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Monthly Archives: January 2017

Asset Protection

Asset Protection Planning is a science and as in all areas of science, there are ethical issues.

Science – any systematic knowledge or practice

Ethics – a set of principles or moral conduct

The roots of Asset Protection are founded in debtor-creditor law. The goal is to remove the assets from the legal title and ownership of the debtor while the debtor retains control and beneficial enjoyment of the assets. An Asset Protection Plan should change the financial face of the client so that creditors have a much more difficult time attaching and seizing the assets, making negotiations favorable to the debtor. A properly constructed asset protection plan also allows the debtor to answer honestly in the face of a judge in court.

The goal is not to avoid debts; the goal is to control debts and settlements. The word debtor may scare you or bring negative connotations at this time because your debts are currently paid. Not only is this understood, but also, it is the most beneficial time to protect your assets. The word debtor refers a person in a in a “post” state of affairs as the accused or judged; in your current state you may have no creditors. However, there are “assumable risks” that you take for granted.

Ownership and Control – Learning to Separate

An American legend and tycoon of the 1930’s and ’40’s, John D. Rockefeller, believed that you should minimize your risk by owning nothing, but controlling everything. This American icon set a standard for preserving wealth and protecting assets. Over the years, a field of law emerged mainstreaming its way into debtor-creditor courts and establishing a basis in Statutory Law.

Literally, thousands of techniques have evolved for separating ownership (or title) from control and beneficial enjoyment. Every asset had a best way for protection depending on the type of asset, the financial control over the asset and the situation of the owner of the asset. The possibility of a creditor attacking the asset depends on the availability and ease necessary for the seizure and the aggressiveness and intelligence of the creditor.

Protecting assets falls into general philosophies. These include transferring ownership by way of person or trust, encumbering the property financially, and recording a naked deed of trust, selling assets under long-term contract. The objective is to choose real protection rather than to set up a smoke screen.

Assets must be protected before there are any claims by creditors otherwise the creditor may claim a fraudulent transfer of assets.

What is an Asset Protection Plan?

Every plan is different, but every plan must fit within the statutory framework and within the assets and their needs. First, the planner must identify and quantify the risk of the client. Then the planner must analyze the asset and the structures available for that asset. The planner should take great care in the profile of future and potential creditors. The more sophisticated the creditor the more encumbrances over the assets should be in place.

Transferring any asset falls under the laws and the tax issues of the jurisdictions involved. A fraudulent transfer is a dream come true for a creditor and may give them automatic domain over the asset and the legal right to pursue the transferred assets. This is why we say that the assets should be protected when the seas are calm.

Very few of us would hesitate at arranging our affairs to pay less income tax. The majority of people think it moral to try to reduce estate and inheritance taxes. It is legal to reduce taxes without committing fraud or tax evasion. In law, obligation is defined by “duty” and “Duty of Care”; it means what you owe by specific circumstances.

Then what Duty of Care does a person owe an injured party? There is a famous saying by lawyers in answering this question, “that depends.” Herein is the answer to the question. “Is it ethical to do asset protection planning?”

Should you become the injured party, you will be subject to the ethics of others and will have no control over the outcome or the consequences you will suffer. One could argue that the party who is right will prevail. There are no guarantees and there is no magic wand.

Your solution could be a combination of asset protection trusts, family limited partnerships, insurance, LLCs, or many other various tools in the toolbox. Be aware that the toolbox is filled with many options when the financial seas are calm and that once your assets are financially challenged or in duress, these options become limited.

Create Cash Cushion

As for me, I was on this Level for a long, long time – probably a decade. I always thought there was a better place to put my money “to work.” Your money should be working for you, right? Every three or four months, I would amass a good chunk of my goal. I would see that money in my savings account and say, “I need to invest this money and get a return. It’s just sitting there.” And, I would try and skip this Level. There were years, I thought I was playing at Level VII, but really I was still playing Level III.

In the beginning, I would take that money and put it in some risky stock speculation. I wouldn’t even call it investing because I was watching the stock prices daily and making trading decisions on a daily basis. That is not investing. I would invariably end up losing 20% – 40% and sell the “investment.” Then I’d be down and put the cash back into my savings account. After another three or four months, when I saved up another good chunk of my goal, well, you know what happened next.

So, did I learn my lesson after the first few times? No. Did I learn in the first couple of years? No. Did I learn the importance of having cash set aside for emergencies? No. I’m stubborn. I’m “smart.” I can beat the “system.” And so I continued like that for years.

