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Safeguarding Your Entrepreneurial and Personal Wealth

Posted on: April 1st, 2020

Think for a moment about how hard you have worked to build your company and your personal wealth over time. It feels great, doesn’t it?

The last thing you want to do is lose that wealth due to the carelessness or maliciousness of other people. That’s why it makes sense to consider putting asset protection planning (APP) strategies in place—or, if you already use them, evaluating whether what you’ve currently got is still capable of doing what you want it to do!

By thoughtfully and proactively protecting your wealth against catastrophic loss, potential creditors, litigants, children-in-law and perhaps even future ex-spouses, you help ensure that you and your loved ones will be able to achieve serious wealth—and realize your most important goals.

The litigation threat

As a successful business owner, you are potentially a magnet for lawsuits and other threats to your financial health. The good news is that we find most entrepreneurs recognize the threats. In a survey of 616 entrepreneurs, nearly four out of five say they are concerned about becoming part of unjust lawsuits or being victimized in divorce proceedings (see Exhibit 3).

Source: AES Nation, 2018. N = 616 entrepreneurs.

The percentage of concerned entrepreneurs is high in part because many business owners have seen others like them impacted by lawsuits. In fact, of the entrepreneurs expressing concern, more than 75 percent reported they personally knew a business owner who was hit with a lawsuit and financially suffered because of it (see Exhibit 4).

Source: AES Nation, 2018. N = 491 entrepreneurs.

The potential for litigation-driven losses can be exceedingly stressful and problematic, and the experience can be accompanied by intense anxiety. It is not only the prospect of financial loss, but also the entire process of dealing with the lawsuit. Not surprisingly, we find that most entrepreneurs prefer to avoid these issues and scenarios.

Asset protection planning

While nothing can stop someone from suing you, asset protection planning can often mitigate the psychological and financial pain involved. That’s why we strongly recommend entrepreneurs consider making asset protection planning a key part of their overall wealth planning initiatives.

We define asset protection in the following way:

Asset protection planning is prelitigation planning intended to deter lawsuits and, if that is not possible, to promote favorable settlements.

The logic of asset protection planning is straightforward. Litigators who have brought unfounded or frivolous lawsuits against an entrepreneur can run into a wall when that business owner has a well-structured formal asset protection plan in place. By legally insulating your wealth, you may deter legal assaults you might otherwise experience.

The very best asset protection plans motivate litigants to avoid court entirely because they recognize that it is highly probable that the legal system will provide little support—perhaps none—for them. This can allow entrepreneurs to favorably settle out of court and avoid any legal judgments against them.

But let’s say court is unavoidable and it results in a judgment against you. Asset protection planning can still be useful, as it may limit the creditor’s ability to collect money from you. When getting paid is too arduous, a creditor is usually motivated to settle for less—sometimes substantially less.

The state of entrepreneurs’ protection

As compelling as asset protection planning is, we see a major gap between entrepreneurs’ concerns about litigation and their actions to limit it.

Example: Just one-third of the 616 business owners surveyed have a formal asset protection plan. And even fewer of the entrepreneurs who said they are concerned have a formal plan set up (see Exhibit 5)!

Source: AES Nation, 2018. N = 616 entrepreneurs.

Important: Note that nearly 65 percent of the successful business owners who are not concerned do have formal asset protection plans in place. This suggests that having such a plan may give entrepreneurs confidence that they are well protected, thereby reducing their concern about being sued unjustly.

Even though many entrepreneurs lack formal asset protection plans, that does not mean they are unprotected. For example, having various types of commercial insurance is a form of asset protection—as is setting up different businesses in different corporate entities. Strong legal language indemnifying the entrepreneurs in their business formation documents is another example of asset protection.

However, a formal asset protection plan is multifaceted, integrated and, whenever possible, synergistic. The multiple pieces work in concert to achieve bigger results.

For formal asset protection planning to make sense for entrepreneurs, it must be cost-effective and adaptable. The costs of asset protection planning are the initial expenses for the planning and implementation. Some asset protection strategies have ongoing costs, too. It is smart to understand all the costs and to make sure that there are no other approaches that will produce comparable results for less.

While some asset protection strategies limit flexibility, the ability to make adjustments to the strategies because of changing circumstances is preferable when possible. Just as business situations often shift due to changing circumstances, so too should formal asset protection plans, to the extent possible.

Stress testing asset protection

There is no formal body of law referred to as asset protection law—in contrast to, say, corporate law. It falls under legal risk planning, which itself is a subset of risk management.

Therefore, formal asset protection planning can be said to be a bit fluid. There are strategies that we see work quite well in most instances. But some strategies are less effective. Moreover, talented legal and financial minds are always looking to devise new and revised solutions to legitimately protect the wealth of entrepreneurs.

Because of the often-fluid state of formal asset protection planning, it is advisable—whether or not you have a formal asset protection plan—to periodically stress test your situation with respect to insulating your wealth. A stress test is a process of carefully evaluating the actions you have taken to make sure you will likely get the results you expect—and that you are not missing anything that could further benefit you and your wealth.

A stress test can be a smart move if you are even just a little unsure that your wealth is sheltered from frivolous and unfounded lawsuits.

Next step: Talk with your financial professional about evaluating your asset protection needs and the effectiveness of solutions you currently have in place.

This report was prepared by, and is reprinted with permission from, VFO Inner Circle.  AES Nation, LLC is the creator and publisher of VFO Inner Circle reports.

Disclosure: The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS.

Fusion Wealth Management is not affiliated with Kestra IS or Kestra AS. https://www.kestrafinancial.com/disclosures

VFO Inner Circle Special Report
By Russ Alan Prince and John J. Bowen Jr.
© Copyright 2021 by AES Nation, LLC. All rights reserved.

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