other real estate holdings and have multimillion dollar judgments – went bankrupt
  • New tenant in rental property starts meth-lab on site. Gets arrested and house was condemned – owner held liable and had liens placed on other properties – net worth destroyed
  • General contractor has employee of roofing sub-contractor die on the job. Sub-contractor vanishes leaving GC liable – GC sued for millions
  • Woman co-signs $1m credit line for brother’s new business. Brother’s business goes bust and he files for bankruptcy. Woman has bank accounts drained and liens placed on all property
  • E-commerce entrepreneur sells financial products online. Client mis-uses information and sues entrepreneur for $2m. Entrepreneur has sites shut down and bank accounts seized
  • Retired couple goes on vacation. Vandals break in to house and throw party there. Someone is injured at party (alcohol related) and couple sued – they lost their house

The stories go on and on. The reality is that unforeseen circumstances are just that – unforeseen. If you aren’t considering asset protection you are just exposing yourself to risk.

Myth #2: Asset Protection is only for the uber-wealthy.

I deal with this issue on a daily basis. When speaking to clients, I just ask the simple question, “Do you have assets you cannot afford to lose?” If the answer is yes, you need asset protection.

The bulk of our asset protection clients fall between $2m and $20m in net worth. While that may sound like a lot for some people, in today’s world that is really quite a small threshold. We do have asset protection clients that are under $2m or over $20m, but most fall within this range.

For example, many real estate investors with rental property can easily have a small net worth, but control a relatively large amount of assets. An investor with 10 rental houses worth $100k each controls $1m in assets, although he may only have 10% equity in each property giving him a $100k net worth.

Keep in mind though, if he was intelligent with his purchases, he could easily be earning $100k per year gross income from his investments. At a minimum he should see a $20k annual cash flow as he sees capital appreciation and a growing net worth.

Unless this small time real estate investor has a properly structured asset protection plan, he is one lawsuit away from financial ruin.

At Global Wealth Protection we also work with a lot of internet entrepreneurs developing their own asset protection plan. While many of them may not have very large asset holdings, they have very lucrative cash generating businesses that are at significant risk from attack.

Websites, software, e-books, patents, and other forms of intellectual property are highly valued assets that generate cash flow and should be properly protected.

We have a focus on internationalization for clients’ assets because moving assets, or at least the ownership of assets offshore (using offshore companies and offshore trusts) is frequently the best way to keep your wealth safe from the financial predators that exist today.

In this case we have many asset protection clients who have moderate wealth, but are fearful of increased taxation, currency controls, and slowing economic growth and what it means for their financial future.

If you are nearing retirement or already there, the last thing you want is to return to the work force full time because you lost your wealth from litigation or one of the many other risks that exist today.

Myth #3: Offshore asset protection is dangerous.

This is a typical American thought. With the barrage of negative press today about offshore companies, offshore banking, offshore trusts, and offshore asset protection, you cannot blame a person for being cautious.

From our viewpoint, the risk of keeping all of your assets in the US and dominated in US dollars is far greater than the risk of offshore asset protection.

Let me explain by illustrating two different scenarios:

Mike from Kansas – Mike is married with 2 kids. They live in a nice house in suburban Kansas City. Mike owns 10 rental properties in Kansas. He has a thriving company in Kansas. He has a brokerage account and bank accounts in Kansas. Mike and his wife are US citizens. Their total net worth is around $3m. All business and personal assets are held in Mike’s name.

Francisco from Chicago – Francisco is married with 2 kids. They own an apartment in Chicago and another apartment in Panama City. Francisco owns 10 rental properties – 5 in Chicago and 5 vacation rentals in Mexico. His brokerage account is in Gibraltar. He has 3 bank accounts – 1 in Chicago, 1 in Panama, and 1 in St. Vincent. He has a thriving company registered as a Seychelles Offshore Company (IBC) that has bank accounts in New Zealand and Latvia. Francisco and his wife are legal residents of Panama and have acquired Italian citizenship in addition to their US citizenship. His total net worth is around $3m. All business and personal assets are held in a Cook Islands Offshore Trust.

I ask you, compare Mike and Francisco and tell me who you think has more risk. They have equal net worth, but Mike’s is completely exposed personally since he has not developed his own asset protection plan.

Whereas Francisco personally owns nothing, but has diversified his assets globally spreading his risk among several different countries. Clearly his asset protection plan will keep his family’s wealth safe from the financial predators that exist.

Myth #4: I don’t need asset protection planning, I have lots of insurance to protect me.

First of all, insurance should be a critical component of your asset protection planning. You need to take your net worth into consideration when you are determining your liability limits for your auto insurance, life insurance, home owner’s insurance and more.

But insurance is only one piece of the asset protection puzzle. For example, with unforeseen liabilities you also don’t know the financial risks at hand. You may have a $1m umbrella policy to cover you for excess risk, but if you are at the wrong end of a $10m judgment, it won’t go very far towards protecting your financial assets.

Another consideration is the insurance company themselves. Remember, it is the insurance company’s job to make money. The more they payout in claims, the less money they make, so they will do whatever it takes to find a loophole minimizing the payout to your creditor. Beware, I have seen this many, many times where coverage was denied for minor loopholes leaving the insured to cover the full burden of the judgment. They wasted years of premiums.

Also, insurance can be very expensive. Excess coverage frequently means excess cost with no real guarantee of coverage when you need it. In many cases it is best to create your own asset protection plan to shield your assets from future potential creditors as the cost is often times much lower than the high premiums that carry on for as long as you have the policy.

If you are serious about asset protection and internationalizing your life and your assets, join us in Bocas del Toro, Panama next month from September 19-23 and learn from our 14 international experts on topics like asset protection, offshore banking, 2nd passports, real estate investments, internet privacy and more. Click here to secure your spot (we have less than 10 places left).