Most investors are stuck choosing between insurance and asset protection with entity structurings such as an LLC, Limited Partnership, or Corporation when looking for a perfect wealth management solution. Both asset protection plans and insurance policies can be viable in your investments as they shield an investor from possible lawsuits. Before choosing either, here is what you should know (you can also have both plans).
Insurance: What should you know?
Many well-meaning advisors like to promote and use insurance as the primary means of asset protection. Unfortunately, relying on insurance alone can leave you exposed.
An insurance policy works based on your needs and the probability of facing particular risks. An insurance policy will only cover your expenses when the event occurs. In some scenarios, you might be denied the policy even when you qualify for it.
Exclusions
Ever notice that insurance policies have pages and pages of what is not covered and only a few pages of what they will cover? The difficult thing with insurance is that you never know what will be covered in the event of a lawsuit. Mold, mildew, lead paint, environmental hazards, negligence, and other hard-to-control items are not usually covered. And remember that an insurance company is in business to collect premiums and NOT payout when there is an incident.
Umbrella Insurance
This policy covers your assets beyond what other insurance policies provide. With this insurance, you can be safe from any litigation and expenses resulting from personal injuries. It also may cover your property from any damage, such as fire or floods.
Insurance Can Make You a Target
Carrying large umbrella policies can actually make you a target of lawsuits. Lawsuits are expensive and insurance companies will do the math and either fight or settle. It’s a simple mathematical equation and if the flight costs more than a settlement then they will settle and move on.
Carrying a large policy with millions in coverage can make you attract a lawsuit if the other party thinks they have a strong case and can get a nice settlement.
Should You Have Insurance?
Does that mean you should not carry insurance? Absolutely not! The fact is that accidents happen and you should carry adequate insurance to cover an actual accident that might happen. You want to be able to cover real accidents so a remedy can be there to help the injured party. This is not only responsible but logical for protecting the basics of an asset.
Asset Protection: How does it Work?
When you opt for this plan, you secure your property from any unforeseen risks. Using legal structuring such as LLCs, Corporations, Limited Partnerships, or Trusts to protect assets adds a legal structure for a strong layer of protection that insurance usually will NOT cover. It is additional protection that can be used along with other traditional techniques.
Most people opt for this plan for protection against creditor claims. It is a technique to limit a creditor’s access to the valuable property when facing debtor-creditor lawsuits.
Do I Need an LLC, Corporation, Limited Partnership, or Trust?
The answer is, “It depends.” Each state has different laws that protect your assets better. LLCs, Corporations, Trusts, and Limited Partnerships all have different court histories and case laws with a track record that either makes one stronger than the other. A strong track record with respect to the “Corporate Veil” and Charging Order laws makes the entity stronger.
Sometimes you will use a different entity for the type of asset you are protecting. For example, an LLC might be appropriate for real estate in some states and a Limited Partnership for a trading/investing account in other states.
Stay Away from the Latest & Greatest
New cutting-edge Trusts, LLCs, or other off-shore types of entities should be avoided or strongly vetted. You don’t want to be a guinea pig when it comes to the courts. Trying to prove that your latest cutting-edge Trust will protect you against anything will be very expensive and you still could lose.
Many Single Member LLCs, Series LLCs, Trusts, and other entities that are relatively new with little court history should also be avoided unless your state has officially adopted statutes to recognize these entities.
Tax & Asset Protection are not Interchangeable
This is a whole other topic that we cover in detail in other articles but it is important to keep in mind that taxes play a significant role in what type of legal structuring you use. Asset Protection is not the same as tax planning. But you need to understand both. Just because the entity protects your assets does not mean it is going to be good for tax planning strategies. A well-meaning tax advisor might suggest you put all your assets into one LLC or Corporation. That might make sense from a tax planning standpoint but from an Asset Protection standpoint, it puts all the assets more at risk because it combines the assets into one entity. The opposite is also true, too many entities can create a tax nightmare. Balance and experience are key. You need an advisor that has experience with both.
Insurance vs. Asset Protection: Which Should You Choose?
Contemplating between the two wealth management plans is quite critical. Choosing insurance doesn’t mean that you have taken care of everything. It would be best to have the two methods if you intend to secure your property.
An insurance policy might be a solution when involved in minor accidents or personal injury. One plan might not protect you from every possible liability. A combination of both could be ideal.
Investors should know that both insurance and asset protection policies play two significant roles; protecting your asset and shielding you from legal matters. Since you need different policies in varied scenarios, you should consider having both of them. To be sure of the perfect wealth protection technique and how each one works, contact us at Protect Wealth Academy.
