Entrepreneurs take enormous risks and achieve extraordinary wealth but often don't do the necessary planning to protect their wealth. As part of a fast-growth business myself, I've sought financial and legal advice.
It's not enough to make money. You need to know how to protect it, and know how to protect yourself. I sat down with wealth expert, Jim Dew, and he blew my mind. Specifically, taught me five things I believe every entrepreneur needs to know in order to protect themselves.
Here they are:
No one except the insurance agent likes insurance but when it comes to asset protection, it's one of the easiest and most inexpensive tools to use. Most entrepreneurs take this for granted, yet there is a lot to pay attention to in this area.
The cornerstone to a good insurance plan is the umbrella liability policy. This is coverage that protects you over and above your normal limits on your home and auto policies. The most obvious case is a lawsuit from a car accident that was your (or one of your children's) fault.
The umbrella can also protect you in other ways. If someone gets hurt at your home or your dog bites a neighbor, this coverage is vital. In addition, the umbrella will have other protections from other types of lawsuits that are not accident related like libel or slander. However, all umbrellas are not created equal. It's critical to read the exclusions section to see what is covered. Some umbrellas will exclude punitive damages.
These are sometimes called exemplary damages and are awarded by a court in addition to actual damages like medical expenses. They can make up a significant portion of a judgement. Also, make sure your dog isn't on the insurance company's dangerous dog list. If it is, your multi-million-dollar umbrella might be limited to something like $25,000. Another tricky area is watercraft exclusions.
Some jet skis for example might be excluded from your policy. These policies come in 1 million-dollar increments and you might be well-served to have $5 to $10 million of coverage.
Even if you don't have employees or a physical location, it's important to have general liability insurance. It can cover things like copy wright infringement lawsuits that could bury your company. These policies won't break the bank. They are a low-cost component of your overall insurance portfolio.
Whether you are using an LLC, C corporation, S corporation, or partnership, there are ways to position your assets to make them less appealing to a lawsuit. Make sure you identify risks and how your entities can be utilized to prevent losing what you have made.
One simple example is having one entity hold property and real assets while having another entity run the operations of your business. This structure has less risk than having everything under one roof.
Things like 401Ks and Defined Benefit Pension Plans are protected from lawsuits under federal law. Don't discount the value of having a well-designed plan for your business. A smart design can create many benefits that most entrepreneurs aren't aware of. In some cases, the difference between a standard off the shelf retirement plan and a custom designed one could mean hundreds of thousands of dollars in additional contributions and significant tax savings.
There are other ways to protect from lawsuits within the IRS code. Captive Insurance Companies allow a business owner to transfer lawsuit risks when traditional insurance isn't available or desirable. These vehicles also have an attractive asset protection and tax savings component.
These products are protected under each state law, so make sure you know the protection available to you in your state. As you grow, you might consider Private Placement Life Insurance (PPLI).
This is a strategy that has been used for decades by billionaire family offices and is now available for the not yet ultra- wealthy. Unlike traditional life insurance, there are no hidden commissions or surrender penalties.
And, you don't have to use the insurance company's investments. When these are structured correctly, you can enjoy tax-free growth and tax-free distributions.
Entrepreneurs often have a revocable family trust. Although this is the foundation of most estate plans, placing assets into other types of trusts through advanced planning can provide substantial asset protection as well as tax benefits and beneficiary protection. Utilizing a Nevada Incomplete Gift Non-Grantor Trust (NING) for example provides asset protection while eliminating state income tax.
Another trust, the Qualified Personal Residence Trust (QPRT) can hold a vacation home providing asset protection while creating a multi-generational place for family to share memories for decades to come. There are many trusts to consider, and it's one of many reasons why you need experienced attorneys on your wealth management team.
From the simple to the complex, consult with a wealth manager that can help you manage the team of tax and legal experts needed to create and monitor the best plan for you. Simply put, have a plan so your assets can't be taken.