Asset Protection Planning-Here’s What You Need to Know

Updated on June 16th, 2020 | By Anthony Glomski  | Leave a Comment

Recent changes in the world, the most obvious being COVID-19 with its social, economic, and political ramifications, have inspired people to look seriously at their current situations. There are so many unknowns now and with headlines of increased litigation risk, more than ever, successful entrepreneurs want to be sure they’re fully protected.

The percentage of concerned entrepreneurs is high in part because many business owners have seen others like them impacted by lawsuits.

The potential for litigation-driven losses can be exceedingly stressful and problematic. Entrepreneurs often experience intense anxiety—not only at the prospect of financial loss, but also the entire process of dealing with a lawsuit. Not surprisingly, we find that most of them prefer to avoid these issues and scenarios altogether.

Important: Note that nearly 65 percent of the successful business owners who are not concerned do have formal asset protection plans in place. This suggests that having such a plan may give entrepreneurs confidence that they are well protected, thereby reducing their concern about being sued unjustly.

Even though many entrepreneurs lack formal asset protection plans, that does not mean they’re unprotected. For example, having various types of commercial insurance is a form of asset protection—as is setting up different businesses in different corporate entities. Strong legal language indemnifying the entrepreneurs in their business formation documents is another example of asset protection.

However, a formal asset protection plan is multifaceted, integrated and, whenever possible, synergistic. The multiple pieces work in concert to achieve bigger results. Here’s where we can help. Contact us at AG Asset Advisory to start the conversation.

For formal asset protection planning to make sense for entrepreneurs, it must be cost-effective and adaptable. The costs of asset protection planning are the initial expenses for the planning and implementation. Some asset protection strategies have ongoing costs, too. It’s smart to understand all the costs and to make sure that there are no other approaches that will produce comparable results for less.

While some asset protection strategies limit flexibility, the ability to make adjustments to the strategies because of changing circumstances is preferable when possible. Just as business situations often shift due to changing circumstances, so too should formal asset protection plans, to the extent possible.

Blake Christian, a Tax CPA with Los-Angeles based HCVT, notes two valuable tax strategies that can offer an extra layer of asset protection for business owners.

First, depending on the legal structure of the business and its employee make-up, the owners should evaluate the benefits of maximizing tax-deductible pension and profit-sharing contributions for the key employees, including the owners. These programs defer taxable income and provide asset protection under the ERISA provisions. Annual contributions can be as high as the $300,000 range for highly compensated employees and owners.

Second, setting aside college funds for children, grandchildren, or others via an IRC Section 529 Plan does not offer an up-front tax deduction, though earnings in the account will generally be tax-free. These assets are still under the control of the grantor, but not includable in their estate and, depending on the state in which the account is established, can be beyond the reach of third-parties to the tune of hundreds of thousands of dollars for each account.