Though wealth can make our lives so much easier and more enjoyable, it also means you have much more to lose. Those who have deep pockets are at much greater risk of aggressive taxation and litigation than people with limited means. With this in mind, if you’re getting the windfall of inheritance, a stock options sale, a business sale or any other kind of large transaction, you need to be doing all you can to protect your wealth from the various threats to it. Here are a few asset protection strategies to think about…
Up Your Liability Insurance
Your first and best line of defense against costly litigation should be liability insurance. Talk to your broker, and look into increasing your liability limits, making sure that your umbrella coverage is for an amount at least equal to your net worth. For example, if a relative has passed away and you know you’re due to receive $250,000 from their estate, you’ll tell your broker that you need a $250,000 liability policy. The rates for these kinds of high-coverage policies are relatively inexpensive and can be an important barrier defending you from parties that may want to separate you from your wealth through litigation.
Keep Your Assets Separate
Depending on the country you live in and the source of the wealth that you’re coming into, if you’re depositing the money into a joint account with your partner, half of that money could instantly become theirs. For many people, this won’t be an issue. However, for others, it could lead to a big problem for their financial future. If, for example, you have children from a past marriage and commingle some inheritance that you receive with your current partner, your children might receive less than you’d want and expect when you pass away. As you can imagine, this issue can become even more of a stress-fest if you and your partner ever divorce. If you don’t want your partner to have partial ownership of your windfall, for one reason or another, keep the assets in a different account, and talk to an attorney about anything you’re unsure of.
Put a Barrier Between You and Tenants
If you’ve recently come across a new house for sale, and you’re hoping to expand your wealth by purchasing it and using it as a rental property, then this could turn out to be another chink in your armour. Many aren’t aware of it, but disgruntled tenants can use disputes over your rental property to carve off a piece of your more valuable assets. One of the best ways to shield these other assets from a tenant who’s out for blood is creating a business entity such as a corporation or LLC. Having done this, if a tenant attempts to sue you, they’ll be able to attack the assets in the entity that holds the property, but all of your other personal assets will be safe.
Re-Assess All Jointly Held Accounts
Linking back to our second point, it’s a good idea to periodically review any joint accounts that are tied to your name. Any money that you put into a joint account with your kids, parents, spouse or business partner is at risk. If one of the owners gets a divorce, a tax lien, or is the target of a lawsuit, then the whole account could be wiped out in no time. Obviously, there are various ways that joint accounts can make your money easier to observe and manage. Depending on your circumstances, you may practically need a joint account. If there’s a tangible need for an account in two people’s names, it’s recommended that you keep the balance as low as possible. This way, you’ll stop any problems faced by the other party from punching too great of a hole in your personal finances.
Formalise your Partnerships
If you’re a business owner, informally tied in with another party, then you’re leaving yourself wide open. Business partnerships are financial ticking time bombs. Much the same as joint accounts, you can be held responsible for the actions of the other party. However, these arrangements tend to be far more dangerous, as a lawsuit against your business partner can often put all of your assets at risk. Let’s say, for example, that you and an old friend have a non-contractual arrangement in place, where you occasionally provide consulting services in your respective areas of expertise. If your partner is accused of some unethical practice, or even just involved in a minor car accident on their way to a client, then the resulting fallout could threaten your assets. There’s no point in letting yourself get pulled into the fray, and straining the partnership more than necessary.
But Don’t Go It Alone!
From what you’ve learned about protecting your financial assets, you may think that any kind of business partnership is something to be avoided wherever possible. While partnerships will instantly put you at more risk, that doesn’t mean that you should avoid changing your business structure completely. If you’re running a sole proprietorship, yes, you’re not going to have to worry about the actions of a non-existent partner. However, all of your personal assets will still be at serious risk if you ever have to defend yourself against litigation. On the other hand, when your operation is registered as an LLC or corporation, you’ll have a certain hedging between your business and your private assets. Obviously, no one wants to be tied into an aggressive court case, and within these structures, you’ll still have a large degree of risk to think about. However, in the event of litigation, you’ll lose far more when you can separate your personal and business assets.
Coming into wealth can be a wonderful experience, but only if you’re able to keep it! In most cases, anyone who’s smart about suddenly coming into money will be fine, but humans are greedy animals, and money can make you a target. Consider some of these strategies for protecting your wealth, and you’ll have a much smoother ride ahead of you!
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