Asset protection planning is a vital aspect of your personal wealth management strategy. Creating the protection plan to safeguard your wealth involves careful consideration of your circumstances and the tools which are available to you.
In this article, we will look at what asset protection planning is, why you need it, and the different tools which can be utilised.
Asset protection planning is the process of taking proactive steps to ensure that your assets are well guarded against unexpected lawsuits, judgements, creditor claims, divorce, and numerous other risks.
This involves using different financial tools which are specially designed to keep your assets private and protected. There are many dangers to your hard-earned wealth. Having a comprehensive asset protection plan in place is an important step to securing a safe financial future.
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Effective asset protection plans are those which are put in place before the real need arises. The sooner you can create your ideal asset protection strategy, the better. It is important to not wait until things actually go wrong before scrambling to try protect your assets. There are indeed options for protecting your assets after a lawsuit has begun, but these are limited and can result in accusations of fraudulent transfer.
Furthermore, creating a comprehensive asset protection plan is not something which happens overnight. It takes time to build your protection structure. Therefore, the absolute best time to begin setting up the perfect asset protection plan is right now.
Whilst setting up your asset protection plan, you should take your entire financial situation into consideration. A holistic asset protection plan should align with your immediate and long-term financial objectives, as well as your estate planning goals. Many of the asset protection tools which we will discuss can also be effectively utilised in conjunction with a sold wealth management and estate plan.
Asset protection planning has many advantages which extend beyond simply protecting your assets from lawsuits. The primary advantages are as follows:
The main benefit and objective of asset protection planning is to protect your wealth from the risk of being seized in a lawsuit or judgment, as well as protect it from other micro and macro risks. There are two primary ways that asset protection tools protect your assets in the case of lawsuits:
The primary layer of protection is in the ability of a good asset protection plan to prevent lawsuits from taking place in the first place. Lawsuits are expensive and arduous. A creditor or claimant will most likely only be willing to go through the struggles of a legal battle if there is sound reason for them to believe they will ultimately win their claim.
Therefore, having a strong asset protection plan in place can be a serious deterrent to prospective claimants, as their lawyers will recognise that it will be extremely unlikely to come out on top.
Make sure to implement a plan before a lawsuit is brought forward as the number of asset protection options decreases after a lawsuit is started.
The secondary layer of protection is your plan’s ability to protect you from unfavorable court judgments. There are extremely powerful asset protection tools such as offshore asset protection trusts which are almost completely impervious to foreign court judgements.
Many of these vehicles will not bend to local court orders and require court cases to be filed within the jurisdiction in which the trust is held (e.g. Cook Islands Trust), which then make it extremely difficult for a claimant to win a case against your wealth.
A great benefit of most asset protection tools is that they offer a high degree of financial privacy and confidentiality. This has many advantages, including the fact that it acts as a primary protective measure. Assets which are not found can not be seized.
The first thing that any prospective claimant’s lawyer will do is a comprehensive search to determine the available assets in your name which could be claimed in a court of law. If a large proportion of your assets are well hidden in private offshore vehicles, they will not show up in the search. This will greatly discourage a lawsuit being filed against you, and will make it difficult to claim your hidden assets in the event that a lawsuit is initiated.
Most asset protection tools are tax-neutral entities which pass the tax burden on to the owner/beneficiary. However, certain tools such as offshore trusts and offshore companies can offer significant tax advantages when used effectively.
They can help to reduce the amount of taxes you incur now, as well as the amount of estate taxes which your heirs will be liable for. They can also provide ways to defer taxes.
Almost anyone with a reasonable estate which they do not want to risk losing can benefit greatly from asset protection planning. High net worth individuals are often more in danger of being targeted in lawsuits and also have the most to lose. As such, they should of course take the necessary steps to build a comprehensive asset protection structure.
However, they are not the only ones who run risks. People in professions which are more susceptible to liability claims such as doctors and lawyers should ensure that their assets are well guarded. In addition, even middle-income individuals and families should take precautionary measures, as a sudden seizure of their assets could be extremely crippling financially.
It is important to enlist the services of a professional asset protection planner or estate attorney to help you build the perfect asset protection plan. Many of the tools used for asset protection are complex in nature and not easily understood by just anyone.
