5 benefits of asset protection

Many people think that taking steps to protect their money from lawsuits is just for rich people with cash and land to spare. But have you ever bought insurance, formed a business entity, or split up your money in more than one kind of account such as a checking and retirement account? Then you’ve dabbled in asset-protection planning too.

That’s a good thing because many of us run the risk of getting sued at some point in our lives. Indeed, about 100 million lawsuits are filed in the United States every year. And Saipan is hardly less litigious.

What’s the reason for this avalanche of lawsuits? Every day stuff that will happen to most of us eventually—divorce, unpaid loans, car accidents, slip-and-fall accidents, business deals gone sour, and on and on.

The upshot is that life happens. As sure as dawn follows night, we know that storm clouds will darken the sky repeatedly during our lives. It’s part of the journey. Thus, the question is not whether the rain will come; it’s whether we will prepare for the rain before it arrives.

Fortunately, there are ways to prepare for rain while the sun is shining. These strategies are commonly known as asset protection. They involve leveraging the law to minimize the amount of assets that someone can successfully seize if they win a lawsuit against you. In concert, these strategies are powerful because ultimately it does not matter how much a person wins in a lawsuit, it matters how much they can collect afterward.

How can these strategies help you? In at least five ways.

First, deploying asset-protection strategies increases the chance that you will keep your stuff if something bad happens. In fact, that’s the chief point: Asset protection minimizes the assets available for your creditors if they win a lawsuit against you. It’s the equivalent of playing defense on the basketball court rather than letting the other team drive to the hoop for an uncontested lay-up.

Second, asset protection can discourage the threat of a lawsuit blooming into an actual lawsuit. The reason is that litigation is ultimately a business decision. A plaintiff won’t sue someone if the cost of pursuing the lawsuit exceeds the gain from winning a lawsuit. This is true even of the emotional plaintiff who claims they are fighting for principle. A sense of justice may drive them at the start, but once the emotion wears off and the checks to their lawyer pile up, reality will sink in and economic calculations will take over. This point applies even more firmly to lawyers. If they fight for principle too frequently, they starve because principle doesn’t pay for food or keep the lights on. And so lawyers will generally avoid cases unless they have a reasonable chance of earning money. What’s the upshot? If you can convince a plaintiff (or their lawyer) that your exposed wealth (that is, the money they could seize if they won the case) is small, then they won’t bother with the suit because the cost will outweigh the benefit.

Third, even if asset protection does not stop a lawsuit, it will often reduce the settlement cost. The reason is similar to why asset protection often stops a suit before it starts—economics. If you have a solid asset-protection plan in place that minimizes the assets easily available for a plaintiff to seize, then they know there’s little low-hanging fruit to eat and, as importantly, if they chase after the protected assets, it will be a slow and expensive journey with an uncertain end. This combination of minimizing easy assets, increasing the other side’s costs, and delaying the potential payout is powerful leverage at the bargaining table. It leaves a plaintiff with an unpalatable choice: They can either accept something now or stack up costs for months or years chasing an unpredictable payout later. In the face of that decision, plaintiffs (and their lawyers) will often take the sure thing now and move on with their lives.

Fourth, putting together an asset-protection plan normally improves your financial plan as a whole. That’s because asset protection intersects with your tax, investment, and estate-planning goals. So, talking about asset protection often yields better strategies for each of these topics, which ultimately means more money for the future version of you and your loved ones. For example, talking about asset protection often bleeds into how to reduce taxes, which then leads to discussions about how to plan your estate to reduce how much the tax men gets when you pass away, thereby maximizing how much of your assets go to your family.

A fifth benefit, and perhaps the key one, is peace of mind. If you’ve implemented a thoughtful asset-protection plan, you can sleep soundly at night knowing that you’ve reduced the downsides of life as much as possible. Thus, when the storm hits, you’ll be ready.

But a word of caution: While everyone should engage in at least some asset protection, it’s a complex area of law that intersects with a multitude of similarly complex fields. In short, it’s not a do-it-yourself project, except for the simplest of strategies. So, if you want to go beyond the basics, do your homework and get some help.

This column is for informational purposes only and is not intended to be taken as legal advice. For your specific case, consult a lawyer.