4 asset-protection strategies to consider including in your wealth management plan
Investment and Asset Management
When it comes to forming a comprehensive wealth plan, including asset-protection strategies is a must. Executed properly, they can reduce the chances of creditors and litigants gaining access to your personal assets. Because the term “asset protection” is rather vague, let’s look at four specific strategies.
- Review your insurance coverage
The first line of defense in your asset-protection strategy is having complete insurance coverage. Liability insurance is a critical front-line protection for your assets. You certainly already have such coverage as part of your homeowners’ and auto policies. But is your coverage sufficient?
When determining how much coverage you need, consider the property’s or vehicle’s value and the likelihood of a liability-generating event. Consider purchasing an umbrella policy that can provide supplemental coverage at a smaller cost than purchasing additional coverage for each property or vehicle.
Because a serious accident or illness can quickly deplete your assets, adequate health insurance is key to any asset-protection plan. Disability insurance, while frequently overlooked, can protect your earning power in the event of extended health challenges.
Life insurance proceeds can help preserve wealth for your heirs if estate taxes are due at your death. If you’re a business owner, life insurance can also supply working capital for the continuation of your business and provide wealth equalization for heirs not involved in your company.
- Shelter assets in retirement accounts
With proper planning, Employee Retirement Income Security Act (ERISA) provisions can be implemented to keep creditors from delving into your retirement fund. Examples of plans covered by ERISA include qualified profit-sharing plans, defined benefit plans, and 401(k)s. Contributing to such a plan may be done primarily to fund your retirement in a tax-efficient manner, but asset protection is an important added benefit.
If yours is a non-ERISA plan, creditors can access plan assets unless a state law prevents them from doing so. IRAs and qualified plans in which the only participant is the owner (or also the owner’s spouse) are examples of non-ERISA plans. Check to see if your state provides IRAs with asset-protection capabilities.
- Separate business interest into different entities
If you own a business, consider dividing it into separate entities to reduce risk. However, be sure to balance the benefits of forming separate entities with the complexity of setting up each entity, the costs involved and the burden of ongoing administration. How far you should go in segregating your business’s assets depends on the level of your litigation risk and the value of the assets you could lose in a lawsuit.
If you have strong family relationships, consider divvying up ownership among your family members. If your company is structured as a corporation, whoever holds more than 50% of the voting stock has control. So, transferring voting stock to family members through direct gifts may be a viable asset-protection strategy. In addition to preventing a creditor from taking control of the corporation, dividing corporate stock in this way can provide substantial income and estate tax savings.
Limited liability companies (LLCs) and limited partnerships (LPs) also provide valuable asset protection opportunities. Although LLCs and LPs are similar, they have distinct differences. In an LLC, all owners receive the benefit of liability protection from business debts and claims, and none are excluded from management functions. In an LP, on the other hand, the general partners are personally liable for business debts and the limited partners are excluded from managing the business.
- Create a trust
Certain trusts can provide another line of defense in asset protection. Although revocable grantor trusts (often referred to as “living trusts”) provide no legal protection from creditors, irrevocable trusts generally offer some protection.
When you place the property in an irrevocable trust for the benefit of your spouse, children, grandchildren, or other heirs, future creditors generally can reach the assets only by convincing a court that the transfer was made to intentionally “hinder, delay or defraud” current or potential creditors of the grantor and that you became insolvent as a result of the transfers to the trust. The downside of such trusts is that you no longer have access to the assets in the trust.
If you’ll need access to the trust assets, an alternative is to set up an asset-protection trust. This is typically established in an offshore jurisdiction (or one of the handfuls of states that allow such a trust) to insulate assets against creditor attack.
Keeping what’s yours
Because of today’s uncertain economic environment and litigious society, incorporating asset-protection strategies into your wealth plan is a smart move. Your financial and legal advisors can help you determine which ones are appropriate for your situation.
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