Keeping up with the Jones? How the Wealthiest Families are Protecting Themselves

While asset protection is important for many individuals, it is particularly important for high net worth families. Asset protection strategies for these families should account for the fact that there is often much at stake. A recent article discusses how the wealthiest families are protecting their assets.

In order to begin the process of asset protection planning, a family must first consider the range of risks that they may face. Often, wealthy families are threatened by business liability, personal liability, risks to assets, and health care risks. Many become targets because they are perceived to have “deep” pockets.

One common way wealthy families protect themselves is through the creation of business entities to hold valuable assets. Families who own investment properties, for example, often create a separate business entity for each investment property. If a person slips and falls in one of the investment properties held by a limited liability company (LLC), the person would only be able to pursue the assets located in the limited liability company, rather than the individual’s personal assets.


Three Important Rules of Asset Protection

Asset protection planning is an important part of any estate plan. Incorporating asset protection strategies into an individual’s estate plan is the best way to ensure that he or she is able to leave the bulk of his or her assets to his or her heirs, rather than his or her creditors. A recent article discusses several rules of asset protection.

First, realize that everything sees the light of day. An individual should craft his asset protection plan with the knowledge that his or her creditors will eventually become aware of the plan and purpose. Typically, the use of secrecy in asset protection planning can only lead to trouble.

Second, it is important to begin such planning before claims arise. An asset protection strategy will work best if it is implemented early and reviewed often. Typically, after a claim arises, it will be too late to take any asset protection measures, as they may be considered fraudulent transfers.

Finally, realize that asset protection planning cannot substitute for purchasing insurance. Having an asset protection plan in place should not deter a person from purchasing liability and professional insurance. Instead, planning should be seen as a supplement to that insurance.

Cat & Mouse: Probate Avoidance as Asset Protection

Probate is a court-supervised process through which the provisions of a person’s will are carried out. Many people choose to avoid probate by employing various estate planning tools that transfer their assets outside of their will. As a recent article explains, an additional benefit of creating non-probate transfers is that they provide a level of asset protection.

Cat & Mouse
(Photo credit: Mark Sardella)

If a person’s estate goes through probate, his or her executor will begin the process by collecting the decedent’s assets and giving notice of the death to any potential creditors. After this notice is given, the decedent’s creditors will have a specified amount of time to make any claims against the estate. The executor will have to pay these claims through the estate before distribution to the heirs.

Alternatively, certain non-probate assets such as life insurance policies, beneficiary accounts, and items held in joint tenancy pass immediately to the beneficiary or joint tenant upon the decedent’s death. Therefore, creditors are often unable to reach these assets.

Although non-probate transfers are a great way to incorporate asset protection planning into your estate plan, it is important not to use non-probate transfers specifically to avoid a particular creditor. These transfers can be undone if a court finds that the transfer was made for the sole purpose of avoiding an existing obligation to a creditor.

Leaving the Vault Open: A Revocable Trust Will Not Protect You From Creditors.

One popular misconception concerning estate planning is that any trust will protect an individual’s assets from creditors. However, as a recent article explains, this is not true. If you are considering incorporating a trust into your estate plan as an asset protection tool, it is important to understand which trusts will actually provide asset protection.

As the title suggests, a revocable living trust will not protect trust assets from creditors. The primary purpose of these trusts is preserve privacy & ease the transfer of wealth by keeping a person’s assets out of probate, which often saves a family time and money. If you have a revocable living trust, it is important to realize that creditors can reach the assets within that trust. This is because you never fully relinquish control of your assets in a revocable trust so you are still considered the legal owner.

If you are interested in incorporating a level of asset protection into your estate plan, consider using an irrevocable trust, or in some cases, as Family Limited Partnership (FLP) or Family Limited Liability Company (FLLC). In contrast to a revocable living trust, an irrevocable trust, FLP and FLLC will protect your assets from creditors. This is because the trust or entity creator is not considered the owner of the assets held in the trust or entity. The trade off, however, is that you may relinquish direct total control of the assets placed in the trust (although, if done right, you may still exercise indirect control.)

What About The Picasso? How to Manage Tangible Assets

As a recent article explains, high net worth families are increasingly turning to tangible assets to hold their wealth. A 2012 report cited in the article explains, “high net worth individuals hold an average of 9 percent of their wealth in tangible assets.” More than half of those surveyed stated that a large reason they purchase rare collectables and memorabilia is for the investment value of the items. Additionally, unlike a bank account, these assets have aesthetic benefits. Despite their many benefits, tangible assets do not come without some form of risk. Therefore, it is important to consider these assets as part of your overall asset protection strategy.

