Asset Protection

What Is Asset Protection?

Most people who talk about asset protection frame it around protecting money from a "typical" creditor arising out of a negligence suit: someone injured by a negligent driver, a patient suing a physician for malpractice, someone who slips and falls on your property.

That's real, and worth protecting against. But it's far from the only creditor out there. Focusing only on lawsuits leaves several other genuine threats to your wealth completely unaddressed.

Asset protection planning can be structured domestically or offshore. Domestic asset protection centers on LLCs and Family Limited Partnerships.

What are the other creditors most people never think to plan around?

The IRS, and your state government if your state has income tax. The IRS is everyone's single guaranteed creditor, every year, without exception. High-income clients hand this creditor real money annually. Paying $15,000, $50,000, or $100,000+ less in income tax this year is a genuinely achievable goal, and it's exactly the kind of thing proactive tax planning is built to do.

The stock market. You already understand this if you had money invested from 2000 through 2002, when the market lost nearly 40% of its value, or again from 2007 through March 2009, when it lost close to 57% (S&P 500, October 2007 to March 2009). Would you rather position part of your money in a wealth-building tool with real growth potential that still principally protects most or all of what you put in? Some of these tools come with an Income Account Value, separate from the walk-away value, that can provide guaranteed lifetime income you can never outlive.

Any guarantees mentioned are backed by the financial strength and claims-paying ability of the issuing insurance company and may be subject to caps, restrictions, fees, and surrender charges as described in the annuity contract.

Estate taxes. Clients with real wealth worry about what their estate will owe when they die, and a lot of advisors genuinely aren't familiar with the tools available to reduce that exposure. I've walked many clients through advanced planning strategies that other advisors simply never bring up.

Long-term care expenses. The single most likely expense clients over 65 will face is long-term care: prescriptions, home health care, nursing home costs, related surgeries. It's worth taking seriously precisely because it's close to guaranteed for a majority of people, even though most clients hate the idea of paying LTC insurance premiums for coverage they might never use. I lean on tools like Fixed Indexed Annuities and single-premium life policies that combine wealth-building or wealth-transfer features with an LTC benefit built in.

Any guarantees mentioned are backed by the financial strength and claims-paying ability of the issuing insurance company and may be subject to caps, restrictions, fees, and surrender charges as described in the annuity contract.

Is a Lawsuit Lying in Wait for You?

What could someone sue you for that could potentially bankrupt you?

Almost anything.

A lawsuit is just one of several ways your lifetime of savings and hard work can be put at risk. Whether you can be sued has almost nothing to do with the actual merit of the case. It mostly comes down to whether the offended party can find a lawyer willing to take it on.

It can be about almost anything, from someone claiming they tripped and got hurt on your property to the aftermath of a minor car accident. Even if you think you don't own much worth protecting, you're still at risk.

You can be entirely in the right and still have a jury rule against you. Or the cost of mounting a defense can get so high that settling ends up cheaper than winning. Nothing about the outcome is certain, and a lot of it comes down to the lawyers involved, the judge, and the jury you happen to draw.

Asset protection stopped being something only the very wealthy needed to think about a long time ago. Anyone who's built a real retirement nest egg, or watched their home appreciate meaningfully, could see a lifetime of savings end up in someone else's bank account.

If you own a business, lawsuits don't only come from offended individuals. They can come from government agencies who believe you've violated a rule, or from groups like environmental organizations that decide to target a business over alleged pollution or other environmental claims.

Professionals Carry Unique Liability

If you're a doctor, lawyer, CPA, engineer, or another licensed professional, you probably already sense the risk. You can be personally sued for anything you do as part of your profession, no matter how your business is structured. Professionals don't get to hide behind the limited liability of a corporation, a P.C., or an LLC for their own professional acts. Every personal asset you haven't separately protected is exposed.

Protecting What You've Built

Whether you work for a corporation, run your own business, or both, it's a genuine legal minefield out there. A properly built asset protection plan is what gets you through that minefield with your wealth intact on the other side.

The goal is a plan solid enough that an opposing attorney looks at what you've set up and decides it isn't worth the fight. Since no two situations are identical, I put together a specific mix of strategies based on what's actually at risk in yours.

Negligence Lawsuits: Real Dangers to Your Wealth

A few real-world scenarios that illustrate how a lawsuit like this actually plays out, and why acting before you need to matters.

Boats, Cars, Snowmobiles, Planes, and Other Toys

Own a boat, a Wave Runner, a car, a snowmobile, a plane, or anything else in that category, and you carry the ordinary liability that comes with operating any of them negligently.

Drunk driving. Everyone knows drinking and driving is wrong, and people still do it. Legal blood-alcohol limits keep tightening, so it takes less than most people assume to be considered legally drunk. Drink, drive, and cause an accident, and you're very likely to be sued personally, with everything you own at risk. Ordinary negligent driving carries the same exposure. This generally isn't a real concern for someone with a net worth under $50,000. Negligent actions become a genuine financial threat once you actually have wealth to lose.

Homeowner Liability

Most people worried about asset protection own their own home, and a home creates liability risks a lot of owners never think about.

Homeowners host parties. Serve alcohol at one of those parties, and if a guest leaves after drinking too much, gets into an accident, and seriously injures or kills other passengers, the homeowner is the one who ends up sued for negligence. A lot of people assume a one-million-dollar umbrella policy covers them completely. It rarely goes far enough. If a jury returns a three-million-dollar verdict and insurance covers one million, the plaintiff's attorney comes after every personal asset the homeowner has to make up the rest.

