You've worked hard, saved hard, and invested your money. Now what? Learn more about building a solid 6-step asset protection plan to guard your wealth.
In this article
- Asset protection places legal limitations on creditors/debtors from accessing your wealth
- Asset protection strategies can take many different forms, depending on your situation
- Titling a jointly held marital bank account as tenants by the entirety is likely one of the fastest methods to protect assets from creditor claims
- Consult an estate planning attorney for more serious asset protection matters
Asset Protection: Building a Solid Plan
I first heard my financial planner bring up the idea that my husband and I need to build a solid asset protection plan back when we were freshly married and were considering building this side hustle business.
When I heard that my husband needed to build an asset protection plan, I thought my financial planner was a little out of his mind – because although my husband and I are not poor, we’re not that wealthy to require offshore asset protection planning.
Well, folks, I was wrong.
Just because my husband and I didn’t have a multi-million-dollar estate (yet), didn’t mean we shouldn’t build an asset protection plan.
I learned a valuable lesson that day with my financial planner: Anyone, anywhere should plan for asset protection.
Although the term asset protection is often associated with strategies such as multi-million dollar offshore trusts, every individual needs some form of asset protection planning.
I learned a lot from our meeting with my financial planner.
As my husband and I sat with my planner, I took some notes so that I can pass along the knowledge to you.
What is Asset Protection?
Asset protection preserves one’s wealth from creditor claims.
Specifically, asset protection strategies help you preserve your wealth by placing legal limitations on creditors’ access to your wealth.
Asset protection strategies are legal practices that essentially help put a chain and padlock around your wealth and assets.
In short, if you are afraid of being sued – for whatever reason – it’s time to build a solid asset protection plan so potential creditors won’t have the luxury of tapping into your wealth.
When Should I Start my Asset Protection Strategy?
Today is the best day to start with your asset protection plan.
If you are worried about being sued by someone, for whatever reason that may be, and you are just now considering beginning an asset protection plan – you’re probably too late.
Start when you’re NOT worried about being sued.
Start your research and the conversation with an attorney now.
3 Pillars of Asset Protection
Before we examine the strategies to build a solid and fool-proof asset protection plan, I think it’s important to understand the 3 pillars to a proper asset protection plan.
Chances are, your asset protection plan needs to be in place if you are being scrutinized for any of the following court cases:
The 3 pillars include:
Pillar #1: Control
It’s a pretty simple concept: The more control you want over an asset, the more likely you could lose that asset.
Let’s consider this: If you don’t want your creditors to hold an asset such as a vacation house, then it might be in your best interest to gift that asset to a trusted person in your family.
Another way you could relinquish control from the house – and with that protecting this asset from your creditors – is by placing the asset into a QPRT, a qualified personal residence trust.
A QPRT is irrevocable, which means you (the grantor) completely loses control of the asset, and thus, your creditors also lose their ability to take this asset.
Pillar #2: Timing
This goes back to my earlier point – when should you start your asset protection plan.
Truth be told, there is no better time than today to start laying the groundwork for your asset protection plan.
They are called “fraudulent conveyance laws.”
In other words, this is when the courts find you to have transferred your assets in an unfair (or even illegal) manner to avoid bankruptcy or other creditors from accessing those assets.
If you are found to have intentionally “discarded” assets through an asset protection scheme in an effort to avoid creditor claims – that’s considered actual fraud.
The courts will look back 1 year from the date of the filing of the bankruptcy (or other creditor petition) to determine whether you have committed actual fraud.
Pillar #3: Transfer
The last pillar of an asset protection strategy is transfer.
In other words, how would you want to transfer your assets in an effort to preserve and protect your wealth?
The answer here is not that simple because there are many different methods to go about transferring assets.
You could simply gift them to your children or close friends.
You could also establish an irrevocable trust or a qualified personal residence trust (as we discussed earlier).
The more complex your manner of asset transfer, the more administrative rules you (and likely an attorney) will have to follow – and the more cost the transfer method will be to you.
6 Ways to Develop a Fool-Proof Asset Protection Plan
Developing a solid and fool-proof asset protection plan is not a “one answer fits all” type of strategy.
In fact, an asset protection plan should be entirely customized, based on your specific financial and personal situation.
Complex financial situations typically require more complex asset protection strategies.
Developing and implementing the right asset protection plan also does not simply encompass just 1 tactic.
Typically, that means forming and molding various asset protection strategies together to develop 1 customized solution for you.
1. Risk Management (aka Insurance)
Insurance – also known in the industry as risk management – is likely one of the fastest, easiest (and possibly cheapest) ways for asset protection.
There are many different types of uses for insurance – so you have to understand what your insurance is supposed to protect.
Insurance uses include:
- Health Insurance
- Life insurance
- Liability insurance
- Disability insurance
- Long term care insurance
- Errors and omissions insurance
- Malpractice insurance
And the list goes on.
As you can see – insurance is a pretty complex topic, and something that should not be taken lightly.
