6 Classic techniques for protecting your assets

If your professional, business, or other activities expose you to potential financial liability, asset protection should be a key component of your wealth planning efforts. After all, no matter how successful you are at building wealth, if you don’t protect your assets a large portion could be lost to a lawsuit or an unreasonable creditor’s claim.

Good defense

Everyone’s situation is different, but the following are six asset protection techniques that have benefited many higher-net-worth individuals:

  1. Outright gifts. Giving assets to your spouse, children or other family members is one of the simplest and most effective ways to protect those assets from your creditors. The downside is that you’ll lose control over the assets and any economic benefits associated with them.
  2. Tenancy by the entirety. If it’s authorized in your state, you and your spouse should hold title to your principal residence or other eligible property as tenants by the entirety (a special type of joint tenancy). This form of ownership insulates assets against your or your spouse’s individual creditors. It doesn’t, however, protect you from joint liabilities.
  3. Retirement plans. Qualified retirement plans — such as pension, profit-sharing or 401(k) plans — are surprisingly effective asset protection vehicles. Qualified plans generally are protected against creditors’ claims, both inside and outside bankruptcy. IRAs offer more limited protection. In bankruptcy, they’re exempt from creditors’ claims up to a specified threshold: currently, $1,283,025. (However, this limit doesn’t apply to rollovers from qualified plans to an IRA.) Outside bankruptcy, the level of creditor protection varies from state to state.
  4. Irrevocable trusts. By including “spendthrift” provisions in a trust, you can protect the assets against claims by your beneficiaries’creditors. These provisions prohibit beneficiaries from selling or assigning their interests in the trust (either voluntarily or involuntarily). You can also place the trust beyond the reach of yourcreditors, so long as you relinquish any interest in the assets. If, on the other hand, the trust is “self-settled” — that is, if you name yourself as a beneficiary — then the assets generally aren’t protected against your creditors, except as described below.
  5. Domestic asset protection trusts (DAPTs). Permitted in several states, these are self-settled, irrevocable spendthrift trusts that provide protection against your creditors even if you’re a discretionary beneficiary. To use a DAPT, you don’t necessarily have to live in a state with a DAPT law. But you’ll need to locate some or all of the trust assets in one of those states and use a local financial institution to administer the trust. The level of creditor protection varies by state. The main disadvantage of DAPTs is uncertainty over whether they’re enforceable in court, particularly when the grantor is a nonresident.

    A potentially less risky option is a “hybrid DAPT,” which is initially established for the benefit of your children or other third parties. Hybrid DAPTs enable your trustee to add you as a discretionary beneficiary later.
  6. Offshore trusts. If you want an even higher level of protection, consider offshore trusts, which are similar to DAPTs but are established in foreign countries with favorable asset protection laws. Typically, they’re irrevocable for a specified term, enabling you to retrieve the assets down the road when your risk may be lower. An ideal jurisdiction for an offshore trust is one that doesn’t recognize judgments from U.S. courts and whose laws place various administrative obstacles in the way of U.S. creditors attempting to collect debts there.

    Offshore trusts have a shady reputation as vehicles designed to hide assets or evade taxes. But when used correctly, they offer legitimate protection against unreasonable or excessive claims. If you establish an offshore trust or foreign account, you’ll need to file information returns. 

A legitimate tool

It’s important to note that asset protection planning is meant to protect you against unanticipated future claims. It provides you with legitimate methods of setting aside wealth for your heirs, deterring litigants and providing creditors with an incentive to settle.

Asset protection planning is not a tool for evading taxes or other obligations, hiding assets, or defrauding creditors. Indeed, fraudulent conveyance laws prohibit you from transferring assets with the intent to hinder, delay or defraud existing creditors or foreseeable future creditors. To ensure you don’t step over any lines, always work with reputable financial and legal advisors.

The sooner, the better

These six tips are only a few of the techniques available to protect and preserve wealth. Whichever strategies you choose, it’s critical to implement them as early as possible. If you wait until creditor claims are imminent, it’ll likely be too late.

If you have any questions, contact Roberto Viceconte at rviceconte@rem-co.com or (212) 944-4433, extension 2480.

© 2017