The Trump Blog

Many people mistakenly believe that they don't need an asset protection plan because they're insured. Nothing could be further from the truth. While insurance does have a place in your asset-protecting system, it must not be your only line of defense.

Insurance proceeds are only paid in accordance with the terms of the policy. Sure, insurance companies are in the business of accepting the risks of others, but it's on their terms.

Think about how casinos make their money: Casinos know that some people are going to win at the tables, for example, but because far more people lose than win, at the end of the day the casino is going to show a profit. Insurance companies have a similar philosophy to making a profit: they know that some policyholders (customers) will suffer an accident for which the insurance company has to accept liability, but many more people will have accidents for which the insurance company is not responsible, or they won't have an accident at all.

Why do more people walk out of a casino as losers rather than winners? It's because the casino makes the odds, and the odds are in their favor. Now let's think about insurance policies, which are based on the "odds" by which the insurance companies issues policies. Who writes those policies? That's right -- the insurance companies. So of course, the policies are in their favor.

With all of this in mind, there are two main concerns about relying solely on insurance policies for your asset protection:

First, policy limits - You should always know how much the policy will pay out in the event that a claim is filed. In many situations, it is impossible to know how much coverage you need, especially with respect to liability policies, since you don't know how much of your money a sympathetic jury might give away in the event of a lawsuit. Still, you can often tell how much coverage is too little, especially for property policies that insure damage to a specific asset that can be appraised.

Second, policy exceptions - All insurance policies are not equal, and many times the insurance company will "put the odds in its favor" by carving out endless exceptions to its policy. Accordingly, it is imperative that you know exactly what types of accidents, events, and damages the policy covers.

Just as important as the exceptions to a policy, an insurance company can be relieved of having to honor a claim if proper filing procedures are not followed. Many times a policy will specify that a claim has to be filed within a certain period of time after an accident has occurred, or if changes have occurred to the business or property covered by the policy.

And always look for whether a liability policy has a duty to defend clause. Such clauses state that in the event that the policyholder is sued, the insurance company will provide an attorney to defend the suit.

Regardless of the type of insurance policy you have or are considering purchasing, always keep in mind that any policy will only fulfill its role as a last defense in your asset protection system.

To be certain your assets are fully protected, be sure to read Trump University Asset Protection 101: Tax and Legal Strategies of the Rich by J. J. Childers.

One of the biggest misconceptions I hear about asset protection law - even from other lawyers - is that everyone should have his or her personal residence owned by a business entity such as a corporation or LLC.

This is a huge mistake. I realize that this may sound counter-intuitive, but your home should always be owned by you and your spouse and held in a revocable living trust. (I discuss revocable living trusts in detail in my new book Trump University Asset Protection 101. You can also learn about them from your attorney and accountant.)

So why wouldn’t you want to have your personal residences owned by a business entity? For starters, let’s think about what would happen if that business entity is sued. Since your business conducts more activities, deals with more money, and interacts with more people than you do personally, your business entity stands a greater risk of being sued than you do. Therefore, if your business entity is sued, all of its assets, which would include your personal residence, stand to be lost.

The second reason you should own your personal residence in a revocable living trust rather than in a business entity is because you would lose the personal deduction on your individual taxes that you would otherwise have. As you already know, the amount of interest you pay on your mortgage each year, depending on the amortization schedule, amounts to a significant deduction. Moreover, this deduction would not be available to your entity. Accordingly, it would not make good tax sense to place your home into a business entity.

The third reason why you would not want to place your home into a corporation is because you would lose the homestead exemption. As you’ll recall, the homestead exemption allows for your home to be protected, up to a certain amount, from most types of creditors. Homestead exemptions (and all other types of exemptions) are not available to business entities. By transferring your home into a business entity, you will be losing a powerful asset protection tool.

So what benefits does placing your home into a revocable living trust give you? As we just discussed, placing your home into a revocable living trust allows you to keep the tax and exemption benefits that you personally enjoy as a homeowner. Another benefit is that it allows you to pass your home on to your heirs and beneficiaries outside of probate. To learn more, check my future installments on this blog or get your hands on a copy of Trump University Asset Protection 101.  

Is your company protecting its most valuable asset - its intellectual property?

Does your enterprise have intellectual property? You might not think so, but it probably does. Intellectual property is made up of copyrights (books, software or music), patents (inventions) and trademarks (symbols or logos).

Why does intellectual property deserve special protection? Let me tell you a story that illustrates the point.

Suppose someone walks into a small one-room office of a company that has no apparent assets: no vehicles, minimal office equipment, small inventory and so forth. Let’s also say that individual slips and falls when heading out the door. Chances are that if that person isn’t actually hurt, he or she will probably just get up and leave. How much is there to gain by suing a company with a simple one-room office and no assets?

But suppose that the business is one that just happens to hold the publishing rights to the entire catalog of the Beatles. Do you think that slip-and-fall victim will wake up tomorrow with a serious injury? Chances are he’ll try to get his hands on those publishing rights with “a little help from his friends” - in this case, lawyers.

Now that you realize what a huge asset intellectual property can be, how do you protect it?

If your company is in the business of selling a form of intellectual property, such as a copyrighted book or software program you’ve written or developed, that property should be owned by a separate holding LLC that can then enter into a nonexclusive licensing agreement with your primary company, granting it the right to publish and sell the book or software program.

Suppose that accident-prone person then decides to sue your primary company and get all of its assets. Would he or she obtain ownership rights over your book or software program? No! All the judgment creditor would stand to receive would be the right to publish and sell your product - and you can easily have a termination clause in the licensing agreement that would terminate the agreement in the event that the primary company lost all of its assets.

The key is to apply the strategy of isolation and insulation, in which you isolate individual assets into separate legal entities to insulate them from the liability associated with any other entity.

It is a terrific strategy that can be applied to real estate and in many other areas of your life. To learn more about using it to protect your assets, I’d encourage you to read my new book Trump University Asset Protection 101, the latest in the bestselling series of Trump University 101 books.

To protect the assets you have worked so hard to build, you need all the defenses you can get.

1. Formulate a strategy. Realize that no matter how carefully and ethically you conduct yourself and your business, it is highly likely that you may be sued.
2. Recruit and organize professionals who can help you accomplish this goal. Most likely, you’ll need an attorney and an accountant who are both skilled at asset protection structures and methods.
3. Prioritize your objectives. Evaluate your overall financial situation, but in a way that doesn’t negatively affect your other financial planning objectives. Consider how a transfer of assets from one entity to another may affect your tax and/or estate planning. If you put your personal residence into a limited partnership, you’ll gain asset protection - but lose the tax exemption.
4. Measure your wealth. What assets do you have at risk, and how do you expect your wealth to change in the future? 
5. Be proactive in your planning. You can’t put an asset protection system in place after you’ve been sued. Unfortunately, people often think about how to protect their assets when it’s too late.