Although commonly associated with multimillion-dollar offshore trusts, asset protection planning takes many forms, for every type of individual. It starts with building a foundation of protection and may progress to more complex strategies.
The three principles of asset protection
The three fundamental principles of asset protection—and the key factors that will be examined in any bankruptcy, creditor, divorce, or injury case—are control, timing, and method of transfer.
- The more protection you want, the more control you may need to relinquish. First, ask yourself two questions: Is there any chance I may want this asset back on a rainy day, and am I willing to relinquish complete and total control over it? The more strings you attach to an asset you are giving away, the more likely it is that a creditor will be able to use those strings to obtain access to the asset.
- Timing is everything. The time to plan for asset protection is when no creditors are looming on the horizon. Although you may plan to protect assets from unforeseeable future creditors, strict rules—called fraudulent conveyance laws—protect the rights of present and foreseeable future creditors. The courts help shape the definition of such creditors on a case-by-case basis, and each state’s statutory time frame varies.
- The method of transfer matters. Do you simply want to give the asset away, or are you considering a more advanced strategy, such as an asset protection trust? More complex strategies may come with additional administrative rules, as well as ongoing costs.
What about federal and state laws?
ere’s where things can get tricky, so be sure to work with an experienced attorney. The implications of federal and state laws on asset protection are complex and depend on many factors, including the determination of which assets are protected from claims by creditors (and which are not), who the creditors are, and the basis for claims. On top of that, state-to-state variations in how federal and state laws overlay can complicate matters even further.
Building a solid plan
Most asset protection plans involve a combination of building blocks, including insurance, estate planning, and advance transfer strategies. Also, although no one likes to think about it, planning for divorce is another key asset protection measure.
Insurance is your first line of defense and typically one of the least complex components of an asset protection plan.
- First, consider liability coverage. Do you have the right amount? Do you need to cover both business and personal assets? To address potential gaps in coverage, review your business and personal property and casualty policies with your insurance professional annually. Umbrella policies can provide additional extensive coverage at a relatively low cost and should be considered for your fundamental insurance package.
- Not surprisingly, medical expenses constitute a major percentage of bankruptcy cases. Disability and long-term care insurance can provide financial security and freedom of choice.
- Life insurance can be an effective way to provide ongoing financial support for your family in the event of your death, in addition to helping to build family wealth, protect a family business, or minimize tax concerns.
The basic estate planning documents typically serve as a second line of defense in an asset protection plan. A durable power of attorney, for example, allows you to appoint an agent to manage your financial and health care affairs in the event of your incapacity. Your will (or possibly a revocable trust) provides protection and direction for the transfer of assets upon death. Once you have these basics in place, work with your attorney to review your beneficiary designations and asset ownership to ensure that your estate plan stays on track.
More complex strategies, including irrevocable grantor trusts, domestic asset protection trusts, and offshore asset protection trusts, can address the dual goals of asset protection and estate planning. If you are considering such strategies, ask yourself:
- Have I already laid the foundation of a solid asset protection plan through insurance, basic estate planning, and other strategies?
- Am I ready to commit the time and resources necessary to execute the plan? Domestic trusts must be very carefully administered, and international trust structures are even more complex to manage.
- Do my future heirs understand the plan, and are they willing to commit to it?
Asset protection may include planning for the possibility of your divorce or protecting assets in the event of a child’s divorce. In either case, a prenuptial agreement is one of the most effective ways to protect personal assets during divorce proceedings. A well-drafted prenuptial agreement can help eliminate uncertainty and contention, as well as costly, lengthy, or hostile litigation. If you feel uncomfortable discussing this type of agreement with your future spouse, your financial advisor and attorney can help you.
Prenuptial agreements are frequently used to:
- Protect and provide for children from a previous marriage
- Protect and conserve a closely held or family business
- Exclude a gift or inheritance from the definition of marital property and, therefore, from an undesired distribution or liquidation in the event of death or divorce
- Ensure that an estate plan is protected from spousal claims at death
It’s important to build your asset protection plan from the bottom up. Start with a good foundation, and then consider whether more advanced strategies might be appropriate. The level of protection you need and how much effort and expense you are willing to devote to your plan will be your strongest guides. A good asset protection strategy is one that you can understand, feel comfortable with, and incorporate into your total financial picture.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer..
Chris Gullotti is a financial advisor and Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or [email protected]
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