Five Key Action Steps to Protect Assets
If you’re one of the many business owners who lack an asset protection plan—or you’re curious whether your existing plan is up to snuff—consider these key steps.
1. Get protected before a claim against you is made. You can do a lot to protect your wealth before a liability arises—but thanks to a concept known as “fraudulent conveyance,” very little after. As with insurance, the time to have asset protection in place is well before you need it—or even think you might need it.
2. Cover the basics. Evaluate your liabilities and other related insurances and maximize them as best you can. The fastest, easiest—and cheapest—move you can make is to take out a large umbrella policy to safeguard assets. Another simple but powerful strategy is to place your assets in someone else’s name, such as your spouse’s. If you’re sued, those spouse-controlled assets are often untouchable.
WARNING: Be sure you have a great deal of trust in your spouse and your marriage before transferring ownership of assets to him or her. In a divorce, your spouse could potentially walk away with those assets—or you could be forced to fight for them at least as hard as you’d fight a creditor who went after them.
3. Consider advanced asset protection strategies. The Super Rich and ultra-wealthy business owners often take sophisticated steps to protect their wealth once they’ve covered the basics. Options to consider include:
- Equity stripping. Some ultra-wealthy business owners protect their assets from unjust and frivolous lawsuits by using bank loans to strip out the equity. Conceptually, it’s simple. You take out a loan from a bank and secure the loan with the assets (such as equipment or real estate). This way, the bank has preference over judgments obtained by creditors. For creditors to get to the encumbered assets, they would first have to pay off the bank loan.
- Captive insurance companies. A captive insurance company (aka “captive”) is a closely held insurance company set up to insure the risks of the parent company. The owner of the parent company wholly owns the captive insurance company. Therefore, you—the business owner—control the operations of the captive insurance company (including underwriting, claims decisions and the investment policy).
- Onshore and offshore trusts. Currently, a number of states allow for domestic asset protection trusts, while countries such as the Bahamas, Belize, The Cook Islands and Nevis (among others) are good locations for offshore trusts. Assets placed in these are generally out of reach of creditors. That said, the rules governing these trusts vary greatly depending on the jurisdiction you select. Understanding the specifics of the jurisdiction is therefore critical.
MORE STRATEGIES: Check out the sidebar below for a sample checklist of other asset protection action steps to consider taking.
4. Be sure your attorney or other professionals are qualified to help you protect your assets. Far too many financial professionals aren’t in a position to provide guidance on and implementation of many asset protection solutions. Take equity stripping, for example. Consider that fewer than 10 percent of financial advisors or the specialists they work with are familiar with equity stripping, and that less than 1 percent have ever provided it to a client (see Exhibit 3).
