A strategic asset protection mindset will separate those who accumulate long-term wealth and keep it. Most successful entrepreneurs let their big egos get in the way, and they don’t take steps to set up a complex (not simple) structure to protect their assets.
A strategic asset protection mindset is part of this important business equation; you must master two skills: first, the skill to generate profits in the shortest period possible and keep them. Many times, keeping them may be harder than creating profits. Keeping them focuses on the strategy of asset protection. You must protect your assets from everything, like lawsuits, taxes, creditors, and bankruptcy.
This success requires a certain mindset for survival. It requires working backward to think through what could go wrong and how your assets would be affected.
You Must Ask Tough Questions
It requires asking some tough questions like, “What would happen if I get sued, and my business insurance (if your business even has any) did not cover the legal fees and damages? What would happen to my financial fortress? If my assets were to take one direct hit (a lawsuit), what would be the outcome? Would I lose everything? How do I mentally handle being totally unprotected?”
Perhaps you have formed a separate legal entity for your business, and a hit at the business level should protect you at a personal level. How do you handle a lawsuit at your business-level where the business has to pick up the tab?
Does Your Business have the Cash Flow for Legal Expenses?
Could your business survive defending a lawsuit that would require a retainer of $20K and $3K a month for 18 months? What would that do to your cash flow? Is there even enough cash flow to handle that extra monthly overhead?
What about an IRS audit? Is your business being operated as a business, not a hobby? What would the IRS discover if they looked at your records? Would there be large holes and gaps in the business records which would lead to huge penalties and interest? How would you and your business handle such an attack?
Here are the key attributes of the asset protection mindset for survival:
Consider the downside first. If you were in the business of setting up firework shows, you would take every precaution and consider what could go wrong to determine the best safety so that no one would be hurt. Are You Negative or Smart? But in most businesses, it could be considered being negative to consider what can go wrong.
I know you do not want to spend all your energy in this space, but it has a vital role in stepping into the consideration as part of your survival plan.
Do You Have a Partner? Business is like Marriage…
This is a must, especially if you have a business partner. You must consider if there is no cash flow to pay yourself, who will personally guarantee the accounts? What legal issues can you create for each other, and how will you avoid them?
In most businesses, the founder gets so excited (similarly to how you feel before getting married) about their great idea and how much money it could generate, how their life would be different…that if you enter the conversation with a point of what could go wrong, or what if that does not work out…you would be considered negative and unsupportive of the idea.
Keep in mind that being positive and excited has its role and is the genesis of most great businesses. At some point, ideally, in a separate meeting, the downside must be considered.
I mean, consider it first, before you open your doors, sign the big lease, and commit your capital. Not that you have to consider everything that could go wrong when an idea comes into your mind, because you would never get started, in that case (that is an entirely different issue).
Want Results? Model Walt Disney’s Approach
The best approach is to model Walt Disney. Walt would conduct a separate meeting to create ideas (the dreaming room) versus evaluating the ideas.
This was key to separate them because the creative and open-ended thinking phases were not the time to evaluate an idea to determine if it would work. That would more than likely stifle the ideas in the first meeting. The same approach works well when it comes to evaluating the downside of a business opportunity. Have fun with the open-ended green light thinking and plan a separate meeting to evaluate the downside or what could go wrong.
The huge mistake is to skip this separate meeting and let your enthusiasm carry you to signing a lease, committing large amounts of capital…
Separate for success. Putting all your eggs in one financial basket is crazy and irresponsible.
It blows my mind that over 67% of all small businesses still operate as sole proprietorships. I realize the pattern that creates that outcome (comes from a tax point of view and belief about the ability to succeed), but it still blows my mind.
Separate Safe and Risk Assets…
You have taken the first step by forming a separate legal entity for your business. Step two is to protect your safe assets from your at-risk assets. That means stocks, crypto, gold, silver, ownership in other companies (this is a big one), artwork…assets that do not cause direct liability.
Did You Protect Your Ownership/Investments in Other Companies?
Why leave any of your assets on the table that is likely to be taken in lawsuits, bankruptcy, or IRS issues? Many will say, “I only have $_____ in safe assets. I do not have enough to protect.”
Do You Have Enough Assets to Protect?
Actually, the less you have, the more important it is to protect it because if you lost $25K, and that represents 100% of your safe assets, that is more meaningful and impactful to you than if you were Elon Musk and got hit with a $10-million lawsuit.
Is the Equity in Your Home Protected Properly?
