As you build wealth, you need to protect it using LLCs, trusts, and other entities. Here's what gets in the way.
Divorce, bankruptcy, lawsuits: These are the most common threats to a person’s assets. As we financial planners help clients build wealth, we also need to help them protect it. Unfortunately, sometimes they won’t let us.
A basic strategy for asset protection — an often-overlooked aspect of comprehensive financial planning — is to put property beyond the reach of legal judgments.
Yet when I suggest asset protection strategies to clients — for example, owning assets in limited liability companies — they often respond with ambivalence or reluctance. I now realize these reactions may be tied to the beliefs clients hold about money and wealth. It isn’t enough for us planners to understand asset protection; we also need the skills to help clients reframe the beliefs that may keep them from protecting themselves.
I’ve encountered several different common beliefs, or money scripts, that clients have pertaining to asset protection. Here are some of them, along with my responses:
- “Liability insurance is all you need.” While liability insurance is a good start, it protects you only if (1) the claim doesn’t exceed your insurance coverage; (2) your policy is in force; (3) your insurer doesn’t deny the claim; and (4) your insurance company doesn’t go bankrupt in the middle of a lawsuit. Well, three of those four exceptions have happened to me.
- “If you are ‘lucky’ enough to have a lot, it’s petty and selfish to want to protect it.” Asset protection isn’t just about the owner of the asset. It also safeguards others, such as employees, tenants, or family members.
- “Asset protection is only for the very rich.” A client may have a small investment portfolio, some rental property, or a small business. That may not represent great wealth, but whatever they have is all they have. For that very reason, asset protection may be especially important for those without a lot of wealth.
- “Asset protection is shady and unethical.” Many people associate asset protection with hiding assets illegally. This is not what any reputable professional will advise clients to do. Planners need to be prepared to discuss the ethics as well as the strategic value of the approaches they suggest.
- “People in general can be trusted, so asset protection isn’t necessary.” Just ask anyone who’s ever been through a nasty dissolution of a partnership if they fully trusted their partner when they went into business — and how strong that trust was at the time of the breakup.
- “You won’t be sued unless you do something wrong.” In an ideal world, this would be true. In the world we live in, it’s surprising how often people of perceived wealth are the targets of frivolous lawsuits. Most cases are without merit and are eventually dismissed or decided in favor of the defendant, but it takes a lot of time, energy, and money to defend against them. Plaintiffs hope to gain a settlement from a defendant unwilling to go to that trouble and expense.
- “It’s wrong to prevent people from collecting damages if they have been hurt.” If you have genuinely injured someone, of course you have an obligation to make that right. Strong asset protection includes provisions, like adequate liability insurance, that allow clients to take care of legitimate obligations without bankrupting themselves.
It’s important to make clear to clients that ethical asset protection strategies are not a way of avoiding responsibility. Asset protection is not intended to protect clients from the consequences of their own wrongdoing. Its primary purpose is to protect clients from the wrongdoing of others.
And the first phase of implementing that protection may be to help clients get past their own money scripts about asset protection.
Rick Kahler, ChFC, is president of Kahler Financial Group, a fee-only financial planning firm. His work and research regarding the integration of financial planning and psychology has been featured or cited in scores of broadcast media, periodicals and books. He is a co-author of four books on financial planning and therapy. He is a faculty member at Golden Gate University and the former president of the Financial Therapy Association.