One of the dichotomies of achieving a comfortable level of wealth is that your focus also needs to include the protection of assets along with the growth of your net worth. One can, at times, almost be nostalgic about the days when there wasn’t much to lose. The harsh realities of today’s legal environment are that the holders of wealth are targets for litigation, which at times could be a frivolous attempt to see if anything can be obtained with legal action.
The following strategies are common strategies to be incorporated into a wealth management strategy to provide protections and options to be able to meet your obligations in a sane and responsible manner.
One can write volumes on a topic as deep and complex as asset protection. An asset protection strategy being implemented in a wealth management strategy will involve attorneys that specialize in the topic to assure the best results possible. The following should be viewed as an outline to raise the awareness of what asset protection strategies should be on the menu for inclusion in a wealth management plan.
1. Insurance- The first line of defense often is from insurance coverage. Adequate coverage for personal liability should be obtained when and where economically feasible. Umbrella Liability coverage based on your net worth should be in place. Errors and Omission and Professional Liability for amounts of likely potential claims should also be in place as well as adequate Homeowners, Auto and other property coverage’s.
2. Ownership- The appropriate ownership of assets is another effective way to shield individuals from a potential lawsuit. For example, one spouse may be exposed to high risk professionally and be unable to obtain economically priced insurance coverage. By titling the assets in the others spouses name will serve to potentially protect them from a claim of the exposed spouse. This needs to done PRIOR to the recognition that a potential claim may exist to avoid the appearance of a fraudulent transfer.
3. Trusts- The use of irrevocable trusts as described in a previous post can also protect the assets in the trust from the claims of creditors.
4. Qualified Retirement Plans-Qualified Retirement plans such as pensions etc. are exempt assets in a bankruptcy proceeding.
5. Family Limited Partnerships– Family Limited Partnerships can also provide a level of protection. The complexity of the tax return may discourage creditors to enforce their claims on these vehicles.
6. Business Entities-Business entities such as Limited Liability Corporations (LLC), Limited Liability Partnerships (LLP) and Corporations can serve to shield personal assets from the business creditors. Care needs to be taken since personal professional liability is not shielded by the business structure but can shield you from the others actions.
7. Life Insurance Cash Values- Some states exempt the cash value of life insurance policies
8. Home Equity- The protection of home equity varies from state to state. InFlorida it is unlimited and inMinnesota the limit is $200,000 per person.
9. Offshore Trusts- Some will claim that offshore asset protection trusts are highly effective and others will say that they are expensive and likely to fail with the 2005 claw-back provision in the bankruptcy code provisions. One thing is clear, plenty of advance planning is necessary to be effective.
A comprehensive wealth management strategy needs to plan for the unforeseen risks of lawsuit and the above bullets should be used as a starting point to engage in a thorough exploration of protecting your wealth.