I’m not going to go over every type of insurance listed here (or else this blog post would likely be 20,000 words long) – but I will briefly review 3 key types of insurance that I do feel are important for asset protection purposes.
- Liability Insurance
In short, liability insurance is a way for you to protect your assets against creditor claims regarding injury or damage to property.
Liability insurance coverage can range north of $5 million (and still be relatively affordable – costing about $1,000 per year for about $5 million of umbrella liability coverage).
- Long Term Care Insurance
Long term care insurance covers a portion of the cost of medical care if you have a chronic condition, disability, or disorder.
Long term care insurance can also help cover a portion of nursing home costs.
- Life Insurance
If you obtain life insurance, that’s an easy way to pass on a death benefit free of tax to your beneficiaries.
Life insurance is likely one of the easiest and cheapest ways (if you obtain life insurance at an early enough age) to preserve your wealth and assets.
A life insurance death benefit – in most cases – is not something your creditors can claim.
Your creditors (or the IRS) are also unable to claim the life insurance death benefit distribution to your beneficiaries.
2. Estate Planning
Too many people shy away from talking about death.
Yes, it’s a morbid subject – but it’s something that you should not take lightly.
There are some questions you should start asking yourself as it relates to your own health and wealth.
Some questions could include:
- What happens to you if you become mentally incapacitated (ie – you have Alzheimer’s)?
- What happens to your assets and family wealth if you cannot make decisions on your own?
- Who takes control of your family’s wealth?
Proper estate planning should happen far before you believe something would happen either to your wealth or your health.
This is where you should hire an estate planning attorney.
Even if you are a millennial (and trust me, I know from personal experience that talking about death is not a happy hour topic) you should start discussing drafting at least the basic estate planning documents to build a solid asset protection plan.
Some basic estate planning documents you should consider drafting include:
- Durable power of attorney
- Revocable trust
- Health Care Surrogate
3. Asset Transfer Tactics
The more complex your estate and financial matters, the more likely you’ll have to resort to more complex asset transfer and asset protection strategies.
Some of the more complex transfer and asset protection strategies include:
- Irrevocable grantor trusts
- Domestic asset protection trusts
- Offshore asset protection trusts
- Family Limited Partnerships
4. Divorce Planning
No one enjoys discussing a potential divorce – especially with their spouse.
Trust me – my husband jokingly called me Debbie (as in Debbie Downer) after I brought up the topic of divorce and how we should go about this possible obstacle.
However, as with all things, it’s important to bring up divorce planning now – while the waters are calm – before it’s too late.
Hopefully, you’ll be just wasting your time (and possibly money) and never need to worry about divorce planning.
However, should you go through a divorce down the road – you will be SO thankful you had this conversation.
Divorce planning may not just mean planning for your potential divorce.
It could also mean planning in the case of your child’s divorce.
1 item is a keystone in this case:
Prenuptial agreements can help set the grounds in the case of a nasty divorce.
They will save you money, time and stress.
- Provide asset protection for children from your first marriage
- Protect a family business
- Protect your estate plan from a potential unwanted spousal claim at your death
5. Tenants by the Entirety
Here’s a little known trick: If you hold any property jointly with your spouse, you can title that property in the form of tenants by the entirety.
Tenants by the entirety is an easy and often free strategy for asset protection.
There are some rules though that you must follow to title your property as tenants by the entirety:
- Property must be held jointly
- You must be married
- If one spouse passes away, the other spouse automatically receives ownership of that property
- You may not qualify for tenants by the entirety titling if you live in the wrong state
Below is a list of states that allow joint asset titling for real estate in the form of tenancy by the entirety:
- New York
- North Carolina
There are also other states that allow tenancy by the entirety titling for any type of property.
These are listed below:
- District of Columbia
- New Jersey
- New York
- North Carolina
- Rhode Island
Why can most creditors not claim assets titled as tenants by the entirety?
In short, tenancy by the entirety states that both spouses share a claim to the entire piece of property.
How does this translate to asset protection?
The fact that both spouses have a claim to the whole of the property means that creditors who have a lien on only 1 spouse cannot take the assets titled by tenants by the entirety – because both spouses technically own the asset.
The only time a creditor can claim an asset titled as tenancy by the entirety is when the creditor has a lien on BOTH spouses (but that’s typically rare).
6. Consult an Estate Planning Attorney
Consulting an estate planning attorney is a key part to optimizing your asset protection strategy.
I can share from personal experience that although I have a financial planner working on our financial goals, our financial planner referred us to an estate planning attorney.
Estate planning attorneys bring valuable insight as it relates to structuring a proper asset protection plan while adhering to your state and federal laws.
In the end, asset protection is an essential need for anyone.
Especially if you live in America, which is a very litigious society, one of the first things on your mind should be building a solid asset protection strategy.
It’s better to start planning in the present – when you need your asset protection plan the least – than to leave everything to luck and chance.
Worst case scenario, one day you’ll have someone sue you and you’ll wish you had your asset protection plan in place.
Start your asset protection strategy today – and your bank accounts will thank me later!
What asset protection strategies have you put in place for your financial plan?