Wealth Planning

 

“To achieve what 1% of the worlds population has (Financial Freedom), you must be willing to do what only 1% dare to do..hard work and perseverance of highest order.”― Manoj Arora, From the Rat Race to Financial Freedom

 

In our financial pyramid article, we laid out in detail how to build your financial house on a solid foundation and how to protect your wealth. This is a related post to that and we will be focusing on financial (wealth) planning. This is a different take on protecting your wealth.

 

What exactly is Wealth Planning?

Wealth Planning can simply be defined as the process of guarding your wealth. It is more of a planning process, which you go through in order to protect your assets from creditor and legal claims. Both businesses and individuals tend to seek the assistance of financial planners in order to limit the access of creditors to certain valuable assets.

 

With the help of wealth planning strategies, you would get the opportunity to insulate your assets in a legal manner. This is one place where getting a cheap advise might not serve you well. One has to make sure it is done through a legal process and that way, you won’t have any doubts in your mind. In other words, you would not attempt any illegal and unethical methods such as bankruptcy fraud, tax evasion, fraudulent transfer and contempt in order to protect your assets.

 

The most common sentiment is to say – “But, I don’t have any asset”. 

Experts recommend people to begin Wealth Planning before a liability or claim takes place. There are plenty of methods available out there for you to protect your asset.

 

 

What is the importance of Wealth Planning?

Wealth Planning is considered a preemptive and strategic preparation that is being done in order to prevent your creditors from getting hold of your assets during civil judgment. This doesn’t mean that you ignore your debt obligations. Instead, this refers to the fact that you would take control over your debt obligations.

 

Before you rush into wealth planning, you need to have a clear understanding about the breakdown of wealth planning concept.

 

Usually, when a debtor has few assets, bankruptcy is recommended as the most convenient and favorable path to follow. But if significant assets are being held by the debtor, coming up with a plan to protect your assets is always recommended.

 

The only good news is, in most cases, some of the assets, such as retirement plans are exempt from the creditors under federal bankruptcy law.

 

 

What are the wealth planning strategies that you can try?

Here is a list of some of the most effective wealth planning strategies, which can be incorporated into your financial planning process.

 

 

1. Increase your liability insurance

Increasing your liability insurance can be considered the first line of defense. You just need to get in touch with your insurance broker over the phone and make a request to increase the liability limits. You will only have to invest about 5 minutes on this phone call. Actually, you might be able to go through the whole process online nowadays. The results you will get from that short exercise will be totally worth it. More than receiving a windfall.

 

Increase your auto liability insurance

For auto insurance, you should strive to buy as much insurance you can afford. This is the opposite of what most people do, including me at one point of my life.

I used to have a Honda civic with about 200,000 mileage on it. That car kept going until it hit a deer (actually, the deer hit me ok). The car was soo damaged, that Geico, offered me 1,400 dollars for it instead of repairing the car. May its soul rest in peace.

 

Where was I going? Insurance. Yup. Since the car was a beater, I chose the cheapest possible coverage I could find at the time. The state minimum. I was a resident and money was not easy to come by. That strategy was very risky. In fact, a beater car like that needed more insurance as the brakes are more likely to fail and no collision avoidance technology, automatic brake system or parking assist or anything to help me out. You only have to hear the sound that car made when driving uphill to understand.

 

The extra liability coverage to my surprise was actually cheap. To increase our coverage from $250,000 to $1, 000,000 for example, did not quadruple our insurance cost. In fact, it cost us less than 100 bucks more every 6 months for 2 cars.

 

Here’s an example of a case scenario demonstrating why you need more liability insurance.

 

 

Case Scenario

The truth of the matter is, no matter how awesome of a driver you are, no one can prevent 100% of accidents. You can only do your best to focus when you drive and insure the rest.

 

God forbid, if you are involved in an accident that is your fault, and you wreck another car leading to morbid injuries involving a whole family of 5. You would be responsible for paying all the medical and repair bill. And that’s if no mortality occurred. Ouch!

 

This is the scenario where backbone coverage just won’t cut it. If your insurance cannot cover all the cost, then a law suit usually follows leading to you paying your life savings to cover the settlement.

 

Know that liability insurance does not cover the repair of your own vehicle. It only covers those injured in the accident. To cover yourself, you need the comprehensive and collision insurance.

 

I only used the auto insurance as an example because you should probably tackle that first. Look into all the insurance you have and increase your coverage to the value of your asset at least.

