Besides knowing the cost of the insurance, be aware of “gotchas” that can ruin you financially.

There are more than 30 million lawsuits filed in the U.S. each year. If you own a home with equity, a business, rental income property or have large sums in stocks, bonds and cash, then you have a target on your back.

It is human nature to think nothing bad will ever happen to us. The reality is that life is full of curve balls, and families and businesses get hurt. Wealth is not automatically protected against lawsuit-hungry individuals and companies, which is why asset protection planning is critically important. When structuring your personal and business assets, always think defensively by protecting your wealth, investments and business intellectual property.

When people hear the phrase “asset protection,” they often assume it’s something that’s necessary only for the ultrawealthy. In other words, they mistakenly believe that individuals of more modest means have no reason to enlist the services of an asset protection attorney. Lawsuits and financial catastrophe can affect anyone, regardless of the value of their assets or their situation in life.

Getting Started
Proper asset protection is not as easy as zooming over to a legal do-it-yourself website. Creating defensible legal shields around your financial castle requires a skilled team that specializes in asset protection law.

Importantly, remember that asset protection is not an “after-the-fact” solution. You cannot call the insurance company when your house is on fire to ask for more insurance coverage. Legal asset protection works the same way. You must get organized when the seas are calm. The most prudent course of action is to include asset protection as part of your big-picture financial plan. You work hard to build your assets. All that effort is a waste if they can be taken from you in one fell swoop. To be effective, proper protection must be in place before you are sued.

Sometimes, protecting your assets involves acquiring additional insurance to protect against accidents and risks. Other times, a well-drafted estate plan can be used to ensure assets are properly protected against future claims against you. How to best protect your assets can be determined only after a competent asset protection planning attorney evaluates your situation.

Sometimes, misconceptions and misunderstandings about legal matters can result in people foregoing important rights or jeopardizing the valuable property they have worked a lifetime to obtain. The field of asset protection planning is no different. Confusion about the work and service provided by an asset protection planning attorney leads many people to procrastinate until disaster strikes and property is threatened before they seek the help of a lawyer. Unfortunately, due to laws in California and elsewhere, it is usually too late to protect assets once an event has taken place. Procrastination is the enemy of good asset protection.

Asset Protection and Real Estate
Nowhere is asset protection procrastination more prevalent than in the world of real estate investing. While real estate is a great way to store wealth and create streams of passive income, it does come with myriad strings attached. Unlike stocks or bonds, real estate often requires a “hands-on” approach and exposes an owner to significant liabilities. For example, the mailman will never slip and fall on your Apple stock. Here is a sampling of situations where an owner may incur liability for their property:

• A tenant trips and falls down a flight of stairs due to a defective handrail
• A tenant’s child drowns in a pool that isn’t adequately fenced off
• A branch on a tree on your property that hasn’t been adequately trimmed falls on a third party’s car
• An environmental survey reveals significant mold or chemical contamination on your property that needs to be remediated

These are all situations that could involve a lawsuit or a claim against your insurance. In certain examples, the liability may be so great that insurance doesn’t cover it, allowing the injured party to come after your investment properties or even your personal assets. The question here is “How do you reduce this risk?” Working from an estate planning context, the goals for investment real estate would be to:

• Protect ourselves from liability while we are living.
• Preserve our assets to maximize what we pass on to our children or other beneficiaries.
• Make it as easy as possible for this transfer to occur upon our passing.

One simple and relatively inexpensive way to reduce the liability on investment property is to purchase an umbrella policy. An umbrella policy provides additional coverage above and beyond your primary policies. For instance, if you have insurance on your investment property for $300,000 and an automobile policy with limits of $500,000, a $1,000,000 policy will increase those limits $1,300,000 and $1,500,000, respectively. This provides a greater cushion in case you incur a significant judgment.

Another way to protect yourself is to create a limited liability company (LLC) to hold your real estate. An LLC is a legal entity that provides significant benefits to its members. The primary benefit is that the liability of the owners of the LLC is limited to the assets of the LLC and does not extend to the personal assets of the owners.

Let’s say a tenant falls down a flight of stairs, suffering severe injuries. In that case, the tenant can only go after the property held in the LLC. He can’t get at your personal home or other investments that you have outside of the LLC. If you have multiple properties, you can create multiple LLCs to maximize the amount of protection you have. Another benefit of LLCs is that they can be seamlessly blended into an existing estate plan. It is relatively simple to transfer LLCs into a living trust to allow your loved ones to manage things in the event of your death or incapacity. Furthermore, as you acquire more assets and build your net worth, you may want to start transferring some of your assets to your children to reduce your estate tax liability. Transferring fractional shares of your LLCs is not only an easy way to make gifts to your children without losing control of your real estate, but it also allows you to qualify for significant valuation discounts from the IRS when calculating your estate taxes.