In Econologics® Results-Based Financial Planning®, we utilize a 3-valued equation to guide us in the accomplishment of an Optimum Financial Condition in one’s household—Income-Expense-Protection. This sequential equation starts with the earning of income, then the intelligent spending of that income to create future value, resulting in the accumulation of assets that need to be protected from value destruction. Each one of these factors has its own rules and procedures to attain the best results.

The purpose of asset protection is to protect income producing assets from losing value. This can be done a multitude of ways since we are simply attempting to create distance and barriers between a valuable asset and any threat that could result in a loss. This is another term for risk management, which is a subject that is in wide use in Corporate America, since every business enterprise seeks to create the greatest return on investment with the least degree of risk—or chance of loss—possible.

When we use the term “asset protection,” I am referring to the universe of tools and strategies available to retain the value being created by one’s production and to prevent against value destruction due to predictable and avoidable threats in the environment. In the life of a private practice professional, these threats—or risks—number around 89. These are definable, predictable and measurable risks, any one of which can destroy the value of what you have worked for, to greater or lesser degree. These risks can be mitigated by the following general tools:

Competence in financial planning. Most professionals are awesome practitioners in their chosen profession, but ignorance of basic fundamental financial laws can systematically destroy a lifetime’s worth of work. These include a basic understanding of strategic planning, law (contracts, estate and entity structure), tax, investment, insurance and debt management. The amount of wealth lost due to ignorance or delusion in these areas can wreck an entire financial lifetime, even if you made millions as a practitioner. The first order of business is to become trained in these areas.

The primary risk in this category is lack of a written, optimized financial plan, followed by lack of implementation of said plan. A proper plan will illuminate correct behaviors that create and preserve wealth, such as saving a portion of everything you earn, arranging your expenditures to reduce tax obligations, invest with correct risk tolerance, accelerate debt payoff, complete legal documents, obtain proper insurances, and entity structure.

Competence in business operation. Some of your greatest risks will come from your professional practice. These can include such value destroyers such as bad employees or clients, regulatory non-compliance, lost income, wasteful spending, or general ignorance in the tools and techniques of running a profitable and expanding business such as sales, marketing and PR. The lack of a business management system and its standard use is probably the greatest loss since it impedes the purpose of the company to expand to its fullest potential.

Competence in legal matters. An area of financial planning that requires an astute approach to asset protection is entity structure. The use of Limited Liability Companies and Limited Partnerships create protections not afforded to other types of entities such as C or S corporations. These types of entities can protect intellectual property, real estate, equipment and management services through unbundling these different business assets into different, related entities.

Another area is the establishment and use of proper trusts. Trusts can be used for a multitude of applications, but the ones most used by private practice professionals are living trusts, which are done to allow the household estate to pass to beneficiaries without the cost and publicity of probate, and asset protection trusts, which are designed to create a higher level of creditor protection benefits.

Competence in tax matters. Probably the single largest expense will be taxes, and any strategy that can consistently and safely keep taxes to a minimum is a very valuable asset protection tool. This is summed up in the manner in which you earn and spend money as it relates to the rewards and penalties inherent in the tax code. The more you know and can use the tax code in your favor, the more of the value of your production is clawed back into your household.

State statutes. Every state in the union has laws on the books regarding the protection of certain assets. Homestead exemptions create a safe haven from creditors as it relates to the equity you have accumulated in your home. This can vary from almost nothing to 100%, depending on the state. Further, each state will have various levels of protections on the cash value of life insurance and annuity contracts as well as Individual Retirement Accounts. In selected states, a unique type of ownership called “joint tenants by the entirety” can protect assets of married couples at a significant level. It is important that you know and use the laws of your state when you structure your wealth building plan.

Insurance. Insurance is that social mechanism that transfers the risk of loss from those who cannot afford it to those who can. Insurance comes in many forms, but the ones needed by professionals are life, health, disability, professional liability, auto, home, general liability, long-term care and credit protection. These risks pose a continual threat to one’s wealth because of the expense associated with claims in these major areas. It is critical to know how much of that risk you can retain and how much to transfer to an insurance company as you go through your professional and family life.

These are the major areas to address when it comes to protecting assets. This subject, as with many others, can be plotted on a graduated scale. How many of these tools do you need to use to get the job done? Are you going to use just a few of these strategies or a multitude of them? It is going to depend on personal factors such as your income, assets, probability of claims, and other exposures related to those activities in which you choose to engage.

However you choose to approach the subject of asset protection, you will find your “sweet spot” when you are certain that you are protected to the degree that allows you to sleep well at night.