6 ways to protect your assets
It cannot be overstated how useful asset protection is for nearly anyone at any financial stage — from a millionaire who manages a hedge fund to a janitor who works in a hedge-fund office. Far too many people concentrate on gathering wealth and don’t think about protecting their wealth until it’s too late.
As my firm defines it, asset protection is the legal process of titling both your personal and business assets to put them beyond the reach of future potential threats, creditors and liabilities while simultaneously enjoying the benefits of those assets. Although insurance provides some protection for your assets, it is no substitute for a well crafted, thoughtfully laid out asset-protection plan that shields all of your assets from financial threats. Comprehensive asset protection includes the usage of business entities to protect your real estate, property and liquid assets (such as cash), as well as assets such as machinery, equipment inventory, intellectual property, cars, boats, planes and inheritances.
While there are many strategies you can employ to protect your assets, here are six options to consider.
1. Transfer all assets in your name to protective entities.
One of the basic tenants of asset protection is to own nothing but retain control of everything. One way to accomplish this is by transferring your assets to protective entities like LLCs, trusts and limited partnerships.
2. Pair asset protection with financial planning strategies, such as asset exemptions and insurance.
In some states, the laws are such that some assets are protected from lawsuits and creditors by default. Typically, these forms of legislation offer individuals protection for their primary residence, furniture, clothing, other personal items, pensions, retirement funds and life insurance.
3. Encumber your assets with liens.
Another way some individuals make themselves unattractive targets for lawsuits is by making their assets essentially valueless. An example of this might be like holding lines of credit against a person’s assets (i.e., owing $950,000 on a $1 million home).
4. Separate business assets.
When multiple businesses operate out of one company, it can serve as a great source of liability. One lawsuit or judgment against the company could take away years, if not decades, of hard work and investment. (This is the primary reason that my firm works diligently to separate the assets of our clients and their businesses.) Your operating company should own as little as possible.
To minimize risk, take the assets that your business relies on to function and separate them from the operating company. For example, create separate companies for assets such as equipment, inventory or machinery and lease them back to the operating company. That way, if the operating business is sued and needs to shut down, it will be able to reopen later as a new company and lease the assets from other companies in their asset-protection portfolio.
5. Use international asset protection for a heightened level of protection and privacy.
Incorporating plans that reach into international jurisdictions provide even greater protection and privacy. The addition of legal and procedural obstacles is often very effective at discouraging overzealous creditors. What makes international asset protection plans special is the way they warn creditors that anything held within them will be very difficult to acquire. That is often enough to discourage even the most ardent plaintiffs.
Domestic asset protection plans offer excellent protection by creating obstacles for creditors to overcome. However, international entities are generally considered superior because, to make claims against internationally held assets, creditors have to navigate protections offered by domestic jurisdictions, and also contend and comply with the laws and regulations of the country in which the entity was created. Additionally, creditors have to deal with the prospect of having to hire local counsel, usually on a fee-only basis, which can pose additional obstacles.
6. Protect your assets through a Captive Insurance Company.
Captive Insurance Companies (CIC) are international or domestic insurance companies that are licensed to write policies within the United States and are registered with the IRS. Think of them as in-house insurance companies that act with limited purpose and do not offer any services to the general public.
CIC policies are popular for a variety of reasons, but one of the most fundamental uses for a CIC is to provide businesses and individuals a way to insure themselves against loss when traditional insurance cannot cover special or unique liabilities. As such, these policies tend to cover real risks that have a low probability of occurring and provide protections for liabilities that are too costly to insure via open market solutions.
Generally speaking, there are three key benefits to using a Captive Insurance Company to protect your assets. First, it allows a business owner to insure certain risks that are often financially prohibitive to insure. Second, they allow a business owner to obtain coverage that would not otherwise be available to them. Third, CICs can afford a business certain tax advantages that a traditional policy may not. The costs of these policies are also usually much lower because there are no “padded costs” built into the premium to cover margins or overhead. Because a CIC policy can fill gaps in a business’ general liability policies, it can be especially useful to boutique or specialized businesses, where the risk is unusual or unique to the business. As with any asset-protection strategy, we always suggest and encourage our clients to do their research and use a financial planning specialist, such as an attorney, when drafting legal documents.
These strategies are but a tiny sliver of what is available to cover and protect your assets. With the use and inclusion of these and other asset protection strategies, you can afford yourself greater peace of mind knowing that your hard-earned assets have greater protection from creditors, lawyers, family and lawsuit-obsessed citizens, to name but a few.