A professional can help you to analyse your circumstances and determine the best wholistic asset protection structure to suit your needs. They will also have the necessary know-how to practically implement your asset protection plan in the most efficient way possible.
That being said, before handing over all the nitty-gritty to a professional asset protection planner, it is good to be informed of the best asset protection tools available and have some level of understanding about how each one works. This will help you give your own constructive input when meeting with your asset protection planner, and will enable them to better align the plan to your own preferences and objectives.
There is a vast array of asset protection tools available. The following is a brief overview of some of the best and most popular tools available today:
Limited Liability Companies, especially those which are formed in a favourable offshore jurisdiction, offer excellent financial protection and privacy. These companies provide limited liability protection to their members. In addition, in most jurisdictions, there are regulations which make it difficult to make claims against an LLC’s owner’s interests which are tied up within the company (which is, of course, a separate legal entity).
LLCs also offer a high level of privacy, especially when formed in an offshore jurisdiction like Cayman Islands, Cook Islands, or Nevis where the names of owners are not publicly available. They also come with a host of other benefits such as tax advantages in holding assets offshore and investment opportunities in regional markets, as well as brokerage accounts and investment funds.
The United States is also home to several strong asset protection structures in the form of LLCs in Wyoming, Delaware, and Nevada offering options similar to other offshore vehicles.
Asset Protection Trusts are considered to be by far the strongest asset protection tools available. These are special types of irrevocable trusts where you can be both the settlor and the beneficiary at the same time. Your personal assets are transferred to the trust, which is managed by a third-party trustee, and thus they are no longer legally owned by you. However, you still receive all the benefits of these assets and can manage and control them through the trustee.
Asset Protection Trusts have proven time and again to be incredibly difficult for creditors and/or claimants to crack. They have complex structures and laws which make them almost invincible in a lawsuit.
There are two main forms of asset protection trusts
While the domestic trusts may suffice for some as they are likely to be far cheaper and easier to establish. However, they do not have the same protection mechanisms in place in comparison to offshore asset protection trusts. Jurisdictions such as the Cook Islands and Nevis for instance provide a level of security, privacy and confidentiality due to their corporate laws that far outweigh the strengths of any domestic trust.
This is primarily because they are out of reach of local courts and do not have jurisdiction over entities residing in another sovereign country. These jurisdictions provide mechanisms that prevent unlawful pursuance against the assets held within the trust that prevents all but the most determined of individuals.
Offshore bank accounts provide an easily accessible and robust form of asset protection. In fact, having an offshore bank account in a country with a stable economic and banking system can protect your assets in more ways than one.
Low reserve ratios and irresponsible lending practices make US banks prone to accepting higher levels of risk, all with a cost. Places like Switzerland and Singapore for example have banking systems that are more averse to risk-taking activities and are more often found amongst the world's safest places to bank, none of which are found in the United States.
Opening a bank account in an offshore jurisdiction is about diversification. Diversifying assets across different currencies, accounts, institutions, and countries help protect your wealth from unexpected banking collapses, economic downturns, and currency manipulations.
Certain employer-sponsored retirement plans are reasonably well-protected by federal law. These plans are often exempt from bankruptcy, meaning you can hold onto them even after filing for bankruptcy. They are also more well-protected than your ordinary personal assets from lawsuits and creditors.
The level of protection can differ across states, and so you should consult the advice of your lawyer to understand what level of protection you can get through your retirement account. The other advantage is that these accounts can also offer significant tax benefits.
There are other notable asset protection strategies available, including:
With many different proven asset protection tools available, it is important to have an integrated approach which considers all of your financial objectives. Each individual comes with a unique set of circumstances, and therefore there is no universal asset protection plan which is right for everyone.
It is of utmost importance to seek the support of a professional asset protection planning service which can help tailor the perfect asset protection plan to meet all of your personal needs.
Finally, the importance of acting swiftly and proactively cannot be stressed enough. Don’t wait until problems arise before putting your protection plan in place. Be prepared for the unexpected before it happens.
Without a customised legal strategy, you put yourself at risk.
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*Note for U.S. citizens: US citizens are limited in their tax reduction possibilities due to FATCA and CFC laws. Opening an offshore company can increase privacy and asset protection, but you can not eliminate your taxes without giving up your citizenship. If you are a US citizen you are obligated to pay taxes on all worldwide income. Read more here about FATCA and CFC laws.
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