Hot babes, hot cars, hot
vacations, hot stars. Whatever made last year’s list of what’s
hot suddenly lands on this year’s list of what’s not. Madison
Avenue can hardly keep up with Americans’ fickle taste.
Besides cocktail parties, pink lipstick, and pet spas, Wall
Street is back on the hot list this year. Squeamish investors
who had dropped out of the market are jumping back in,
buckling up for a bullish ride. Stocks and mutual funds are
warming up nicely after a serious bout with frostbite. We
expect economic and lifestyle trends to ebb and flow. But
there’s nothing trendy about protecting our assets; what’s hot
stays hot and never dare mix it with what’s not.
Take the Temperature of
Your Assets
A “hot” investment isn’t
necessarily a hot asset in terms of legal protection. Hot
assets carry the greatest risk of lawsuits. Cold assets are
those least likely to cause injury. So no matter how
lucrative or “hot” your securities investments might be, your
portfolio is considered a cold asset with regards to
liability. It’s highly unlikely that anyone would ever slip
and fall on one of your mutual funds and sue you. Ironically,
even though it’s a cold asset, that nice little nest egg
you’re building, left unprotected, could all be lost if
someone gets hurt on your property.
Real estate is considered a
“hot” asset because it carries a high risk of lawsuits.
Accidents happen in homes and businesses every day. More often
than ever before, property owners, whether negligent or not,
are prime targets of lawsuits. Without effective protection, a
plaintiff could lay claim to all of your assets—whether hot or
cold.
LLC Protection
That’s why the limited
liability company (commonly called “LLC”) has become the most
popular and most effective method of asset protection in the
country. Arizona’s LLC law prohibits a creditor or plaintiff
from attaching assets outside the limited liability company
that actually causes an accident or injury. For example, if
you cause a car accident that kills someone and you are not
asset protected, everything you own could be at risk. If,
however, you had placed your assets in LLCs, your financial
exposure would be minimized. A plaintiff would not have access
to any LLC assets.
Separate Hot from Cold
I advise my clients to
separate their ‘hot” assets, such as vehicles, equipment, and
real estate from “cold” assets, such as stocks, art
collections, and expensive jewelry. Your small business—no
matter its purpose—is a hot asset because it is highly
vulnerable to lawsuits by employees, customers, creditors,
even Uncle Sam. Protect it with one LLC, and place the profits
from the business that you invest in the stock market—a cold
asset-- in a separate LLC. By minimizing your exposure, you
maximize your protection. Certain qualified plans, such as
401Ks and IRAs are already creditor-protected by state and
federal law, and need no additional LLC protection.
Separate Hot from Hot
It’s dangerous to combine hot
assets. If you hold several rental properties in one LLC, for
example, a tenant who sues could acquire the other properties.
By placing the properties in separate LLCs, only the property
where the injury occurred is at risk.
Combine Cold Assets
In most cases, it’s safe and
practical to combine your cold investments in one LLC. Since
stocks, bonds, mutual funds, cash, promissory notes, deeds of
trust, art, and jewelry are all relatively harmless to other
people, they don’t need to be separated.
But they must be
protected. Even if your business assets are in limited
liability companies, your personal assets are at risk if you
cause an accident in your home or personal vehicle. By placing
your cold assets in a separate limited liability company, you
are minimizing your exposure.
Insure Your Assets
LLC protection does not negate
the need for insurance. I urge all of my clients to purchase
one umbrella policy for their personal assets and another for
their business assets. Insurance offers peace of mind for
minor claims. But never underestimate the power and might of a
greedy creditor or plaintiff. Every asset that is exposed is
vulnerable.
The bottom line is simple.
Figure out what’s hot and what’s not. Even if what you’ve got
is not a lot, it’s all you’ve got, so protect it as you
ought.
See Your Attorney
Although
the forgoing applies to most cases, this information should
not be deemed a legal opinion, because every client’s
circumstances are different and could dictate varying
applications of legal advice. Please consult an estate-
planning attorney who specializes in asset protection
regarding your individual needs
Bill Gibney is
an estate-planning attorney, practicing in Phoenix. His
specialty is asset protection. He can be reached at
602-953-0006 or at gibneylaw@cox.net..
