The real estate market is an ever changing market that affects our economy through real estate purchases, sales, rentals among other business opportunities.  On the media we often hear about the gain on sales, tax deferment, and what the current rental market looks like.  Most of us however, don’t hear a whole lot on protecting and preserving our assets, or Wealth Preservation, other than getting an insurance policy.  While insurance is a great first line of defense, Wealth Preservation is a structure which makes assets difficult or impossible to reach.  This article will outline briefly why Wealth Preservation is to be considered when it comes to protecting our assets.

Why We Should Have Asset Protection:

Wealth Preservation planning is about protecting your life’s work and legacy.  Whether it be a primary residence or a rental business, Wealth Preservation is about protecting these assets as much as you can.  Generally, Wealth Preservation is cost effective tool when conducting businesses, estate planning, and family purposes are the primary objectives, with asset protection merely a resulting benefit.  The countless results can be to increase wealth, manage and develop real estate, reduce estate tax, avoid two layers of taxation, protect LLC members from LLC creditors, provide confidentially, avoid probate, establish an order of succession, prevent transfers of interests because of ailed marriages, control cash flow to members, provide buy-sell agreements, resolve disputes privately, and reduce taxes just to name a few.

Wealth Preservation is a structure which makes assets difficult or impossible to reach.  If proper steps are taken, you can protect real properties by putting a portion of your assets behind some obstacles.  The more obstacles, the greater the protection.  Wealth preservation also plans for future liabilities.  Gaining this type of safety and security is essential and allows you to stop worrying about what type of liabilities you may open yourself up to.  Much of the time we focus on building, we often fail to stop to think about how these risks could harm our primary residences or business ventures.  Effective Wealth Preservation planning is based on the premise that the planning steps that you take today includes the protection on the future transfer of that wealth to younger generations.

We reside in a litigious society where suing a person or business is common especially when we are trying to look for someone to blame.  Secondly, nothing can stop someone from filing a lawsuit.  This means that the expenses of a defense when you’re sued, even if you win at all levels, you can still spend an upwards amount of $100,000 plus defending yourself and will likely never recover these costs and attorney fees.  Customers, clients, patients, employees, family members, business partners, renters, basically the general public at large are all people who can file suit against you.  These lawsuits vary in flavor as well and while as fair as we try to make the judicial system, sometimes juries are unreliable.  Depending on who is sitting in the jury, they may not feel as much sympathy for a real property owner.  When factoring all of these dangers, it’s worth taking steps to have Wealth Preservation obstacles in place.  If and when something happens, at least you know that you have a line of defense ready rather than having to open up to all of your assets.  This type of pre-planning for current and future transfers of wealth to younger generations are to put the asset into a protected form.  Effective Wealth Preservation planning is always based on the premise that at the time the planning is implemented no known or should-have-known creditors will be left holding the bag.

What Are Wealth Preservation Tools?

There are various tools we can consider in order to give us more asset protection.  Insurance, Trust, forming entities and/or multiple entities, gifting plans, retirement plans (under ERISA), and application of knowledge.  These Wealth Preservation tools are available so you can control your property and assets for your own benefit.  There are several Lines of Defense that can be utilized: insurance, entity formation, and estate planning, to name a few.

  1. Insurance

Insurance offers protection when a lawsuit is filed.  How much coverage is enough and how much does the policy cost are questions that would depend on each business and personal comfort.  There are various insurance policies on the market and while not all products would meet the goals of each person and business, having a of insurance would be the first line of defense.

  1. Entity Formation

Entity formation is something that can be used to segregate assets.  Many businesses, operating in one company or in in their own name, one lawsuit can result in the loss of everything you own.  If you own things in separate companies, then only the entity involved in the suit is at risk.  While having entities formed does not mean that your other assets are not reachable because in some cases Courts are applying the piercing legal theories equally to corporation as well as limited liability entities.  Disregarding “entity formalities”, is the primary reason for Courts to pierce the entity veil.  The Corporate Shield stays in place so long as the entity observes formalities with formal maintenance plans, convert formalities into valuable planning opportunities, brings on lawyers and CPAs together with owners for annual planning meetings.

When you’re thinking of protecting a business asset, think about what type of entity formation would work for you.  Then, when you picked the right type of entity, follow the proper procedures to ensure that the entity is formed.  And lastly but just as important, have an exit strategy in case there is a death, disability or divorce.  Because these can be difficult decisions to make, especially during an unforeseen circumstance, it is best to plan for these difficult times early during the honeymoon phase of creating the entity.

  1. Estate Planning

Having a Trust based estate plan avoids probate.  Probate is a long, arduous process that is public and expensive.  California’s intestacy plans do not allow for who your beneficiaries are and in what way you can leave your estate whether it be a special needs trust or a lifetime trust.  Trusts include both Revocable Living Trusts and Irrevocable Trusts.  There are also Special Needs Trusts, Lifetime Trusts, and a General Needs Trusts which are essential to beneficiaries with special needs and those who may not be financially ready to inherit from an estate due to substance abuse issues or would squander their distribution.  A Trust can also plan for your incapacity where a Trust based plan allows for you to imbue people with the authority to manage your assets when you are unable to take care of yourself.  Trusts can plan for these issues to ensure that a family’s legacy is protected and handed down in a manner that the Trustmaker intended.

While there are many ways to protect your asset.  It could be through layers of insurance and different types of insurance with an umbrella policy.  It could be through the use of a complex or simple entity plan.  It could be establishing a Trust and Will.  Or it could be a combination of all of the above.  Through use of the tools above and a combination of different strategies, you can come up with a creative defense mechanism that is catered to your asset depending on what your assets are, who you are preserving the assets for, all so that you can have a better night sleep and if and when you need a line of defense, you have them all lined up and ready to be utilized to protect you and your assets.

by Sophia Cizmarik, Esq. and Brett Lytle, Esq

Please understand that this information is offered as general knowledge and not offered as legal advice. If you are interested in learning more about estate planning and wealth preservation, call us today to schedule a time to speak with one of our attorney about your case. Contact us at 650-572-7933 or