Whether you’re a business owner, doctor, engineer, board member or someone else with considerable income and assets, the chances of another individual or creditor seeking to deprive you of your money become more likely as your net worth grows.
Today, we’ll discuss five specific asset protection vehicles that help preserve wealth.
When first structuring an asset protection plan, it’s important to perform a needs-based analysis. Start by asking yourself the following four questions. Generally, the more yes answers, the greater the need for asset protection.
- Are you working in a high-risk profession, e.g., chief information security officer or doctor?
- Are you working in a high-profile capacity, e.g., pro athlete or elected official?
- Do you own high risk assets, e.g., an apartment building or shares of a private jet service?
- Do you own intellectual property, e.g., patent, trademark or domain name?
5 Asset Protection Vehicles
#1 – Retirement Plans[i]
When you save for retirement through an Employee Retirement Income Security Act (ERISA) qualified retirement plan, such as a company-sponsored 401(k) plan, your savings are generally protected from creditors by federal law. However, for Individual Retirement Accounts (IRAs), federal law only protects the first $1,283,025[ii] from bankruptcy claims. This figure accounts for inflation and is adjusted every three years. What’s more, for IRA savings beyond this amount, protection is determined by each individual state. There are exceptions surrounding the protection of your retirement funds. Therefore, to ensure you’re minimizing asset risk, it’s important to have a detailed conversation with an experienced attorney.
#2 – Life Insurance & Annuities
Life insurance and annuities can be used to protect some or all of your assets from creditors. Specifically, federal and state laws include various exemptions for the cash value and policy proceeds. However, the degree of protection varies state to state.
#3 – Limited Liability Company
A Limited Liability Company (LLC) is reasonably easy to form and requires less paperwork and legal compliance compared to a C or S-corp. In terms of asset protection, members (owners) of LLCs are protected from the business’ liabilities, and can’t be forced to pay claims or other debt with personal assets. Also, keep in mind that many states will allow an LLC to have just one member. Therefore, if you’re a single owner, you’d receive far more asset protection as compared to operating a sole-proprietorship.
#4 – Limited Partnerships
If you’re in business with another individual, but with little or no control over daily business operations, then establishing a limited partnership can help to protect you personally from being liable for the business’ debt. A limited partner can’t be mandated to use personal assets to pay the business’ debts or claims. This business structure requires a general partner, an individual responsible for the daily decision-making and who is ultimately liable for any debt or claims against the business. Keep in mind that as a limited partner, you can still lose your original investment.
#5 – Asset-Protective Trusts
Wikipedia offers a simplified definition of an asset-protective trust[iv]; specifically, any form of trust which provides for funds to be held on a discretionary basis. Such trusts are set up in an attempt to avoid or mitigate the effects of taxation, divorce and bankruptcy on the beneficiary.
We’ll add that for this approach to be most effective, timing of transferring funds to the trust is imperative. Generally speaking, the longer your funds are held in an asset-protective trust, the more protection you’ll derive from the trust. Keep in mind that timeframes of transfers vary state to state.
Often Overlooked, Yet Vital Consideration
We hear about it almost daily in the news — identity theft. Protecting your identity is one of the most basic steps in helping to protect your assets. Therefore, organized attention should be given to protecting your identity. Consumer Reports has published a helpful checklist of eight steps to secure your identity[v]. Also, join us on September 28th for a presentation on how to guard yourself against cyber-crime in our increasingly digital world.
In closing, to help ensure that your assets are well protected, it’s important to conduct a solvency test. Essentially, you’re looking to measure your ability to pay your debts. To capture a realistic picture of your situation, you’ll want to consider the total value of all of your assets, and then subtract your liabilities as well as creditor protected assets, e.g., 401(k) or IRA. What remains are available assets for you to transfer into more asset protective vehicles.
At Ibis Capital, we believe that every sustainable wealth management plan is underscored by diversified asset protection strategies. What’s more, the more money and assets you have, the more complex it is to achieve asset protection without some form of trust or legalized business structure. A general rule-of-thumb: The more time you allow to transfer your assets into a protective vehicle, the better they’ll be protected. Said a different way, time and planning equals asset protection.
The information provided here is general in nature. It is not intended to be, and should not be construed as, legal or tax advice.
Investment advice is offered through Stratos Wealth Partners, Ltd., a registered investment advisor.