 

 

 

 

2. Get umbrella insurance

The umbrella insurance covers what is left after the auto or home insurance has hit its limit. You can read it in this post here.

 

The most important is that you get umbrella insurance that is at least equal to your asset. Most umbrella insurance companies, for example Geico in our case, required that we raise our liability coverage to the maximum before they can cover us with umbrella insurance. This makes sense. If you have 1 million covered by your car insurance, then the umbrella insurance covers the rest.

 

For example, in the case above, if you are in for 2 million dollars, and your car insurance was able to pay 1 million dollars, your umbrella insurance will pay the remaining 1 million dollars.

 

Whats more, umbrella insurance is one of the cheapest insurance out there. I guess because you most likely won’t use it. But its one of those things. Its better to have it and not need it, than to need it and not have it. It cost us less than $500 for 10 million dollar coverage. 

 

 

 

3. Keep your assets separate

This is another effective method that can be followed for protecting assets. Hear me out before you judge. 

 

Community property states definition

In simple terms, this means that all property owned by couples from the marriage date are considered community property which means it belongs to both parties.

Community property includes:

• Dollars either spouse earned from the marriage date
• Things bought with dollars either spouse earned during the marriage
• Separate property that has become commingled with community property that it can’t be identified – More on that later. 

 

Last time I checked, there are at least nine community property states. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are the culprits. If you live in those states, move out quickly. Maybe not as drastic, but you should know the property laws in your state.

 

Of course, if you have a prenup, that is a different story. Should you have a prenup? That is a debate for another time. Some feel strongly about it while some people believe the marriage is damned from the beginning if you talk about prenup. 

 

Fortunately or unfortunately, we did not have to worry about that, as we both had no assets when we met. In fact we had student loans. So we can say we built each other up. We both started together from the bottom, so to speak. 

 

 

A dollar could change your life

While researching this, I came across “commingling” rules.

Here is the gist of how one dollar can cost you a lot of money.

When you get inheritance money or own significant asset before marriage, you have to keep this asset separate.

 

For example, if you have an account with your own money prior to marriage and you add a dollar in it from money earned in your marriage. The entire account  could become marital. You have commingled your funds. Why, you ask? This is because in the court’s eye, money is fungible. Once that dollar drops into the bucket, it is like a virus, it has polluted the whole bucket.

 

No way to tell which dollar is yours and which one is the marital dollar. Think about it this way, if you withdraw all the money and you lay all the cash on the floor. The court now says, point to the one dollar you put into the account. Can you do it? 

 

 

 

In order to avoid having to deal with this at all, it is better to keep your premarital and inherited assets separate. Of course, a dollar might be extreme, but whats blogging without a little hyperbole. 

 

I personally don’t think that is fair.

 

If you have commingled, well, just know for knowing sake. Who knows, it might come in handy someday for your nephews. 

 

 

4. Protect yourself from your renters

If you are planning to invest in rental property or if you already own rental property, youneed to think about enhancing your protection. You can do it by creating a business entity such as a corporation or LLC, so that you can shield your assets from the tenant.

When the renter sues you for $1 million, he has the ability to attack your assets that hold the real estate property. However, the remaining personal assets that you own would stay safe.

In fact, some people even take this one step further and have each investment property as a separate LLC. Imagine having 100 different LLCs.

 

Sometimes, that’s what you have to do to protect your assets.

 

Even, owing a blog like this one, many have advocated turning it into an LLC. This is something we will look into. You never know in this litigious society that we live in.

 

Here is how to properly use LLC for your real estate. 

 

 

Introduction to Asset Production

 

5. Formalize all the informal partnerships

Business partnerships are  similar to time bombs. That’s mainly because you are responsible for the work that is done by your business partner. According to the law, if your business partner does something risky, all the assets that you own would be at a risk as well. Therefore, it is always a good idea to stay away from partnerships unless you know you can trust the person.

 

 

6. Use business entities to shield your assets

Since, in business, you really cannot truly trust anyone completely, instead, you should be thinking about protecting yourself. Just like we said above, think about establishing anentity such as a corporation or LLC. In such a situation, you can be shielded from the actions taken by your partner.

A good article about different types of corporation is on investopedia.  

 

 

How many LLC do you need

The answer is not so simple. Here is someone who broke it down using cobra as an example (Yes the snake). The examples are very effective. He also talks about clinics too for the doctors in the house. 

You definitely want to separate your clinic from your other assets, that is for sure. Check out this video. 

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