Asset protection for a tangible asset begins with an accurate appraisal. If you need help finding a qualified appraiser, consult an appraisal industry association such as the American Society of Appraisers. After you have gotten an appraisal, the next step is to confirm that you have proper insurance coverage. Most insurance companies offer a valuables policy, which allows a person to declare their valuable items individually and list the value of each piece or collection within the policy. Additionally, for tangible assets subject to price variation, many policies will guard against this by covering the item for its market value at the time of loss up to 50 percent over the value indicated on the policy.

While insurance is important, most people would rather not have to deal with loss of a valuable item in the first place. Therefore, it is also important to meet with a risk consultant with the goal of preventing loss altogether. Through working with a risk consultant, families can assess risk factors and provide more security for their items.


Using a Trust to Protect Your Legacy

For parents of minor children, passing assets on to their children cannot be the only focal point of estate planning. Rather, parents must have a plan for the management and control of these assets until the children are old enough to handle them responsibly. A recent article discusses how trusts accounts can be used to accomplish this goal.

Even if your children are no longer minors at the time of your death, they still may be unable to responsibly handle an inheritance. There are a number of reasons that this may be the case, such as immaturity, substance abuse, or mental incapacity. Additionally, parents who leave their children particularly large inheritances tend to spread them out until the children reach age 25 or 30.

No matter how you choose to structure the distribution, the simplest way to do so is through a trust. When creating the trust, you can select a person to manage and distribute the assets for your children (a “Trustee”). Additionally, you can leave detailed instructions for the trust to ensure that the assets are distributed the way you would have wanted. For example, you can specify that funds will not be released until a child is 25, unless he or she needs them for college tuition.

Furthermore, a parent can design the trust so that he or she retains access to all assets within the trust during his or her lifetime. That way there is no worry that the assets are being given up too soon. Finally, during the life of the trust, it can provide the added bonus of protection against divorcing parents, creditors, plaintiffs, and business risks.

Separate Accounts From Your Spouse? Avoid This Asset Protection Pitfall!

It is becoming more commonplace for spouses and cohabitating unmarried couples to keep their financial accounts separate. While this strategy has many advantages, it comes with at least one (avoidable) asset protection pitfall. A recent article discusses what this pitfall is, and how you can avoid it.

As the article explains, tangible property that is jointly held between two spouses has an automatic layer of protection against plaintiffs and bankruptcy creditors in most states. This protection comes from the fact that plaintiffs and creditors often will not pursue tangible assets that they can only gain a half interest in. Most often, tangible assets must be liquidated in order to be of any benefit to a creditor or plaintiff. However, this would be impossible if, for example, a creditor and your spouse are half owners of your home.

Alternatively, tangible assets that are owned separately are considered fair game because the creditor or plaintiff can pursue the entire interest. However, this problem can be easily solved through the use of trust accounts. If spouses would like to keep their assets separate, they can each create a trust account to hold the assets. This will not only protect the assets from creditors and plaintiffs, but it can also facilitate the transfer of the assets upon either spouse’s death.

Put It In Inc.: Using Corporate Formation to Shield Assets

Without the proper protection, a single claim against a person’s business can cause financial ruin for the owner. Importantly, a person’s business extends to more activities than you may think. If you have a partnership, small business, or even a hobby that earns you money, consider following the asset protection strategies offered in this recent article.

First, if you have a partnership, consider incorporating it. As the article explains, “business partnerships are ticking time bombs.” This is because a partnership is akin to a joint account, in that actions taken independently by your partner may affect you as well.

If your partner faces a personal liability lawsuit, the plaintiff could seek to collect against all of your assets as well. Conversely, the owners and managers of other business forms such as LLCs and corporations do not face personal liability for claims against the entity or each other.

Similarly, if you have a small business, hobby, or part time job for which you are self-employed, consider incorporating that as well. Again, the incorporation will shield the business assets from claims against you personally. It will also shield you personally from claims made against your business.

Three Investment Structures for Asset Protection & Tax Planning

There is no one-size-fits-all asset protection strategy. Rather, asset protection needs to be completed for each individual or family and is based on particular needs. A recent article discusses different investment structures that may be part of your asset protection scheme.

Personal Ownership: Personal ownership of assets may work for individuals and families who have a low marginal tax rate. Additionally, personal ownership is important for those who require unrestricted access to their assets. However, personal ownership cannot protect assets from creditors. Therefore, if one anticipates facing personal liability in a lawsuit or divorce, one should consider implementing some level of asset protection planning.

