Asset protection refers to the efforts and plans you undertake to guard your wealth against creditors, taxation, probate process, and other losses. It helps you protect your wealth and legacy.
Knowing its essential role, you should avoid certain mistakes that can undo all your years of work and intentions. Most of the time, you make mistakes thinking they are the best decision. Some of the common asset protection mistakes include;
Not having or delaying an asset protection plan
Lacking a plan is common for most people, thinking that asset protection is only for the rich and celebrities. The problem is that anyone can fall victim to creditors, liability lawsuits, or in need of long-term nursing care. Further, there is the issue of inheritance and estate and property taxes. Unless you have nothing on your name, you should consider asset protection before waiting until an incident occurs as then it would be too little too late or even illegal.
Planning asset protection on your own
The next common mistake is doing asset planning on your own. In this case, you understand the advantages of asset protection but think it is an easy process you can do by yourself or that it will save you money that way. Asset planning is not simple, and a comprehensive plan is multi-layered as it covers all issues and potential contingencies. You do not have the depth of knowledge of both financial and legal stipulations to choose the most beneficial asset protection plan.
At best, you will end up leaving other assets vulnerable, and at worst, you would not have the protection you think you have and even break a few laws along the way. Should anything happen, that's when you realize your whole portfolio is exposed just because you tried to save a few dollars; you should have paid for expert advice.
Not considering the tax consequences of your plan
Taxes are a vital consideration in any asset protection plan you draw up. Part of the reason most people start thinking of asset protection is to legally limit their taxes and what their inheritors pay once they get ownership of the property.
However, the probate process and income tax can eat a considerable portion of your property when done wrongly. You must consider who pays the taxes with different ownership and the stipulations, especially across different assets. Whichever plan you come up with should illustrate how shielded you and your inheritors are to various taxes.
Not updating your will and asset protection plan
Having a will and an asset protection plan means nothing if they do not reflect current circumstances. Are you still married to the spouse you signed as the next of kin in your life insurance and retirement scheme? Do you still want your parents or siblings to be administrators to your trust? Has any child you wanted to inherit you passed on before you? Do you want the wealth to go to your grandchildren? Have you bought any new assets not added to the plan? These and many other events can change, and if your plan does not reflect this, it will fail its essential purpose.
Using the wrong asset structures and tools
There are numerous ways to protect your assets, including trusts, limited liability companies, insurance plans, and offshore accounts. If you use the wrong structure, you will not have the protection you are hoping for.
For example, revocable trusts will not protect you from creditors, and even traditional LLC companies in some states like California attract franchise taxes annually. Further, a typical single-member LLC is not the best option as your assets will be vulnerable if the opposing attorney can show the court that the LLC is your ‘alter ego.’
Failing to title/fund your trust
Another mistake people make is setting up a trust but failing to title them accordingly. It happens when you do not move the assets you want to protect to the trust's account. Some people even sell assets titled under the trust, and in case they buy new ones, say a house, they do so in their names, which exposes your assets to estate taxes and probate.
Picking the wrong asset protection lawyer/expert
Equally costly as not having any asset protection plan is picking the wrong person to help you. You want an attorney versed in the current laws, the limitations of various options, and the best alternatives. They should have experience in the field and should be able to point to a successful portfolio and, where possible, use someone with the proper recommendations.
Asset protection is certainly not a quick fix or something you can undertake using a premade plan online. You will need to think about it deliberately and find an expert experienced in the field to help craft a comprehensive plan. Even then, it will still require your continued attention to ensure it is updated and the relevant assets continue to be titled under proper structures.