Accumulating assets is just one part of creating a financial legacy. Protecting them is just as important.
You don’t have to be an accounting major to know that assets are good and liabilities are bad. With that said, while we spend our lives accumulating assets, most people are woefully unprepared to protect them. They are just one bad decision or one unfortunate event away from losing everything they have worked so hard to obtain. To help you protect your wealth now and for generations to come, keep reading as we explore some common asset management mistakes and effective means of protecting them from risk.
Lack of Diversification
In the age of fintech, anyone can become an investor. With as little as $10, you can open a brokerage account and start the path to financial freedom.
The operative word here is “path.” The road to wealth is a slow and steady one, the result of patience and a steady stream of solid habits.
Unfortunately, too many novice investors feel like they know something the market doesn’t and put their entire life savings into the next big stock or cryptocurrency. They are ready to become a millionaire overnight, only to get a rude awakening when euphoria dies away and the shiny attraction proves to be fool’s gold.
Solution: Diversify your holdings by purchasing shares of ETFs and index funds. By having your risk spread out over all of the assets in a class, you can feel confident that the market will ultimately return 6-8% over the long haul. As the father of value investing, Benjamin Graham, said: “Don’t look for a life-changing return from your investments: seek an adequate one.”
Inadequate Estate Planning
As we move along through life, it is only natural that we begin to think less about ourselves and more about our loved ones.
This inevitably leads to estate planning. Things that felt like a waste of money a decade ago, to-do items that could wait for a more convenient time, suddenly gain new significance as years go by. What will happen to my house if I meet an untimely demise? Who will provide for my children if my income is no longer there to support them?
The common move is to draw up a will and take out a life insurance policy.
While these are undoubtedly important components of a comprehensive estate plan, they are not insufficient in and of themselves. Wills can be overturned in court if slighted heirs and shorted creditors have the time, resources, and motivation to pursue litigation. Life insurance comes in many complicated forms with specific conditions necessary for payout, leaving many policyholders far less protected than they think.
Solution: Talk to an asset protection attorney about forming a domestic asset protection trust (DAPT). A DAPT trust allows the grantor to move assets into an irrevocable trust while still retaining some degree of beneficial interest. By forming a statutory wall between yourself and your assets, a DAPT trust keeps your hard-earned wealth untouchable from courts and creditors and guarantees that they will be used as intended for years to come.
Forming the Wrong Business Type
It is the American dream to be your own boss and start a business.
The problem is that no matter how hard you try, the only people who seem willing to invest in your start-up enterprise are yourself and your closest family members.
You find yourself dumping your life savings and enlisting sizable investments from brother, sister, and a favorite uncle just to get started.
Seeing that 1 in 4 small businesses fail within their first year, with the number ballooning to over 50% after 5 years, it doesn’t take much imagination to see how this setup could bring ruin to your entire family without the proper legal protections.
Solution: Form a limited partnership (LP) for your business. You may be wondering: what is a limited liability partnership? Isn’t an LLC better?
While both business forms are definitely better than standard operating agreements (or no agreement at all!), an LP actually offers the best option for asset protection. As the general partner, you can bring your family on as limited partners and allow them to participate in the financial gain/loss of your enterprise while giving them personal protection against liability and debts of the business that extend beyond their investment. Because LPs have been around much longer and are far more standardized than LLCs, it is more cut-and-dry how courts will rule when legal action is taken against the business. You can also use the gift tax exclusion to give a tax-free gift of up to $16,000 worth of LP assets to an individual each year, allowing you to slowly transfer wealth without incurring hefty estate taxes.
Protect Your Assets with an Uncrackable Financial Fortress
Accumulating assets is just one part of creating a financial legacy. Protecting them is just as important. Unfortunately, this crucial piece of the puzzle often gets overlooked. Therefore, if you are ready to get started on protecting your wealth for generations to come, explore the resources at legalreader.com and contact an asset protection attorney for industry-leading guidance!
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