How to Protect Your Assets

How owners hold title to their property is one of the most important aspects of asset protection, asserts certified financial planner (CFP) G. Kent Mangelson. Placing assets in a limited liability company (LLC) is one of the primary tools an individual or business owner can use to keep his or her holdings protected. In his April 8 presentation at NPGA’s Southeastern Conference, Mangelson focused on three main areas of asset protection: estate planning, lawsuit protection, and income tax reduction.

He is senior adviser for the American Society for Asset Protection, a company that teaches business owners how to use legal tools to achieve asset protection. In his presentation, “Lawsuits, Taxes, and Probate: Reduction Strategies for Propane Gas Professionals,” Mangelson disclosed that if a person uses a “will” for estate planning purposes, the will guarantees that to be used as a legal document it must go through a process called probate. Probate can be expensive, time-consuming, and usually involves a loss of privacy because the information is now a public record.

“Most estate planning attorneys agree that using a living trust can achieve the same objectives as a will without the probate process.” Having a living trust in place is an important step in the first area of asset protection that he covered — estate planning. He emphasized that if you do not have a will or a living trust, the state has a will already drawn up for you — it’s called “state statute.” The statute is probably not how you want your estate to be distributed. If you don’t have a living trust, you should have a will because it will at least tell the probate court how you want your estate to be probated. Further, Mangelson always suggests that a person should still have a will along with his living trust as a “backup” in case the person forgets to include assets in the living trust, and then after his passing, those assets may become subject to the probate process.

In estate planning, he frequently recommends that a business owner include his or her personal holdings in the living trust instead of those holdings being owned in the person’s individual name. An example of that would be to have a bank account titled into the name of the living trust rather than in the individual’s personal or joint owner name. That strategy will usually eliminate the bank account being probated following the owner’s death. Mangelson has seen some unfortunate examples involving fairly wealthy people whose estates were eroded by half or even two thirds before their heirs ever saw a dime due to probate and estate taxes. How you take title to your assets makes a big difference in solving those issues. Setting up your assets so they are owned by estate planning entities can often reduce substantial losses of assets upon death.

That is also an important consideration for the second area of asset protection that Mangelson covered — lawsuit protection. In the event of a lawsuit, if a person holds property in his individual or joint ownership names, the law offers limited asset protection in most states, he observed. Placing assets in a properly structured LLC makes it difficult for a trial attorney to come after them. Using that tool is helpful for private individuals and businesses.

Mangelson reiterated that estate planning and lawsuit protection are more successful when the business owner is careful about how the assets are owned. Placing property into an LLC provides much better predictability and protection than if the asset is in someone’s individual name.

Tax reduction was the third area of asset protection in Mangelson’s presentation. “Most people would agree with me that they could do a whole lot better financially if they could pay less taxes,” he noted, adding that being classified as owning your own business is one of the greatest tax shelters in America. If a person’s only relationship with the IRS is a 1040 personal income tax return, his ability to reduce his tax liability is very limited. On the other hand, the tax code can provide many more tax reduction strategies to individuals if they also have a business. If a person has his own business, the business can frequently provide many financial benefits to the business owner that are tax-free or tax-advantaged.

When a person sets up a business, setting it up properly is important. One popular form is that of a sole proprietorship. This method is somewhat limited in its scope and often provides less favorable tax benefits and lawsuit protection. Listing the business as a corporation (or an LLC and taxed as a corporation) is usually a better option. Mangelson provided examples of how being taxed as a corporation offers greater tax reduction than that of a sole proprietorship. He says that most businesses fall short of using anywhere close to the number of tax deductions that they should be taking — the Internal Revenue Code Section 162 provides a list of nearly 300 tax deduction suggestions that many business owners are neglecting to take advantage of.

Many people don’t know about those suggestions because they are not receiving their advice from the right people. Tax preparers do a good job of preparing taxes, but Mangelson believes people should also seek advice from tax advisers.

“Very few people use a tax adviser,” he said. “Most of the tax advisers I’ve found in my career are tax attorneys. They’re used to defending people’s cases in tax court, and they’re a lot more inclined to be aware of the advanced tax reduction strategies that the business owner should be taking advantage of.”

In summary, “total asset protection” advisers provide expert guidance, and their advice frequently focuses on asset protection, which has everything to do with how you take title of your assets. Mangelson noted that total asset protection attorneys would help you decide whether “to own property in your own individual or joint ownership name, or do you use these other legal tools we use to solve these problems.” —Daryl Lubinsky