The next step in asset protection is to protect the equity in your home (if you have any in this economy). Check into your home state homestead laws to find out how much equity is protected.
In some states, like Nevada, $550,000 is protected; and in others, it may only be $5,000 of equity. Florida is unlimited. Next, separate your real estate, both commercial and residential, from your own personal name. Typically, each commercial building (depending on the value and overall percentage of your net worth) would be held by a separate LLC.
Your real estate risk level would depend upon the overall percentage of your net worth, which would be a big part to dictate whether a separate entity should hold each piece of real estate or if you would have 3-4 properties in each LLC.
Your Living Trust Does NOT Protect Your Assets from Liability, But…
Next is to tie in the living trust, as the entities’ owner, for estate planning purposes. This is a critical step to remember. Why protect your assets during your lifetime and, upon your death, leave the state to handle the distribution of your assets? Probate can be costly and take years, in some cases.
Lawsuit Strategy for Survival: Ask questions, understand the challenge, back to work. What happens when you are hit with a lawsuit? The natural reaction is to be upset, frustrated, and mad!
Most Lawsuits Emotional Derail Most Entrepreneurs, this is the Expensive Part
Typically, you were attempting to do good, help someone out, or provide a quality product or service, and an individual or a business did not see it that way. They think that you screwed them over (right or wrong). Now, you are staring down the barrel of a lawsuit.
Even if you feel right up front, this is totally bogus, not right, and should be set aside in court (which is, by the way, the mindset that may get your butt kicked in court).
You May Become Financially Paralyzed
That lawsuit can prevent you from receiving any financing in your business name or personally, depending on who is getting sued. You never want to assume a lawsuit is bogus or will have no merit in court.
You must approach it with 4-5 ways to attack this lawsuit, what you must do to protect yourself, and provide it invalid. You weIt would help if you organized and prepared.
Thinking you have a slam dunk leads to being unprepared and getting your butt kicked.
What You Should Do If You Are Sued…
Here is the best approach for survival if you get sued. First, interview 2-3 different attorneys on the lawsuit and ask a lot of questions.
Ask for their initial opinion, how they would approach it, how long it should take to defend, what stages are involved, how much is their upfront retainer, what are the time requirements involved, what would have to happen for you to lose, to win, can you counter sue, and should you attempt to settle outside of court…
Get Back to Work and Focus on Your Business
Once you get your asset protection mindset around the big picture, all the steps involved, the time frame, and what your game plan will be, then you can take the most important step, focus on your business, and get back to work.
The costly part of a lawsuit can be the profits you lose from your business because you are distracted by the lawsuit. You are up at midnight, upset at the person or company suing you, and thinking, “How can they do this to me after I attempted to do business with them or help them in some way?”
Are You Weak and an Easy Target?
The worst approach can be to let them see you will make no effort to defend yourself because the lawsuit has no merit. That sends a message that you and your company are soft.
I recently spoke to the VP of a $15-billion-per-year company, and the VP told me that they must aggressively go after every lawsuit that hits their company, so they do not appear as a weak and easy target.
The approach is correct. In the end, you have to be prepared to understand the challenge at hand, find out the time frame, issues, and expenses, put it in your budget, and get back to working on profitability. It’s like a military operation.
Expand Your Legal Budget
Again, as you can imagine, most do not handle it this way, and that is why even if you win and your insurance company pays the legal fees, a lawsuit can be financially devastating.
This will help you avoid many legal issues, to begin with. You may often sign an agreement or contract, and you assume the other party has reviewed the agreement.
You should NEVER sign a legal agreement or contract without having an attorney review it. I know it may take two hours to review, and it may be $500 or more for those two hours, but it can be a worthwhile investment in the long run.
Being Cheap can Comeback and Haunt You
Now, if you are opening a brokerage account with a major firm and you want to review it for the sake of understanding what you are signing, that makes sense. But if you think you will make some recommendations for changes to this major firm, that is not happening. Being cheap in this area can come back to haunt you.
Why Partnerships Fail
It does help when you start a new opportunity with another company if their side writes the agreement for you to review; that is much less than you writing the agreement. I have been on both sides. It does depend upon your position of strength in wanting to get the deal done.
If you are working with partners and do not put things in writing, that is bound to fail. This all refers to you really have a legal budget of perhaps $400-$700 per month in place, which may come into play 2-3 times per year.
If your company is much bigger, that number may be huge, especially if you have employees. HR issues can be very costly, and it is best to run it past an HR attorney vs. your buddy, who has 10 years of management experience.