Most homeowners also assume their property is in better repair than it actually is. Having guests over creates a legal duty to keep your property reasonably safe, a duty that gets heavier if you run a business out of your home. A faulty handrail or another overlooked defect that injures a visitor creates real personal liability, and a real path to a negligence suit against everything you own.

Vacation Rentals

Real estate has become a popular way to diversify a portfolio, especially when the stock market goes flat and investors look for somewhere else to put their money, often into rental property.

Vacation rentals are a genuinely nice asset to own, and they carry a real liability problem for the owner. Commercial-style property, whether it houses a business or functions as a rental, comes with a heightened duty to keep the property in good repair. Most owners hold title to rental property in their own name, so an injury to a tenant or a tenant's guest turns into a lawsuit against the owner personally, putting every personal asset they have at risk.

Teenage Children

Have teenagers, and sooner or later you'll leave town while they're home alone, possibly with friends over. Picture a party of fifty teenagers that gets out of hand, drinking involved, and a group of drunk teenagers driving home afterward. If they hit another driver, say a cardiologist who can no longer practice for the next thirty years because of the injuries, who's actually liable? The teenage driver's own parents might have no meaningful auto insurance to speak of. But the homeowner who hosted the party, whose alcohol was consumed, is almost certainly getting sued, and a personal injury attorney will go after everything that homeowner owns, including their house. A one-million-dollar umbrella policy doesn't stretch far against a ten-million-dollar-plus verdict.

The Common Thread

Every one of these scenarios should make clear that the threat of a lawsuit is genuinely real in a society this litigious. You can assume it won't happen to you, or you can take a proactive step toward protecting your wealth by reaching out and starting the conversation.

What "Domestic" Asset Protection Actually Means

Simply put, it's asset protection planning that doesn't involve going offshore. Domestic asset protection comes in a lot of different flavors, and who you ask determines the answer you'll get:

• Ask an insurance agent, and in many states their answer is putting your money into life insurance and annuities.
• Ask a pension consultant, and their answer is maxing out an ERISA-qualified plan.
• Ask a typical CPA or attorney, and they'll often tell you they don't fully understand the question.
• Ask me, and you'll get a real set of questions first, followed by a client questionnaire, then a detailed summary of your actual exposure and the solutions that fit it.

As a general rule, domestic asset protection planning centers on Family Limited Partnerships and Limited Liability Companies.

Why Not a C- or S-Corporation?

It comes down to what remedy a creditor can actually get when they ask a judge to enforce a judgment or settlement. Assets held by a properly structured LLC or FLP limit a creditor to what's called a charging order. The court can't reach into the LLC or FLP and hand those assets directly to the creditor.

What a charging order does not give a creditor:

• It doesn't transfer your interest in the LLC to them, or force you to sell your interest and hand over the proceeds.
• It doesn't let them force the LLC to sell assets.
• It doesn't let them force the LLC to distribute income.

So what does a charging order actually get a creditor? The right to pay income tax on income the LLC or FLP generates but doesn't distribute. A 1977 revenue ruling (77-173) established that a creditor holding a charging order can be treated as a partner for federal income tax purposes, without any of the actual benefits of being one.

Compare that to assets held by an individual, or by a C- or S-Corporation. A judge can order a debtor to hand over personally held assets directly to the creditor. No protection at all. With an S- or C-Corporation, a judge can force you to liquidate your interest and hand over the proceeds, transfer your interest to the creditor outright, or let the creditor vote your shares.

A C- or S-Corporation generally isn't a good vehicle for protecting personal assets: a home or condo, rental or non-rental property, an IRA, stocks or mutual funds, life insurance, bank accounts, CDs, planes, boats, cars, or other business interests. Anything of value held in your own name, your spouse's name, or jointly, sits exposed to creditors.

The Bottom Line

Most people in this country don't have their assets properly protected. An FLP or LLC isn't a cure-all on its own, but it's the foundation nearly every domestic asset protection plan is built on, and the starting point for protecting yourself from both business and personal creditors.

Stock Market Protection

If you lost 40% or more when the market crashed between 2000 and 2002, or somewhere in the 40 to 60% range during the 2007 to March 2009 crash, using Fixed Indexed Annuities to protect wealth from market losses is worth a genuinely open-minded look.

Why FIAs?

They can offer:

• 100% principal protection: your money never goes backward from a negative stock market return.
• Positive index gains locked in every year.
• An Income Account Value, separate from the walk-away value, that can provide guaranteed lifetime income you can never outlive.

Any guarantees mentioned are backed by the financial strength and claims-paying ability of the issuing insurance company and may be subject to caps, restrictions, fees, and surrender charges as described in the annuity contract.

Why Haven't You Heard About This?

Some broker-dealers, the firms that license advisors to sell stocks and mutual funds, forbid their advisors from selling or even discussing FIAs with clients, and most of those advisors never disclose that restriction to the very clients they're supposedly building wealth for. I think FIAs can play a real role for people who want to grow wealth securely, with the confidence that their principal won't go backward.

Index and fixed annuities aren't built for short-term money and may carry caps, restrictions, fees, and surrender charges as described in the annuity contract. Guarantees are backed by the financial strength and claims-paying ability of the issuer.

Plenty of different FIAs with guaranteed income riders exist in the marketplace, and the products themselves change periodically. The point here is simply to make sure you know they exist and roughly how they work.

Frequently Asked Questions