- Posted by NateKragness on January 15, 2010
Almost everybody has some form of insurance policy in their life: whether it's car, home, renters, disability, life, business, general liability, or any other type of insurance, almost everybody has at least several, and for good reason -- insurance mitigates risk, in the event of unforeseen or unavoidable occurrences in life. But how many people have an insurance policy that covers their general portfolio against loss? Surprisingly, very few individuals take the time to consider and establish an asset protection plan, which serves to insure their assets against the unforeseen. I recently read an excellent book on this topic, titled Asset Protection : Concepts and Strategies for Protecting Your Wealth, which goes into great detail about the ethics of asset protection, as well as separates the strategies that actually work in the real world from those that people usually think of, like elaborate off-shore trust accounts that aren't actually effective.
Part of what I enjoyed about this particular book is that the author takes great care to examine the ethics of using asset protection as an insurance policy. For example, consider two scenarios:
- Due to negligent driving on your part, you cause a collision which causes serious bodily harm to someone else, and they sue you for damages related to medical bills and lost wages. You are completely at fault, and the injured party should be entitled to collecting from you to pay their bills. In this instance, it would not be moral for your asset protection plan to try to hide assets from the injured party, as your negligence caused the injury. However, a good umbrella insurance policy might be helpful in this instance.
- You own a rental house, and your renter invites some friends over; in the course of their visit, they manage to break their leg in the back yard of your rental house, and sue you for damages. In this instance, depending on the circumstances, you may be liable for some damages -- but if anything, they should be contained to the assets of the rental property, and not your personal retirement funds.
If the difference of the two examples is not immediately apparent, consider that in the first instance, your negligent behavior was the direct cause for injury to another party; in the second case, as long as the property was generally in repair, someone got injured and is looking to collect from the incident. You have a claim to moral defensibility in the second instance, but not the first. A subtle difference, perhaps, but a very important moral distinction none the less. Asset protection should be an ethical process, designed to protect you from unscrupulously litigious individuals who are trying to deprive you of your assets.
In addition, the main goal of a proper asset protection plan shouldn't be to prevent a judgment in court -- it should be to prevent being sued in the first place. Even if you are absolutely innocent, there are always court fees that you will have to pay to prove your innocence; avoiding the whole process before it starts is the best defense you can have. When determining whether to accept a case to sue you, a lawyer will generally run a basic background check on any public assets that you might have. If your asset protection plan is properly set up, anything of value that you own or control will be sheltered by layers of corporations, making it seem as if you don't actually have anything. As such, most lawyers will not take the case on a contingency -- in other words, they will demand money up front -- because they don't think they will be able to successfully collect a judgment against you. This in turn can dissuade many frivolous lawsuits before they even happen, as you are not an easy mark.
There are many good reasons to establish an asset protection plan for your portfolio, and the most compelling reason is that you just don't have control over who can sue you; and, in our extremely litigious society, the risks of losing your entire portfolio to a lawsuit becomes more and more likely. By properly isolating various portions of your assets from each other, and obfuscating your real net worth, you provide a great deal of insurance to protect yourself from any financial accidents that might occur in your life.
I hope you never have to experience getting sued, but in reality a large percentage of people do get sued at some point in their life, and you need to have a strategy in place long before this happens if you want to protect yourself. If you are interested in reading more about this topic, I highly recommend the book Asset Protection : Concepts and Strategies for Protecting Your Wealth -- not only does it go over the ethical and social considerations of asset management, but it also examines in great detail the specific strategies and layers of protection you can implement in order to protect your own assets from potential litigations.