Another version of this lesson for me was why having extra cash around is so important. There are so many emergencies that can happen that require extra cash. If you don’t have the money sitting in a savings account, then you have to sell something to raise cash. Typically, you’re selling at a very inopportune time. Maybe taxes come up and you owe more than you think. If you don’t have cash, then you have to sell something. What if the economy is going through a recession? Typically the time you lose your job is the same time that the stock market is down 20% or more. That really hurts when you have to sell at a loss to raise cash. It’s almost having a process of “buying high and selling low” in your financial investments “system.” That is not going to increase your net worth over time. That is going to lose you money.

Let me tell you another reason why Level III is so important. Later in the game, we’re going to be investing in real estate and businesses that generate cash flow, but are not considered liquid. That means you can’t sell them easily. It’s going to take time to sell these non-liquid assets. It’s going to be more like selling a house than selling a stock on the stock exchange. These non-liquid assets are where a lot of the power is because of their ability to produce cash flow. We’ll be looking to buy them with the potential of never selling them. We won’t be looking for capital appreciation. We’ll be looking for cash flow. So, if you don’t have the proper reserves in place, and if you haven’t learned this lesson yet, you’re going to get yourself into a lot of trouble. Entire dynasties have been brought down because they didn’t have enough cash in the bank. An opportunity is only an opportunity if you can take advantage of it. Otherwise, it’s just a good idea. For you to be able to take advantage of an opportunity, you’re going to need cash. For you to be able to protect some of your other investments, you’re going to need cash.

It took me over a decade to learn this invaluable lesson. Save, at a minimum, three months of expenses in savings account for emergencies. Your emergency fund is the buffer in your system, the redundancy, that allows all the other systems in your financial structure to work well. It’s the grease, not the gas – but, both are needed in a well-running car to get you where you need to go.

Create Surplus

Increasing income with increasing expenses at equal amount does not help in increasing surplus. A budget plan plays an important role in determining how much to save and control expenditure. If you spend below budget, you would have surplus higher than expected. If you overspend, you would leave a smaller sum for saving.

Quotes by Warren Buffett:

  • on spending: “If you buy things you do not need, soon you will have to sell things you need”.
  • on savings: “Do not save what is left after spending, but spend what is left after saving”.

It is important to know the difference between what you want and what you need. Whatever not in your budget is not a need. Before any spending, please ask yourself: “Do I really need it?” If the answer is “No”, forget about it! There are more important goals waiting for you.

Financial Literacy

A healthy savings habit is the gift that keeps on giving. All of life’s major money milestones – whether it’s for a down payment, starting a new business, or a long period of unemployment- require having cash in the bank. For your children, the feeling of being able to tackle challenges like these without parental support is both extremely liberating and a memory they will pass onto future generations. Although everyone’s situation is different, a good rule of thumb for those starting out is to put 10% of total income toward long-term goals (like retirement) and 10% toward short-term goals (like the emergency fund or a house down payment.) To help ensure success, we recommend having these savings deductions automatically withdrawn from a paycheck into separate accounts each month. We find that it’s much easier to not spend if you don’t see the money. And for those who’re receiving holiday bonuses for the first time, save at least 50% for the future. We promise that this practice will have you remembering the holidays in a positive light for years down the road.

Every year on TV we see the Grinch who tries to ruin Christmas. But for twenty-somethings, he’s going by a different name this year – debt. As a parent you’ve known for a while that there’s no such things as free money, but this is a new concept for young adults. Tour guides don’t discuss loan repayment strategies on the campus tour and credit card companies don’t emphasize their high interest rates while they tempt kids with free t-shirts on the Quad. Credit cards are one of the best ways to help establish good credit. They can also come with great perks, travel benefits and discounts. But, all of these “benefits” are only helpful if these cards are used responsibly. If you’re comfortable, help your child open their first credit card, but discuss with them the importance of paying it off in full each month. Show them how incredibly high the interest rates are on these cards – higher than the return any investment or savings account will ever earn them. We recommend starting with a low credit limit ($500 or less) for the first year or so while they grow accustomed to paying off the card each month. If your student was one of those kids that picked up one of those free t-shirt/credit card combos, but doesn’t remember what happened to either, it also would be a good idea to check out their credit report. This report will give you the details on the card, as well as help you monitor for fraud or identity theft.