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Posted by Dennis Jao

Asset Protection Strategies to protect Your Financial Wealth

Asset Protection Strategies to protect Your Financial Wealth

Asset protection strategies are paramount considerations for wealth that are vulnerable to lawsuits, creditors, costly divorces, etc. We live in an increasingly controversial society where lawsuits are more and more frequent, especially in professions such as doctors, lawyers, businessmen, and any professional who risks being targeted.

There are several options and tools to protect and hide your assets. These strategies have repeatedly proven to be the most effective in various circumstances. To know the best way to structure your asset protection plan, you need to know the available options.

The Best Asset Protection Strategies

1. Use Limited Liability Business Entities

An effective way to protect your assets is to form a limited liability business entity. This is especially important for entrepreneurs or freelancers to separate their personal assets from their businesses. Limited Liability Companies (LLCs) are the most widely used vehicles for separating assets and liabilities.

These companies are separate legal entities where the owner is not liable for claims against the company. If legal action or liability arises in the course of business (e.g., customer lawsuit, creditor claims, etc.), your assets are protected and cannot be claimed.

Another major advantage of LLCs is the presence of charging order protection in some jurisdictions. This means that a creditor who wins a claim against the LLC is only entitled to distributions from the LLC, not directly to your property. However, the proactive measure is that the creditor cannot oblige you, as an entrepreneur, to actually pay these distributions.

At the same time, those entitled to distributions are subject to tax, even if those distributions are not paid. Basically, this means your lender could end up with a huge tax bill without getting a penny. This may be enough to dissuade any smart creditor from filing a lawsuit in the first place.

2. Using Asset Protection Trusts (APT)

Asset Protection Trusts (APTs) are considered the most powerful asset protection tools. These are special forms of irrevocable trusts where you are allowed to be both settlor and beneficiary. Your personal assets are moved to the trust, administered by a third-party trustee, and is no longer your legal property. However, you still get all the benefits of these resources and can manage and control them through the administrator.

Asset protection funds have repeatedly proven to be incredibly difficult for creditors and/or plaintiffs to understand. They have complex structures and laws that make them almost invincible in a trial. This is, even more the case with offshore protection trusts in jurisdictions such as the Cook Islands, Nevis, and the Cayman Islands. Indeed, these offshore trusts are beyond the reach of local courts and lawyers. These jurisdictions provide many safeguards for the assets of the trust, provide high levels of confidentiality, and have other advantages, such as tax advantages.

Currently, there are also national asset protection funds available in several states. They may be cheaper and more accessible, but they don't offer the same level of protection. Irrespective of the type of asset protection trust you're considering setting up, it's a good idea to seek expert advice, as these are complex tools that need to be set up correctly to work effectively.

3. Pension funds

Some workplace pension plans are sufficiently protected by federal law. These plans are usually bankruptcy-free, which means you can keep them even after filing for bankruptcy.

They are also better protected than your usual personal assets against lawsuits and creditors. The level of protection can vary from state to state, so you should consult your attorney to understand the level of protection you are entitled to get through your retirement account. Another advantage is that these accounts can offer significant tax benefits.

4. Homestead Protection

In some states, home equity is protected. This means that creditors cannot claim against your homestead. The level of protection varies from state to state, with some offering unlimited protection and others offering none. Ensure home equity is covered in your state.

If it is, it makes sense to pay off the outstanding mortgage with your excess assets and wealth, as that wealth would be better protected if tied to your home.

5. Protected Annuities and Life Insurance

Like pension funds and homestead, annuities and life insurance can also be protected under state law. Again, this varies widely from state to state and should be checked with a licensed attorney to be sure.

6. Liability Insurance

This is one of the simplest yet often most effective ways to protect your personal property from legal action. Several types of insurance policies provide liability coverage in the event of litigation, such as home insurance, workers' compensation insurance, liability insurance, and even setting up captive insurance.

You can also take advantage of comprehensive coverage that can cover you in a situation where your first line of insurance is insufficient. Other insurance types, such as long-term care insurance, protect your assets against risks such as the tremendous cost of healthcare in your later years. All of this has its place in a comprehensive asset protection plan.

7. Discretion

This is an important aspect when it comes to protecting your assets. Be discreet about them. As soon as you begin to show off your wealth to the outside world, you become the target of unsolicited legal action. We live in a greedy and controversial society where many people are ready to take advantage and get your money by any means. Don't become a prime target.

Trusts have earned a reputation as the most effective asset protection tools. They have proven to be more effective than any other financial institution in protecting assets from creditor claims, lawsuits, and almost any type of legal threat.

Since all trusts are not created equal when it comes to asset protection, it is best to go with Asset Protection Trust (APT), as it is the best type of trust for asset protection.

Make an asset protection plan.

An asset protection plan consists of placing resources in structures that provide the best level of resource protection. The best example of a multi-entity structure in relation to offshore asset protection funds is the combination of an offshore fund with a limited liability company (LLC).

This involves the grantor establishing an LLC, whose ownership is then transferred to the trust. The trust assets are transferred to a bank account opened in the name of the LLC. To clarify: the LLC owns the assets, and the trust owns the LLC. The settlor of the trust can be appointed as a trustee of the LLC, which means they retain control of the assets under ordinary circumstances. However, during times of "legal hardship," the trust automatically transfers control of the LLC to the trustee as a backup.

Another important structural consideration is who to appoint as administrator. It is advised that the trustee be a foreign party to the trust. They should not be citizens or residents of their national jurisdiction because, as foreigners, they will not be affected by local court orders. They will be much more able to assert their powers as administrators and refuse to cooperate with local courts.

How your lawyers come into play

An asset protection attorney can help you assess your situation, explain the various legal alternatives available, and recommend a comprehensive asset protection plan that is right for you. They can put together an asset protection plan, appoint trustees, and assist with financing. An experienced asset protection attorney knows the legal landscape and can help you make informed decisions about how best to protect your assets.



Dennis Jao
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