Company Ownership: Individuals or families can also own assets through various business forms. These are common for families in high marginal tax rates, and those with large family trusts. Through company ownership (typically an LLC, a Corporation or a Partnership), a family can protect important assets from creditors, and pass them on through the generations.

Trust Ownership: Placing assets in a trust is popular for its ability to protect assets against creditors, maximize tax-effectiveness, and ultimately be used as an estate planning vehicle. When putting assets into a trust, it is important to carefully select the terms of the trust based on your use of the assets.

Circle of Life: Live Events That Affect Your Asset Protection

Asset protection planning does not happen all at once. Rather, an individual’s or family’s asset protection strategies should grow and evolve with them. A recent article discusses several life events that should prompt an individual or family to revisit their asset protection strategies.

  1. A Run-In With The Law: As wealth advisory manager Heather J. Swob explains, “If you’re in a potential liability situation, the advisor should be kept aware. While there are look-back provisions that might keep you from moving assets, the advisor can still provide some valuable advice.”  In addition to advice, it may not be too late to plan.
  2. Engaging in a Business Transaction:  Business owners and investors get sued.  Whether it’s a Partnership dispute, a lender’s claim, an employee lawsuit or some other claim, it’s wise to protect your assets before the onset of such a liability.
  3. A Struggle With Addiction: Although it may be embarrassing or difficult to discuss that you or a family member is struggling with addiction, it is important for your advisor to know what to look out for. According to Swob, “estate documents should be reviewed to keep assets out of the [addicted family member’s] control in the event of a sudden death.”
  4. You Are Experiencing Dementia or Other Deterioration of Mental Condition: If you are experiencing the early stages of dementia or other mental illness, time is of the essence. Once your mental capacity is affected, you may no longer be able to sign off on important documents that you have been putting off, such as a financial power of attorney.

Before Kramer vs. Kramer: Protecting Assets Following Divorce

One of the greatest threats to an individual’s wealth is divorce. With the chance of a successful marriage hovering at or below 50% in the United States, it is important that individuals consider asset protection strategies before marriage. A recent article discusses how one man used a “Collapsing Bridge Trust” to protect his assets against a messy divorce.

Day 150: And that's that.
(Photo credit: Wikipedia)

The man, let’s call him Fred, who was worth $150 million and facing divorce, contacted his father’s attorney in an attempt to shield his assets from his soon to be ex-wife, let’s call her Wilma. The attorney quickly created a “Collapsing Bridge Trust,” which proved successful in protecting Fred’s assets from the divorce.

In order to do this, Fred’s attorney first created an offshore asset protection trust. These trusts are often set up in places such as the Cook Islands or Belize. Next, the advisor created a Domestic Limited Liability Company owned entirely by the new offshore trust. Fred’s attorney then moved half of Fred’s assets into the LLC, and named the man as the manager. Although this meant that Fred no longer owned the assets, Fred was able to oversee their management and investment.

If Wilma attempts to access the assets within the trust, the collapsing bridge provision would come into play. Essentially, the offshore trust would collapse the LLC, which would revert the assets in the LLC to the trust. In the trust, the assets would have been unreachable by Wilma.

As with any Asset Planning, timing is everything.  Be careful to consult with your attorney to ensure that any such plans do not run afoul of Fraudulent Conveyance rules.

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Four of a Kind: Four Asset Protection Strategies

Those who have substantial assets are often the targets of lawsuits. It is therefore vital that high net worth individuals and families practice asset protection strategies. A recent article discusses several of these strategies:

  1. Increase Your Liability Insurance: Liability insurance is often an individual’s first line of defense against litigation. Check with your insurance broker periodically to ensure that you have the correct amount and types of coverage.
  2. Consider Separate Assets: Imagine that you receive a windfall inheritance. In many states, if you deposit the money in a separate account, it remains 100% yours. However, if you put the money in a joint account, half of it instantly belongs to your spouse.   It is strongly recommended that you consult with your advisor as to state law, separating assets may also have the counter effect of destroying asset protection for marital assets.
  3. Protect Yourself From Renters: If you own any rental property, it is vital to shield your personal assets against the claims of a disgruntled tenant. Consider creating an LLC or corporation to hold the rental property, with a trust to own the LLC or corporate interests.
  4. Review all Joint Accounts: Money in a joint account may be at risk because it is subject to the risks associated with the other people on the account. Periodically review all joint accounts to ensure that it is still a wise decision. When reviewing these accounts, remember that divorce, a tax lien, or a lawsuit judgment may wipe out the entire account.