There is 1 Killer Mistake that Can Wipe out Your Entire Portfolio.
You can be the best stock picker in the entire world, your portfolio can crush the S&P 500 year-over-year, but if your stock portfolio is held in your personal name, you can lose it all.
My name is Stephen Speiser, and I am an asset protection attorney based in Palm Beach, Florida. I am also a member of the Tykr community and I want to share with you some of the asset protection strategies I use to protect my clients and shield their wealth.
The Problem: If you own assets in your personal name, you stand naked and defenseless against our legal system, and your assets can be taken from you.
The Solution: Never hold assets in your personal name. They should be protected inside a legal structure that you either own or control.
The Zen of Asset Protection
“Own Nothing, Control Everything!” – Nelson Rockefeller
In the 19th century, John D. Rockefeller built the Standard Oil Company – the largest fortune the world had ever seen. What most people don’t know, however, is that Rockefeller did not own the Standard Oil Company. Rather, it was owned by the Standard Oil Trust – a series of interlocking trusts – which he used to monopolize the oil industry and lay the foundation of the Rockefeller fortune.
These trusts were so powerful, that it literally took an Act of Congress (the Sherman Antitrust Act of 1890) to break them up.
The Good News
The good news is that these same trusts and the other structures and strategies that I am going to share you, are still available and can be used by you today.
Do I Really Need Asset Protection?
Most people do not see the need for asset protection. The same can be said for nearly all of my clients. They are honest people. They would never steal or cheat or intentionally harm someone.
They have insurance. They were not concerned about a catastrophic lawsuit or saw the need for an asset protection structure. So, why did they ultimately need my services? What went wrong?
Their fatal mistake, what they failed to grasp, was the true nature of our legal system which can impose devastating liability for things over which we have little control.
I have been practicing law for more than 40 years (yikes), and 95% of the clients who walk into my office are shell-shocked. Shell shocked!
Never, in their wildest dreams, did they ever think they would be facing a life-altering, financially devastating lawsuit.
They never saw it coming!
Client Case
Several years ago, I represented a family from the mid-West. The father had started a business manufacturing adhesive labels used by pharmacies to put on pill bottles. The company grew over time, and it became a successful, small family business. One day they decided to fax a price sheet to more than 10,000 independent “Mom and Pop” pharmacies across the United States.
A harmless act, right?
It turns out that sending unsolicited advertisements via fax to businesses is a violation of the Telephone Consumer Protection Act of 1991. This federal law requires businesses to obtain prior consent from the recipient before sending such faxes, which my client failed to do. The TCPA provided for statutory damages of $250 for each violation, plus legal fees, court costs and expenses.
Needless to say, my clients were shocked and devastated when they were served with a federal class action lawsuit seeking $2,500,000 in damages (i.e., $250 x 10,000 faxes), plus legal fees. In all, my clients were facing over $5,000,000 in damages and legal fees, and they had no valid legal defense.
Postscript: I was able to protect the family’s personal assets, but there was no way to protect the business once the case was filed.
What about insurance?
Unfortunately, my clients did not have insurance that covered this particular lawsuit. This is not uncommon. The bottom line is that Insurance is not a substitute for asset protection.
Why?
70% of lawsuits are NOT covered by insurance.
- Policy Exclusions (the fine print)
- Policy Limits (coverage may be inadequate).
- Denial of Claims (insurance companies have teams of lawyers for a reason).
- Gaps In Coverage (multiple business policies often have gaps in coverage).
- Business Policies do NOT cover:
- Fraud/Willful Violation of Law
- Intentional Misconduct & Reckless Conduct
- Business Disputes, Partnership Disputes and Other Financial Risks
- Discrimination, sexual harassent, etc.
- Punitive Damages
So, if a policy pays the claim, great. But, if it doesn’t, there is nothing standing between you and financial ruin except your asset protection plan.
Asset Protection Strategies
There are several common asset protection strategies that you can use to safeguard your wealth from various risks.
Here are some of the most effective ones:
1. Limited Liability Companies (LLCs)
Forming an LLC is an important first step in protecting your personal assets. By transferring assets like bank accounts, brokerage accounts, real estate, vehicles or other assets into an LLC, you can shield those assets from creditors and lawsuits. However, each LLC should be a special-purpose entity that only holds 1 asset. For example, you’re going to want to set up a special purpose LLC (SPE) to hold your stock portfolio and nothing else. The reason for this is that combining multiple assets into one LLC puts all of those assets at risk if a lawsuit is ever filed against the company.
