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GOLDSEA | ASIAN MONEY WORKS

7 STEPS TO PROTECTING WEALTH
Don't leave your financial security at the mercy of life's nasty surprises.
by P. T. Wang

ill was at the height of his fortunes when I first met him. He had joined his father's widget manufacturing business straight out of college. By outsourcing some components, expanding the product line and personally heading up an aggressive sales effort, Bill built a sleepy mom-and-pop into a growing, dynamic business.
     Ironically, Widgetco's breakneck growth would prove to be Bill's financial undoing.
     Bill was often out drumming up a steady stream of new conracts and couldn't oversee the mundane details of day-to-day operations. One day two illegal aliens hired to help fill labor shortages on the production line got tangled in production machinery and suffered severe disfigurement and the losses of various limbs. That was the start of a chain of events that destroyed not only everything Bill's family had built over two generations but also destroyed Bill's financial prospects for as far as the eye could see.
     The victims of this horrible industrial accident retained an attorney who argued that, as an illegal aliens, his clients and their families were not limited by Worker's Compensation laws. The liability insurer promptly offered up Widgetco's two-million-dollar policy limits to settle the suit. The offer was rejected in favor of going after not only Widgetco's assets but the personal assets of Bill and his parents, including two nice homes and a fruit orchard. When the dust had setttled Bill was left with the clothes on his back, a bankruptcy and a criminal record for having hired illegal aliens and violations of certain state-mandated safety regulations.
     In his rush to grow Widgetco, Bill had neglected several crucial steps that prudent professionals or businesspersons should have taken to protect their assets.
     Bill's first mistake was keeping Widgetco a general partnership between his father and himself. That left both partners personally liable for all of Widgetco's liabilities. But for that error Bill may not only have been insulated from Widgetco's financial liability toward the accident victims but may also have remained off the hook for Widgetco's criminal liability.

[CONTINUED BELOW]

     Secondly, Bill didn't bother checking to see whether Widgetco's existing liability coverage would adequately cover catastrophic ocurrences. The policy had been written when the company had been a sleepy operation staffed by a seasoned, closely-knit workforce. It was never revised to cover the entirely different operation it had quickly grown into.
     Finally, Bill had been so busy making money, he hadn't bothered to protect the substantial assets he and his family had accumulated, leaving it vulnerable to the kind of random catastrophic events that proved the family's financial undoing.
     I tell this story because it's the best illustration I know of the importance of protecting your wealth. Building wealth is difficult and backbreaking work. It makes sense to take a few simple steps to protect it from the freakish mishaps that happen all too often in today's complex society.
     Here are the 6 steps you will want to take to ensure that your hard-earned wealth isn't vulnerable to life's unpleasant surprises:

1. Incorporate your business.

        By turning your business or practice into a corporation, you draw a bright legal line separating you from its obligations. To ensure that the business's corporate status stands up to challenge, you must satisfy several requirements, including adequate capitalization, observing corporate formalities, keeping corporate and personal funds and assets clearly segregated and avoiding transfers of assets back and forth between the corporation and yourself.
        The corporation's status as a separate legal "person" is greatly enhanced if you have at least one or two other shareholders besides yourself, especially if they buy into the corporation with their own separate funds. The actual amount of their investment is less important than the fact that their investment was apparently made in good faith. If you are considering incorporating, consult an attorney.

   
   
   
2. Update your business insurance coverage regularly.

        Coverage needs change with changing conditions. By keeping your policy updated, you minimize the possibility of unforseen surprises. Only a few dollars more per month in premiums would have increased Widgetco's liability coverage to five million dollars and shielded Bill and his father from personal financial liability. Keep in mind that a coverage review is as likely to result in a premium reduction as in an increase.

   
   
3. Shield your personal assets against legal claims.

        Remember that your personal assets must be protected against two types of risk: loss or destruction and being sold off to satisfy legal obligations. If you own rental property, farms or other real estate investments, consider placing those assets under separate corporate ownership. Your share of the corporation may ultimately become subject to a legal obligation, but being held by a bona fide corporation will generally protect the assets from pretrial attachments or direct confiscation as a result of legal action against you or your primary business. Again, consider the legal benefits of not being the sole shareholder.

   
   
4. File a homestead declaration on your personal home.

        This will shield a certain amount of its equity from being used to satisfy legal obligations without you having to file bankruptcy. Consult an attorney for details.

   
   
5. Insure your personal assets against destruction or loss.

        A good homeowner's policy or a renter's policy will reimburse you for loss to your real property and personal belongings caused by theft, vandalism, fires and most types of natural disasters. If you live in certain areas, losses from earthquakes or landslides may be expressly excluded. Keep all receipts relating to your appliances, electronics, jewelry and other durable belongings so as to be able to prove your losses.

   
   

6. Insure yourself against liability for injuries suffered on or around your property.

        Your homeowner's liability insurer will step in to defend you against virtually any lawsuit that may arise out of ownership of your home, including accidental injuries to guests, uninvited kids drownings in your swimming pool, even injuries caused by you or your pets. These types of claims could involve compensation for life or limb, so make sure your liability coverage is as high as you can comfortably afford. It may become your last line of defense against losing your home, business or other assets due to a tragic accident on your property.

   
   
7. Avoid casual participation in, or financial contributions to, other businesses.

        Rolling up your sleeves or cutting a check to help out a relative or friend struggling to keep a business afloat may have been purely an act of kindness on your part. Unfortunately, such acts can be used by aggressive plaintiff's lawyers to add you as a defendant to lawsuits against the business. If you involvement was truly casual, you will ultimately be found to be without liability. But the legal expenses you incur could be far more than the amount of your loan, gift or investment. Your participation in any business -- especially a startup -- should be strictly limited to buying corporate or limited partnership shares. Minority shareholders and limited partners are clearly not liable for acts of the corporation or limited partnership. If you choose to make a loan instead, do so only pursuant to a legally valid loan document.

     The steps outlined here are intended to give you a general overview of the kinds of steps you can take to protect your wealth. They are not intended to be a substitute for the legal services you may need in any specific instance.