Are you building an empire, or do you have a house of cards?
( or “How I got sued twice and got smart once”)
How to make sure your empire endures, by using smart paper
Some people put their heart and soul into building a business, some people invest their money into real estate, some people like building wealth through stocks. How you build your empire is up to you; the main thing to ask is “How do I protect it?”
Don’t ask this question once you’ve “arrived” and are worth six or ten figures; ask it right from the start. Plan your defence right from day one. It’s difficult to add three extra storeys to a small house, turn it into an apartment block and *then* go back and strengthen the foundations… (Leaning Tower of Piza, anyone?)
Like it or loathe it, we live in a society which can be jealous, litigious or even criminal. Think of all the stories you’ve heard of people who slipped on the floor and sued McDonalds… think of the stories you’ve heard about an intruder breaking into someone’s house, hurting themselves and then suing the homeowner.
If you own something of value, sooner or later, someone is going to try to take it from you. I know this first-hand as I have been sued twice.
Both times the lawsuits were unsuccessful, (thank the goddess 🙂 or the legal system), but it makes you think.
A picture of me when I am an old man. I’m smiling because I got to keep all of my toys 🙂
If someone tried to break into your car twice, you’d probably ramp up security. If someone tried to break into your house even once, you’d probably get a better security system (or better locks). Many people carry protection against theft, muggings or sexual assault, even if it has never occurred to them in the past. They don’t want it, they don’t like it, so they do their best to protect themselves from it.
You may not own a million-dollar business or multi-million dollar stock portfolio, but there’s a strong chance you’ll have a house or something of value, which another person wants to take from you.
I’m not defending criminal acts on either side, but we are all human, we all make mistakes, the trick is to make the mistakes not so costly.
A surgeon’s slip could see him sued by a patient and lose his house. A cab (or Uber) driver could have a momentary lapse of concentration on the road and be sued by a passenger for the physical pain of a crash, or the psychological pain of even *thinking* that there may be a crash. Whether your humanness or mistake caused physical pain or just stress or trauma, there is a chance you’ll lose your house, car, or other assets.
Recent stats from Forbes magazine indicate that up to 53% of small business owners will be sued in any one year, and over 90% of people will be involved in a law suit in their lifetime. That’s arguably higher than your chances of being robbed or your house burning down. So, be prepared!
HOW TO PROTECT YOUR ASS(ets):
Step 1) Cover your ass(et) in paper: Get some insurance for whatever field you operate in, whether you be a high-profile plastic surgeon, retailer, realtor, consultant or just selling homemade jams at the weekend farmers markets.
Public liability insurance or professional indemnity insurance may seem expensive at first glance, (then again, so can vehicle or home insurance); just remember it’s protecting the underlying asset. Home or vehicle insurance may cost you 1-2% of the asset cost, but it does guarantee that you will get to keep 98% of the asset after a theft, fire, robbery or lawsuit.
Talk to your insurance broker or small business adviser about getting relevant insurance for your circumstances, and always remember to divide the cost of the insurance by the cost of the asset, to work out a viable ratio. 10% or less should be a sweet spot.
Step 2) Step away from your ass(et): many high-profile people will put “their” assets in the name of a lower-profile spouse, child, relative or corporate entity. This allows them to have the benefit of using the asset, without the responsibility of losing the asset, if things turn sour.
A software developer may have the house in his wife’s name, in case he fumbles some code and causes data loss to a client. A restaurateur may have her stocks in her kid’s names in case a customer gets food poisoning and sues.
Step 3) Cover all bases: insure the inside of the house, AND the outside. Insure the car for theft AND fire. If you do step 2), you still need to do step 1)
These are a few of my prize assets. They are insured for theft, fire, flood, and in the name of another legal entity 🙂
What happened when I got sued
In one of my past businesses (financial planning), a client tried to sue me because their recommended investment only made 30%. I thought that was a bloody good return on investment for a year! Yes, it’s true, some other investors made more than this, however, they were investing into far riskier things, which the older client had previously stated they did not wish to invest into.
It’s far easier to make judgments with the benefit of hindsight (wouldn’t we all liked to have invested into Microsoft in 1983? But most of us didn’t understand tech, or we didn’t trust small startups… so here we are, not tech billionaires…).
Thankfully, I had ticked all the right boxes, and had the right documentation to show that my client had elected to NOT invest into the riskier options. I also had the professional indemnity (PI) insurance backing me up, so the PI insurance could pay for the legal fees whilst the lawyers played a game of paper chase and dueling letterheads. My assets were in the names of other legal entities and not my own.
Sometimes, frivolous or even criminal lawsuits can win against good people; if the good person does not have their paperwork in order. This is why you hear the stories of people being sued after they had an intruder break into their home: it can happen.
Protect your assets and cover your ass:
1) get appropriate insurances for your situation, and
2) have another legal entity who can be trusted to hold the assets in their name, whilst still allowing you to use them. This may be a wife or husband; but, beware that this person could also be potentially sued.
A more “bullet-proof” option is to have the assets held by a separate paper legal entity, such as a company, trust, PBS or similar, which is extremely unlikely to be sued (because they are not human, and they do not make human errors or mistakes).
When looking at the price of these legal entities, again, divide the cost of the structure or setup by the size of the asset you are protecting, to get an indication of true value. 10% or less is still a sound investment, and sometimes it can be as low as 1% or 0.5% to guarantee you keep the asset.
A side benefit of protecting your assets is that the entity holding your asset (whether it be partner, relative, or paper legal entity), may be treated differently for taxation. For example, the lower-profile partner may be on lower tax-bracket, so if the asset produces an income (rent, lease, royalties, capital gains etc), then these proceeds will be taxed more lightly than if they were (at risk) and in your own name.
Yes, it’s possible to make your empire almost “bullet-proof”, “lawsuit-proof” and even “tax-proof”, you just have to follow the 3-step formula.
Stay wealthy, and enjoy the peace of mind you get from protecting your ass (ets) 🙂
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