Asset protection planning is closely related to financial planning. Both asset protection and wealth preservation strategies are about managing risk, which requires careful planning and appropriate asset allocations.
Asset Protection Works like Premium Insurance
In the insurance industry, underwriters charge fees (“premiums”) to undertake risks. Individuals and businesses pay those premiums in order to limit their exposure to financial losses. In other words, premiums represent known, fixed costs that are paid in exchange for a release from future liabilities, the extent of which are unknown. Traditionally, asset protection has worked in a similar way. The transaction fees required to set up wealth preservation strategies and asset protection plans are fixed, up-front costs similar to insurance premiums.
In the aggregate, people are more likely to lose money due to poor financial planning–a lack of proper asset allocation, biased advisors, and a bad economy or poor investment choices–than they are to lose money in a lawsuit. But each individual situation is unique, and some people are in riskier, more lawsuit prone businesses than others. In the case of high net worth individuals with significant exposure to risk (e.g. physicians like OBGYNs), certain wealth preservation strategies (in addition to insurance) absolutely must be pursued.
Wealth Preservation Through Asset Management
The least expensive form of wealth preservation comes from shifting at-risk assets to exempt assets. The only cost from such a reallocation of assets (other than transaction fees) is a possible reduction in liquidity. As an example, one could sell a certain portion of their stock or bond portfolio and purchase a cash-value life insurance policy. While stocks and bonds are highly vulnerable in a lawsuit by creditors, the cash value of life insurance is protected from the claims of creditors in many states. The practice of economics is the shifting of assets from areas of low yield to areas of high yield. Thus, if one can achieve her or his required rate of return via one of two investment vehicles, it makes economic sense to choose the less risky vehicle–the vehicle with less exposure to a suit by creditors.
Preservation of Assets
Where the goal is preservation of assets, timing is another consideration. The structure of any asset protection plan should match the investments made within the plan. It would make little sense to implement a wealth preservation strategy intended to last 30 years only to lose the principal in risky, short-term investments. In the very near future, however, it may be possible to earn growth portfolio type gains while only taking wealth preservation risks.
Why Bankruptcy Doesn’t Always Work
If I lose my case, I’ll just file for bankruptcy.” We hear that statement often from scared doctors, dentists, orthodontists and other professionals, trying to fool themselves out of needing asset protection. Most of these doctors, unfortunately, don’t understand U.S. and state bankruptcy laws. Most believe that if a huge lawsuit comes their way, they can simply declare bankruptcy, have the judgment forgotten and continue their normal life.
Besides the damage to one’s credit and the rebuilding process that would ensue over the next seven years, there are many consequences originating from federal and state bankruptcy rules that govern a person’s lifestyle. For example, federal bankruptcy rules state that a married couple can have $34,850 in home equity after bankruptcy. Chances are, as a successful medical professional, you have more equity in your home than that. Be prepared to sell the house, give the profits to your debtors and move into an apartment. It may be easy to declare bankruptcy and avoid paying off a lawsuit debt, but we guarantee that it will be difficult having to change the lifestyle your family has become accustomed to.
The bankruptcy exemption rules are very specific about business “tools of the trade”. A successful doctor may have a thriving practice with a state-of-the-art office. But if that doctor declares bankruptcy, all the “tools of the trade” will be sold off to debtors except for $1,750 according to Federal laws. What type of doctor’s office can be run with just $1,750 in equipment?
Each state has their own bankruptcy exemptions and these take the place of federal exemptions where applicable. Lucky doctors in Utah get to keep their home after declaring bankruptcy no matter what the value.
Utah Bankruptcy exemptions and generally, Utah is very lenient compared to most states. For most successful professionals, declaring bankruptcy will drastically alter their lives.
After learning of these rules, most of our clients come to the understanding that it will be better for the happiness of their family to utilize asset protection to protect wealth instead of giving it up through bankruptcy. Before considering bankruptcy as an option, please consult with an attorney specialist in your state.
Free Consultation with a Lawyer in Utah
If you have a bankruptcy question, or need help with asset protection in Utah, call Ascent Law now at (801) 676-5506. Attorneys in our office have worked on thousands of cases. We can help you now. Come in or call in for your free initial consultation.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506
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