Many people and especially investors do not realize the importance of wealth protection until it is too late. And while most retail investors prefer to do their business under the radar of the public domain, at times it can prove too difficult to remain anonymously rich. People will eventually notice from your lifestyle and social interactions.
This means that a wrong foot in the wrong place could land you in big trouble because, just like Robert Pagliarini points out in this Forbes article, “Lawsuits aren't filed against those with few assets; they are filed against those with deep pockets.”
Therefore, it is paramount that investors consider wealth protection part of their overall investment strategy. In doing so, they will be fulfilling one of Warren Buffett (Trades, Portfolio)’s famous rules of life: “Never lose money.” And while his statement may have been anchored in an investing perspective, when it comes to losing money it doesn’t matter much what the cause is, a wrong choice of stock or lawsuit.
So how exactly do you protect your wealth?
It all revolves around legal matters. Most people become targets of lawsuits once they become wealthy. As such, it is important to take the necessary measures to make sure that, should a lawsuit befall you, then your wealth is well protected.
It’s a little bit more like investing. You cannot expose all your investments to one risk asset. This is why it is important to separate your assets.
Wealth protection through asset separation
Some people think that running a company is riskier than running a sole proprietorship. Of course, the biggest fear in running a company rather than a sole proprietorship is the possibility of losing your company to the board of directors, or even senior management. It happens. A good example is a case involving the late Steve Jobs during his first stint with Apple (AAPL, Financial).
Jobs founded Apple but then was forced out of the company following his unsuccessful bid to have CEO John Sculley removed. Others include David Neeleman of JetBlue Airways (JBLU, Financial) and the late Aubrey MacClendon of Chesapeake Energy (CHK, Financial). But this is nothing compared to a situation where a sole proprietor’s business gets hit with a lawsuit.
Here is a hypothetical example.
If the business in question is only worth $250,000, and the owner, who happens to operate several other businesses under the same name, is worth $2 million, then total assets worth, exposed to the lawsuit, would be $2 million and not $250,000.
If the business in question runs as an independent company, then the exposure will be $250,000. That makes a massive difference. Therefore, asset separation is an essential element of wealth protection. As the saying goes, it is unwise to “put all your eggs in one basket.”
Get an insurance cover
The business environment is now more complicated than before, and companies are getting sued by their rivals or partners every other day. The market is now filled with patent trolls that target production companies with litigation. It is almost impossible to produce anything that does not require permission and agreements with other companies to use their licensed patents.
As such, insurance for intellectual property lawsuits is crucial especially for companies operating in the technology sector. But that does not make other companies immune from lawsuits. According to Sherwin Arzani, a personal injury attorney at a top personal injury law firm in Los Angeles, companies cannot ignore insurance against public liability.
Businesses still need to protect themselves from public liability lawsuits, which have been on the rise in the last few years. This involves protection from lawsuits filed by customers against a company’s products as well as employees and other stakeholders for injuries suffered while at the business premises.
Arzani also adds that wealth protection cuts across the board and even individuals who consider themselves not to be wealthy, ought to protect their assets through insurance so that in the case of personal injury, they are well protected and compensated.
Conclusion
It is a complicated world where no one would hold back from filing a lawsuit against a wealthy employer. As such, wealth protection is a crucial element of wealth creation because, if you cannot protect what you already have, then you expose yourself to a risk equal to your net worth.
Disclosure: I have no position in any stock mentioned in this article.
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