As a high net worth individual, which accredited investors are by definition, the unfortunate reality is that you become a target for lawsuits. Whether or not the lawsuit is justified is totally irrelevant, they occur and expensive judgments can be awarded. Most people don’t think about that until it is too late to do anything about it. In his new book, “Legal Strategies for Everyone” [1], Mauricio Rauld provides an overview of a number of strategies that can be used to protect your assets from people who are trying to take them away from you.
One of the things I really appreciate about Mauricio is that he works with people to help them understand the law. Many lawyers seem to live in a world focused on fear and confusion, where they believe that you will only work with them if you don’t understand what is going on. Mauricio is different. He wants you to understand your options and will help you make the best decisions for you and your business.
In this relatively short and easily understood book, Mauricio covers a number of strategies ranging from straightforward ones that you may already be using to complex strategies that only make sense once you have several million in net worth or are working in a high liability profession (like a doctor). You will likely start out employing only one or two of these strategies but then add more layers as your situation becomes more complicated. The nice thing about this book is that it gives you enough to see where you may need to go in the future, helping you understand what the next steps may be in your journey.
Some of the strategies that Mauricio covers:
- Statutory protection for certain assets. Retirement accounts, homesteads, and life insurance policies are all assets where you are granted a certain level of protection from lawsuits. You don’t need to do anything to get this protection, but it is important to know that it exists and what is and is not covered.
- The role of insurance in asset protection. Insurance provides excellent initial protection and transfers responsibility for certain liabilities from you to the insurance company. However, it has limitations and the insurance company is not always on your side. There are also several types of insurance you may need depending on your various roles and responsibilities, so understanding what the options are and which types of insurance you should have is important – and not well understood in general.
- The use of privacy to reduce the chances of a lawsuit. Many lawsuits are filed on contingency, which means that the lawyer gets paid based on what is collected. To be clear, privacy won’t provide any additional protection if you have a judgment against you since you can’t lie about what you own if you are under oath. However, by making it harder to identify the assets you own, the chances that a lawyer will go to court instead of settling for the insurance payout are reduced.
- The use of appropriate business entities. In the US, ownership of an asset is tightly associated with liability. Entities provide a way to compartmentalize the liability incurred by a business or asset such as a rental property so that it does not negatively impact other assets you may own.
- The importance of having a proper estate plan in place. Asset protection includes making sure that your wishes are followed when you die. While a will is important, it is not usually sufficient for high net worth individuals. You will also likely need a trust, living will, power of attorney, and other documents to ensure your estate is properly managed when you are no longer able to make decisions yourself.
- How to stay legally compliant when engaging other people. As you grow your assets, there are times that you will want to take advantage of other people’s time and money. When working with partners and employees, it is important to ensure that you use the correct structures. Setting things up incorrectly or not following the rules can lead to unexpected liabilities that can spread beyond the deal.
- Using asset protection trusts (APTs) to isolate assets from your largest potential liability. Many people don’t realize that they are the largest potential liability to their assets. Using an APT can separate you from your assets so that if you do incur a liability, such as a car accident, your assets can be sheltered from lawsuits.
- Don’t waste money on strategies that don’t deliver. There are a lot of strategies touted by people selling you their services. In many cases, these strategies don’t actually do anything beyond making your life more complicated. Save yourself the time and money by doing some research up front. For example, don’t put your house or car into an LLC or use an S-corp outside of an LLC entity. And, whenever you talk to a lawyer who is billing you by the hour, get straight to the point and avoid being billed for small-talk.
Overall, this book is a great resource for everyone. While very few people will use every strategy it outlines, understanding the broad landscape of asset protection is important and helps ensure you are positioned properly.
If you have any questions or comment about this post, please email them to me at blog@mbc-rei.com, I will reply to the questions that are straightforward and will turn the questions requiring more detailed answers into future blog posts.
For additional reading:
This article is my opinion only, it is not legal, tax, or financial advice. Always do your own research and due diligence. Always consult your lawyer for legal advice, CPA for tax advice, and financial advisor for financial advice.