For example, if your SPE were to hold both your stock portfolio and real estate, your entire stock portfolio would be at risk if there was a lawsuit filed against the LLC because of something involving your property.
2. Holding Companies
Holding Companies are used to tie all the SPEs together into one comprehensive structure. For example, if you own 3 real estate investment properties and each is held in their own SPE, the Holding Company would own all 3 SPEs. Income would flow up to the Holding Company, where it is protected from your personal creditors. You could then use the Holding Company to pay your bills or to buy and sell other assets by adding new SPEs to the structure.
3. Asset Protection Trusts
These are irrevocable trusts that own and hold your assets, which makes them inaccessible to your creditors. Trusts fall into 2 categories: domestic asset protection trusts (DAPTs) and foreign asset protection trusts (FAPTs). Offshore trusts, such as those formed in Belize, Nevis and the Cook Islands, offer far greater protection than domestic trusts. Nevertheless, whether foreign or domestic, your trust would typically own your Holding Company. This structure would allow you to place your hand on a bible and, if asked under oath if you own any assets, you could honestly and truthfully answer “No, all of my assets are owned by a trust.”
Remember the axiom: “Own nothing, Control Everything!”
4. Retirement Accounts
Retirement accounts such as 401(k)s and IRAs, are protected from creditors under both federal and state law and can be used to own a tax-deferred stock portfolio. This is a fabulous way to buy and sell stocks without having to pay taxes until you reach retirement. You’ll need to use an IRA/401(k) custodian that allows self-directed retirement accounts (SDRAs), of which there are many.
You will then want to set up a tax-compliant LLC owned by the IRA/401(k), but which is managed by YOU. You can then buy and sell stock on behalf of your IRA/401(k) through the LLC no differently than you are doing now with TYKR. This is a fabulous way to achieve asset protection for your IRA/401(k) stock portfolio and obtain some very serious tax benefits.
This is a “no-brainer” that you should jump on.
5. Homestead Exemption
Some states offer homestead exemptions that protect a portion of your home’s value from creditors. This can be a valuable tool for safeguarding your primary residence.
6. Umbrella Insurance
This type of insurance provides additional liability coverage beyond your standard policies, protecting you from major claims and lawsuits.
Implementing these strategies can help you manage financial and legal risks, offer tax advantages and ensure your assets are protected. If you have specific concerns or a unique situation, an asset protection attorney can provide tailored advice.
The First Thing You Should Do TODAY
As you can see, asset protection structures are built using a series of overlapping layers (called “firewalls”). The more layers you have, the more difficult it will be for a creditor to get at your assets.
Some of these elements will require the services of a skilled asset protection attorney; others do not.
There is, however, one thing that you can and should do today! You need to move your stock portfolio out of your personal name and into a special purpose LLC and, if need be, you can do this yourself.
If you don’t know how to set up an LLC, there are online companies that can help.
Here are some popular options:
- LegalZoom: Offers a variety of legal services, including LLC formation, with packages that provide additional legal support.
- IncFile: Known for its affordable pricing and free LLC formation services (you only pay state fees), along with a range of additional features.
- ZenBusiness: Provides LLC formation services with a focus on small businesses, offering various plans that include compliance and ongoing support.
- Northwest Registered Agent: Focuses on personalized service and provides registered agent services along with LLC formation.
- Rocket Lawyer: Offers LLC formation as part of a broader suite of legal services, including access to legal documents and consultations.
- BizFilings: Provides LLC formation services along with ongoing compliance assistance and registered agent services.
- Swyft Filings: Offers a quick and easy LLC formation process with various packages to suit different needs.
- MyCompanyWorks: Focuses on LLC formation with additional tools for managing your business and staying compliant.
When choosing a company, consider more than just price. Consider additional services, customer support, and user reviews.
A. Planning and Preparation
- Choose a State: Popular choices for special-purpose LLCs include Wyoming and Nevada due to their strong privacy regulations and asset protection laws.
