We live in a litigious society. Regardless of the level of wealth, everyone’s personal assets are at risk, whether it be a slip and fall on your property, an auto accident, or an unsuccessful business deal that has personal guarantees. Given these risks, it is crucial to implement a well-thought-out asset protection plan to safeguard assets. Asset protection refers to various legal and financial strategies to safeguard assets from potential claims by creditors, litigants, divorcing spouses, and other potential claimants.

Here are 10 asset protection strategies that can be employed to protect wealth:

Liability insurance

Liability insurance provides a basic but extremely valuable role in asset protection. Everyone is familiar with auto and home insurance, but the expansion of liability coverage through an umbrella insurance policy is sometimes overlooked. Depending on your business and personal activities, various other policies may also be needed.

Retirement accounts

Pension plans and other retirement accounts, such as 401(k)s and IRAs, are generally protected from creditors. However, IRA protection may be limited to a certain dollar amount in bankruptcy proceedings.

Insurance and annuities

Many states exempt annuities and life insurance from creditor claims. The protections vary greatly by state, so it is important to understand the state law that applies in each particular situation.      

Homestead exemption

In many states, the homestead exemption protects a portion of your home’s value from creditors. Although the protection limits vary by state, this can be a valuable tool for safeguarding equity in a primary residence.

Asset titling

Tenancy by the entirety is a special form of property ownership available to married couples in some states. Unlike joint ownership, a creditor who obtains a judgment against one spouse cannot seize tenancy by the entirety property to satisfy their claim. The protections in states that do recognize tenancy by the entirety property ownership vary. Some states limit the protection to real estate only, while others also allow it for personal property like bank accounts.

Prenuptial agreements

No one enters a marriage thinking it will not last forever. The facts suggest otherwise. Approximately 50% of marriages end in divorce. A prenuptial agreement can be used to protect assets acquired before marriage. 

Limited liability companies (LLCs)

LLCs are used to shield an owner’s personal assets for business activities, to segregate liability amongst distinct business activities, and, if properly structured, to help prevent personal creditors from seizing business assets to satisfy their claims.

Lifetime trusts for children

Parents often fear that the assets they intend to leave their children after they pass will be taken by a child’s spouse in the event of a divorce. Lifetime discretionary trusts for children allow the child to benefit from the trust while they are alive, but as long as the assets remain in trust, they are protected from creditor claims, including divorce claims. To strengthen the protection against claims by divorcing spouses, a prenuptial agreement is advisable.

Gifting assets (outright or to irrevocable trusts)

Transferring assets to family members or irrevocable trusts benefiting family members can reduce the donor’s exposure to creditors. Instead of transferring assets outright to family members, it is often advisable to transfer them into irrevocable lifetime trusts for the benefit of the family members (see #7 above). An added benefit is that gifts into these types of trusts often decrease the grantor’s taxable estate for estate tax purposes.    

Asset protection trusts

The assets in a revocable living trust are generally not protected from the trust creator’s creditors. A select number of states, however, allow for domestic self-settled trusts which allow the trust creator to be a trust beneficiary while still maintaining asset protection for the trust assets. To qualify as a domestic asset protection trust, the trust must be administered in one of the states that allow for this type of trust.  

Similar to domestic asset protection trusts, offshore trusts allow someone to create a trust, albeit in a foreign country, which helps shelter assets from beneficiary creditor claims. Offshore trusts are complex legal structures that may trigger foreign trust reporting in the U.S.    

Financial planning generally addresses investment management, cash flow needs, retirement planning, tax planning, and estate planning. Asset protection planning should also be part of that process. After all, what good is it to build wealth if it can be taken away in an instant? Effective asset protection planning and strategies must be done early because once a claim arises, it is often too late. Please contact us to discuss your asset protection options. We would be honored to put our capabilities to work for you. 

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