All these areas are key when it comes to developing the best asset protection mindset for survival. When you develop a stronger mindset in this area, take action, and implement the recommendations. If you get hit with a big lawsuit, it will NOT derail your entire business or ruin you personally!
Growing your business can be one of the most rewarding experiences for you and your family. It can provide a stream of income for years to come.
Being successful in business is planning for the unexpected, anticipating what can go wrong, and having contingency plans. On a personal level, you should be taking the same approach.
For example, do you have life insurance (especially if you have loved ones) to support your family if something happens to you? I know in my situation with three girls and my wife, I want to make sure they are taken care of if something should happen to me (hopefully a lot later than sooner). Having life insurance was something I had in place right after I was married over 24 years ago.
Over the years, I have found the big areas that create the biggest mess; when a business owner does not get around to complete their estate planning, something unexpected happens.
This creates a financial mess for the family that is left behind. It is hard enough to handle the sudden loss of a loved one, but to add to the financial turmoil can be just devastating for your loved ones.
Especially when the IRS gets involved with estate taxes that will be due to that may cause unnecessarily to liquid assets at a fire sale point of view to pay the estate taxes.
Here are my top reasons why your estate planning should be a must to complete in the next 30-60 days and for you to take immediate action after reading this article; otherwise, it maybe 12 months from now, and you have not started yet.
1.Take care of your family. Your spouse must be prepared financially and emotionally as best as possible to make sure if something happens to you what the steps are financial.
Certainty and financial security are very high needs, especially guys for your wives. Don’t leave your spouse left holding the financial bag and having to work with other family members and in-laws to figure how what should happen next.
Especially if you run the business, provide the revenue to support your family, and your wife runs the household, kids’ schedule, and school (which is a much harder job, by the way, in my opinion). This is even more of a must if you are in a second marriage, and there are your kids and your spouse’s kids.
You may inadvertently have your net worth not go to your kids when you thought it would. Even worse, what happens to your kids if something happens to both of you? What directives do you have in place to take care of your kids? Do you have guardians in place?
Here are six mistakes that happen in this key area of naming a guardian;
1) they name only one person with no back-up;
2) they name a couple without directing what should happen if something happens to one of the partners of the couple;
3) they consider the financial resources of their guardians instead of leaving enough behind through insurance or savings;
4) they don’t name anyone to take care of their financial resources for their children;
5) they name only guardians for the long-term and don’t consider what would happen in the immediate moments or hours after an accident until their long-term guardians could arrive, and
6) they fail to exclude anyone they know they would never want to serve as a guardian. If you die without a Will or having named guardians, the decision as to who will take care of your money and your children is left up to a State Court Judge operating in a broken court system who don’t know you or what’s important to you.
Another challenge is having your estate go to the probate courts because you have no estate plan in place.
Here is how this works. In any jurisdiction in the U.S. that recognize a married couple’s property as tenancy by the entireties, if a person dies intestate (owning property without a will), the portion of his/her estate so titled passes to a surviving spouse without a probate.
This part seems to be ok at this point. If the estate is not automatically devised to the surviving spouse in this manner or through a joint tenancy and is not held within a trust, it is necessary to “probate the estate,” whether or not the decedent had a valid will.
A court having jurisdiction of the decedent’s estate (a probate court) supervises probate to administer the decedent’s property’s disposition according to the law of the jurisdiction and the decedent’s intent as manifested in his testamentary instrument.?
To dispose of certain estate assets, it is necessary to sell the liquid assets, including real estate. This is where your spouse may be left to sell real estate at a discount and lose significant value.
If the decedent died without a will, known as intestacy, the estate would be distributed according to the state’s laws where the decedent resided or held by the court.
You never want the state to determine how to distribute your assets. If the decedent died with a will, they would usually name an executor (personal representative), a person tasked with carrying out the instructions laid out in the will.
The executor marshals the decedent’s assets. If there is no will or will not name an executor, the probate court can appoint one. The other issue with probate is that your assets may be tied up in court for a year or many years longer.
Many celebrities’ estates have been tied up for several years with families and lawyers fighting over the assets. That gives more money to the lawyers and less to the loved ones.
2. Take care of your business. You are working to build your business as an asset, and if something happens to you, there should be a clear plan on how the business can continue or how to sell it best off.
If you have a business partner and one of you dies, this can be a real disaster when it comes to paying off the estate of your partner who passed on.
Having a buy-sell agreement with a term life insurance policy on each partner is a must! Your living trust should hold the ownership of your entity for estate planning. Putting your adult kids as an owner or officer/manager is not a good idea unless they are really involved in running the business.