- Name Selection: Pick a very unique name. Many times, a name will be available for registration in your state, but the same or a similar name is already being used in a different state and you will have no way to know. This will be a problem when you go to get a Tax ID (EIN) number from the IRS, which you will need to open a brokerage account. If the IRS has already issued an EIN to another LLC that is using the same or a similar name, they won’t issue one to you. To avoid this problem, I like to use random numbers in an LLC name. For example, adding the year of formation to the LLC name is an easy fix.
- Governing Documents: You’ll need an Operating Agreement outlining member roles, profit and loss sharing, and management responsibilities. Most online formation companies can provide a basic agreement. It will not have anti-creditor and asset protection provisions, but an asset protection attorney can always amend the Operating Agreement should the need arise.
B. Formation Process
- Registered Agent: Appoint a registered agent in the state where you form your LLC. This agent is required to receive legal notices on behalf of your company. The formation company can help with this. You can always change your agent if you are not happy.
- Articles of Organization: The formation company will file the Articles of Organization with the Secretary of State. This document details your LLC’s name, registered agent, and business purpose (which can be broadly stated as “any legitimate business purpose”).
- EIN (Employer Identification Number): Obtain an EIN from the IRS to identify your company for tax purposes. When you do, you will need to make a tax election for the LLC (i.e., whether to be taxed as a pass-through entity, as a partnership, or as an S-corp.). Speak to your CPA before you make this election.
C. Post-Formation
- Operating Agreement: Finalize and sign your Operating Agreement, which becomes the governing document for your company.
- Bank Account: Open a business bank account for your company.
- Brokerage Account: Open a brokerage account, and have your broker (Fidelity, Schwab, etc.) move your stock portfolio out of your personal name and into the LLC. They will not need to liquidate your portfolio, and you will not have to incur capital gains taxes. They can just slide your stock portfolio over into the LLC.
- State Filings: Most states require annual reports or filings for LLCs. Make sure you comply with your state’s filing requirements every year.
- Federal Filings. Beneficial Ownership Information (BOI) reporting is a new requirement of the Corporate Transparency Act (CTA), which requires that you file an information report with the federal government disclosing information about the individuals who ultimately own or control your LLC. You can file your own BOI report through the BOI E-Filing System, or use the company that filed your LLC (such as LegalZoom). You have 90 days from the formation of your LLC to file this report, or you will face penalties.
Important Considerations:
- Tax Implications: Consult a tax advisor to understand the tax treatment of your LLC before you form it. They can offer guidance on structuring your company for optimal tax benefits.
- Legal Assistance: For complex structures like holding companies, consider seeking professional legal advice to ensure proper formation and compliance with regulations.
Additional Resources
If you want further information on asset protection or any of the subjects covered in this Blog, you can visit my website www.speiserlaw.com.
Conclusion
If you want to avoid 1 Killer Mistake that Can Wipe out Your Entire Portfolio, you do have a few options as mentioned above.
The single most important thing you can do right now to safeguard your stock portfolio and all the other assets in your estate from unforeseen risks, financial threats, and future liability events that are beyond your control, is to create an asset protection structure with multiple firewalls that is specifically designed for your needs and situation.
It is vital that it be done now, before there is a liability event or a creditor threat because it is difficult to move assets once there is a problem. It’s like trying to by insurance once the house is on fire.
It is a relatively small, one-time investment that will provide you and your family peace of mind knowing you are fully protected from lawsuits, creditors and our legal system. At a minimum, I urge you to consult with an attorney to understand your risk profile and the steps you can take to protect your life savings.
If you do not have the resources to set up a comprehensive asset protection plan at this time, I urge you to move your stock portfolio into a special purpose limited liability company right away. If you have to, set it up yourself. It doesn’t matter if the legal documents are not perfect or if it’s not organized in the best way possible.
What’s important is that you set it up and move your portfolio now – before there is a creditor threat. Once there is a threat, you will not be free to move your assets around. A skilled attorney can amend the operating agreement, change the jurisdiction of the LLC, and make other amendments that they deem advisable. What your attorney cannot do is set up a structure to protect your stock portfolio after you’ve been sued.
After you get your portfolio set up within an LLC in the US (or a business entity outside the US), we welcome you to join Tykr for free.
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