As your net worth increases, so does the complexity of managing your assets. Indeed, the wealthier you are, the more likely it is that predators and creditors will come after your hard-earned financial resources.
Unfortunately, failing to put the right precautions in place can be costly. In fact, one survey from Chubb found that 10% of high-net-worth respondents had to pay at least $100,000 in legal judgments, in many cases due to improper planning.
Thus, as you accumulate wealth, you must also be mindful of protecting it. In this article, we’ll explore a variety of asset protection strategies that can help you safeguard your wealth, so you can grow and preserve it for generations to come.
Consider the following asset protection strategies to protect your wealth as your net worth grows:
Insurance plays a crucial role when it comes to protecting your assets. Without the right coverage, unforeseen events such as accidents, illnesses, or property damage can lead to substantial financial loss.
Thus, it’s important to review your policies regularly to ensure you’re protecting your assets from risks outside of your control.
Life insurance can be a powerful asset protection strategy, offering several benefits that contribute to wealth preservation and financial security. Yet only 52% of Americans have life insurance, according to data from LIMRA.
Life insurance helps ensure your dependents are financially secure in the event of your untimely death by providing a guaranteed payout. This payout can be used to settle outstanding debts, fund funeral costs, and cover daily living expenses, so your family doesn’t need to tap into other resources.
In addition, the beneficiaries you list on your life insurance policy are the only ones who can receive the death benefit. That means creditors can’t seize it, even in the event of bankruptcy.
Lastly, life insurance can be a strategic tool for estate planning, especially if your net worth is substantial. Your beneficiaries can use the death benefit to pay estate taxes, preserving more—if not all—of your estate’s value.
Consider consulting with an insurance specialist or fee-only financial planner to determine the right amount of life insurance coverage for your situation. Also, be sure to review your policy regularly to ensure it aligns with your changing financial circumstances.
Excess Liability/Umbrella Insurance
Excess liability, or umbrella insurance, provides additional coverage beyond the limits of your standard insurance policies.
For example, if you’re at fault in a car accident that results in serious injuries, your standard auto insurance may not cover all the medical bills. An umbrella policy can cover the excess costs, protecting your personal assets up to the amount in your policy.
Typically, umbrella insurance becomes more valuable the wealthier you are, since high-net-worth individuals tend to be more vulnerable to lawsuits and other claims. These policies are usually sold in $1 million increments, with coverage limits starting at $1 million.
It’s generally a good idea to purchase an umbrella policy when your assets exceed your existing liability coverage. For most people, this is when personal assets exceed roughly $250,000 to $300,000—the average liability limit for auto and homeowner’s insurance.
Of course, each person’s situation is unique, and coverage needs will vary. As your net worth grows, be sure to review your liability coverage periodically to ensure you’re properly protecting your assets.
Cybercrime & Identity Theft Insurance
In today’s digital age, cybercrime and identity theft are growing threats, especially to those who have the most to lose. While there are steps you can take to protect your identity and finances from cybercriminals, a cybercrime and identity theft policy can serve as an additional safeguard.
For instance, cybercrime insurance can cover financial losses resulting from online fraud, data breaches, and cyber extortion. Meanwhile, identity theft insurance covers the costs associated with restoring your identity and repairing credit reports.
As you evaluate potential asset protection strategies, you may want to consider adding cybercrime and identity theft insurance to your financial plan. These polices can be especially valuable if you have an extensive digital presence and/or have been a victim of cybercrimes in the past.
#2: Asset Location
Strategic asset location is another crucial aspect of wealth protection. Not only can this strategy help maximize your after-tax investment returns, but it can also protect your assets from potential creditors in many cases.
Qualified Retirement Accounts
Qualified retirement accounts such as 401(k)s and IRAs aren’t just essential tools for securing your financial future. They also provide unique asset protection benefits.
By strategically locating assets in these types of accounts, you can defer your tax burden and potentially maximize your investment results over time. This can significantly boost your wealth, providing you with a financial safety net in your retirement years.
In addition, the Employee Retirement Income Security Act (ERISA) of 1974 protects most employer-sponsored retirement accounts from being seized by creditors, even in the event of bankruptcy. That means your retirement savings can remain intact if you become the target of a lawsuit or liability claim.
In addition to being practical estate planning tools, trusts can also be efficient asset protection strategies.
When you establish a trust, the assets you place within it technically belong to the trust, not to you. This separation of ownership can protect your assets from being seized by creditors in the event of bankruptcy or lawsuits.
In addition, many trusts include a spendthrift clause, which prevents your beneficiaries from selling their interest in the trust or using it as collateral for a loan. This, in turn, helps protect the trust’s assets from your beneficiaries’ creditors.
It’s important to note that the effectiveness of trusts as an asset protection strategy can vary depending on your personal circumstances and state laws. Be sure to consult with a fee-only financial planner or estate planning attorney, who can help you identify the best strategies to protect your wealth.
Family Limited Partnerships (FLPs) and Limited Liability Corporations (LLCs)
Many wealthy families set up family limited partnerships (FLPs) and limited liability corporations (LLCs) to exclude certain assets from their taxable estate. However, FLPs and family LLCs can also be useful asset protection strategies since they protect family assets from creditors and possibly even divorce.
Once family members contribute assets to an FLP or family LLC, the family no longer owns them. Instead, each family member holds units or membership interests in the new entity, thereby limiting member liability in lawsuits and other claims.
FLPs and family LLCs can be complex, and their legal treatment often varies by state. Be sure to consult an expert to see if these strategies are right for your personal situation.
#3: Asset Titling & Estate Planning
Lastly, the way you title your assets can have meaningful implications for your estate plan and the long-term preservation of your wealth. Indeed, even the best estate plans can be undone with improper titling, according to JPMorgan.
Certain forms of asset titling, such as joint ownership with rights of survivorship or transfer-on-death designations, allow assets to pass directly to your named survivor or beneficiary upon your death. This allows the asset to bypass the often lengthy and costly probate process.
Some forms of asset titling also offer protection from creditors. For example, in many jurisdictions, assets held in tenancy by the entirety (a form of ownership available to married couples) are protected from the creditors of just one spouse.
Ultimately, the best approach to asset titling depends on your individual circumstances and goals, as well as the laws that govern these asset protection strategies. Be sure to work with a fee-only financial planner or legal expert, who can help guide you through this process.
Chladek Wealth Management Can Help You Identify the Right Asset Protection Strategies for Your Financial Goals
The more money you have, the more important it is to protect it. By implementing the right asset protection strategies now, you can safeguard your hard-earned wealth so it can continue to grow and serve you over time.
As a fee-only financial planner, Chladek Wealth Management can help you develop a plan that stands the test of time, so you can confidently achieve your financial goals and aspirations. If you’re interested in learning more about how to protect your growing wealth, we invite you to schedule your Free Financial Assessment today.