Why bring undue liability to your business? I would not recommend that. This is a version of shortcuts to avoid good estate planning. If someone in your family or one of your business partner’s wishes to keep the business alive after your death, he or she may face opposition from others who wish to sell the business or who also wish to have a say in running the company.
If you know that you can pass the business on to a ready and willing person, say so in an estate plan. Like a guardian plan for your children, an estate plan for your business allows for an easy handoff, so your company can maintain stability.
3. Minimize Estate Taxes. There seems to be some confusion between avoiding estate taxes and income taxes.
A Living Trust will NOT help you avoid income taxes. The key is to help lessen your estate taxes. In fact, if you’re the trustee of your Living Trust, you will file your income tax returns in the same way you filed them before the trust existed.
There are no new returns to file, and no new liabilities are created. Keep in mind that you may require more complex estate tax planning to help minimize your estate taxes.
In 2020, an estate must be worth $11.58 million to trigger federal estate taxes, so the vast majority of people do not need to worry about this issue.
However, several states also have estate taxes, and the exclusion tends to be lower.
4. Privacy. Most of you would not want your estate to become a public record after your death. Having a Living Trust in place is not usually filed in court to become a public record.
However, in many cases, an inventory must be filed with a court upon death. The inventory will at least show the trust’s size and may be required to list the assets. The inventory is used for the inheritance tax determination. The inventory is a public record.
The amounts received by each beneficiary may also be public record. One goal is to make things like smooth a transition as possible if something happens to you.
There are stories upon family members’ stories suing each other after a loved one is gone fighting over the money. This leads to years and many times, generational splits in the family because of fighting over an estate, which can be avoided with proper planning.
Why even put your family and your future generations in a position to fall apart because of a lack of planning on your part?
Are you convinced that this is now a must for you and your family?
Please take the time to put this in place, and you will sleep better at night knowing your family is protected.
As you know, there are over 80 million lawsuits filed every year in the United States. Frivolous lawsuits alone are said to cost the United States over $200 BILLION annually.
Even in this current economy, things could turn and go back down. If money gets tighter, will more get desperate? How many entrepreneurs abandon their business, which was their vehicle for financial success, and now look to a much easier approach…like suing you and your business.
Does someone look at you as their retirement plan? For many Americans, their only option for retirement is to win the lottery or sue someone. I know, not very uplifting, but conceivably reality.
This may be the last wake up call to button up your asset protection plan, tax and bookkeeping, and business credit, so you and your family are protected. Unfortunately, one entity is not a catch-all for results.
Let me ask you these important questions to show where you may be very vulnerable:
1. Do you still operate a side business as a sole proprietorship? That is like playing Russian Roulette with your financial future.
2. Do you own real estate in your own name (separate from your residence)? Even if you do not have any equity, to others, you must be rich and a target. That is like walking around with a big sign on your forehead that says, “I own real estate in my own name, check it out online…go ahead and sue me.”
3. Are you relying upon your living trust to protect your assets? They do not protect from liability! Do you have family members or parents that are doing the same? That is an open invitation for someone to take their net worth.
4. Do you own safe assets in your own name (like gold and silver)? Is it enough to protect with a separate legal entity from your operating business? Maybe it is a “small” amount in general.
You have to ask yourself how you would feel if you woke up tomorrow, and your “small” investment was gone?
Now…that may be a different feeling. Losing 100% of your investments, no matter how “small,” maybe a huge deal to you. It is time to protect them before it is too late!
5. Are you operating a business with a partner as a general partnership on the side? That is a double danger because now your partner could cause you to lose all your assets.
Are you waiting to make more money first…remember, you cannot buy homeowners insurance when your house is on fire…and you cannot protect yourself (very well) after you have been sued.
If you have $100K in assets and are sued for $100K, you cannot form an entity and transfer them to protect them (well, you can do anything you want, but…) the judge will call that fraudulent conveyance and undo your transaction if your goal was to protect your $100K because of the $100K lawsuit.
If you had $200K and you did not mind leaving $100K on the table to be taken, that is different…but why be in that position when there is a better way?
This is only one threat your business is up against. The other is the IRS (and they are hurting big time when collecting tax revenues).
Are your records up to date? Do you have any records other than an online checking account balance? That is not a business but a hobby, according to the IRS. Finally, is your business financially naked?
How much revenue are you losing on a daily, weekly, or monthly basis? Read the article on how to position your business to be financially naked and have an opportunity for success.
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