The Direct Connection Between the New World of Tech and the Classic World of Asset Protection
It seems that every day I hear about a new startup and a new tech success story (though I am keenly aware of how many out there try and face numerous challenges). So, this certainly jives with an article I read recently about how in the past 40 years, we have gone through three different industrial revolution eras, and the speed at which we move from each one to the next seems to be getting faster and faster. I mean, in 2020—a year in which we were struck by a pandemic, mind you—$156.2 billion was invested in American startups alone, making it a record year after some $140 million was also invested in 2019 and 2018, respectively. American startups also generated a staggering $290.1 billion in liquidity in 2020.
Many of these startups are in the hi-tech sphere and some of them have developed technologies that are genuinely groundbreaking. As such, it may be tempting to think that they fall into a sort of unprecedented territory the likes of which the world has never seen. It is important to keep in mind, however, that there are some things in the world of business that simply do not change—no matter the generation, no matter the industry, and no matter the round of industrial revolution in which we may find ourselves. What is that common denominator? It is that most everyone wants to protect and preserve their wealth, pass that wealth on to their children (or some other recipient, like a charity), and minimize taxation. The strategies and structures employed for accomplishing these tasks are often known as asset protection.
When Should I Start Being Concerned About Asset Protection?
The short answer is: as soon as possible.
Now, of course, let’s face it. If you are just at the start of your journey with a very small startup company, it is unlikely that you will be rushing to pay the necessary legal bills with nothing to show for it. However, if you are beginning to see your ideas get translated into reality, it is important to identify your “aha” moment as soon as possible. That “aha” moment is the moment you realize that your company may be on the cusp of achieving actual success and having real value, even though it may not be worth anything yet on paper, or it may not be worth as much as it stands to be in the near future when it will be sold or will go public. It is at THAT point that you should already actively be looking to make a decision as to what to do with your assets because the costs will be negligible, and the payoff could be great. That is the ideal time to start doing some planning from an asset protection standpoint so as to avoid the punishment of any potential lawsuits that may somehow come your way (a reality of life). It is also even the time to start looking at things from an estate planning standpoint so that you can navigate your way forward to passing on your wealth in the future.
How Do I Actually Protect My Assets?
The main thing is to move the assets outside your personal name and your personal estate. There are several reasons for this. You want the future growth to belong to the legal entity to which you have transferred those assets. These entities primarily include either a trust, which originates in British common law, or a foundation, which originates in French civil law.
The element that trusts and foundations have in common is that they are both their own legal entities. They are their own juridical person. When I transfer an asset to that independent juridical person, that asset is no longer mine. When that asset is no longer mine, it can no longer be taken away from me in the case of a lawsuit. Upon death, it is also not part of my estate so it cannot be taxed, even with changes to estate tax laws.
If the asset is not yours, you cannot be held responsible for providing that asset to anyone else, whether they are the government demanding taxes or a disgruntled former employee who tries to sue you.
Now, just because the trust or the foundation contains assets that are no longer yours does not mean that you cannot benefit from those assets. You can be a beneficiary of the trust, for example, and receive payments, whether they are monthly now or in a lump sum in the future. Although you do not own the assets in the trust, you will be what is known as their ultimate beneficial owner.
How Can the Tech World Learn From the Industries That Came Before Them?
The fact is that when it comes to asset protection, it doesn’t matter whether you have generated your wealth from an industry as new as cryptocurrency or from something as old as the steel boom of a century ago. The point and the legal effect achieved do not really change.
Trusts are the oldest legal structures in existence. While companies have only been around for about 300 years, trusts have been in existence for 1,000 years. They are not going anywhere. The new generation simply needs to take the old concepts and marry them together with the new world order, whether it’s tech companies or cryptocurrency.
The bottom line is that no matter how new your industry is or how tech-oriented you fancy yourself to be, asset protection and estate planning matter. That means having a financial defense that is as good as your offense by protecting and preserving what is rightfully yours. And it means already thinking about the assets that you would like to pass on to make sure that your family is secure—even for the partner that you may have not yet met and children who are not yet born.