Asset protection is an essential part of any long-term financial strategy. Helping your clients protect their savings, properties, and business interests will give them financial freedom. A successful asset protection plan lets them live the life they want.
But what is asset protection, and how can it help your clients?
What is Asset Protection?
A legal issue or judgment can drain accounts and strain even high-income earners. An asset protection plan allows asset holders to distribute cash and other valuables so that creditors cannot claim them in any court settlement. A doctor involved in a malpractice lawsuit would benefit from asset protection. By giving ownership of vacation homes, investment accounts, and valuable collectibles to certain relatives, he can avoid losing them if he loses the case.
Some assets receive automatic protection from collection attempts. US federal bankruptcy law does not allow creditors to collect the following property:
- A family’s primary home
- A primary vehicle
- Furniture, home maintenance tools, and decorative items
- Tools used for a job
- Retirement accounts like 401Ks or IRAs
If your client is found partially liable in a lawsuit involving a corporation, limited partnership, or limited liability corporation, there are laws in every state that protect individual assets in these cases. However, the value of the protected items is subject to a judge’s interpretation. To ensure an item or piece of property will be safe in the face of legal actions, include them in an asset protection plan.
Asset protection planning should start before legal troubles develop. Once involved in a court case, transfers of wealth and property might look like attempted concealment, which is a federal offense.
What Asset Planning is Not
Beyond obvious cases of attempted fraud or tax evasion, asset protection planning is often confused with other financial strategies.
- An asset protection plan does not replace any insurance policy. While having a plan will ensure a person’s wealth ends up in the right hands, it will not protect businesses, homes, or other property from loss, damage, or accident.
- A protection plan does not allocate funds for legal defense. In the case of a lawsuit, the client will still have to pay their lawyer and court fees.
- Once a property is assigned to a trust fund or other asset protection strategy, it technically no longer belongs to the client. That means the property may not be sold, customized, or used in certain ways.
- The use of offshore or international bank accounts to hide assets is not a legal asset protection strategy. If discovered, a judge will order the return of off-shore assets to the United States.
- Bankruptcy is not a natural part of asset protection. An asset protection plan will keep a property in friendly hands during bankruptcy proceedings. However, moving assets during an active bankruptcy case is attempted fraud. The judge can easily reverse transfers and might add a criminal case to the existing financial problems.
Customizing a Protection Plan
Financial needs change throughout life. Help your client understand how their current actions contribute to their future goals when starting the planning process.
- Those under the age of 30 may not think they have much to protect. However, if they are motivated to achieve, developing an asset protection plan early prepares them for financial success.
- Asset protection isn’t just for doctors, lawyers, and those employed in high-finance professions. Artists, small business owners, and entrepreneurs of all kinds can benefit from a protection plan.
- Conduct asset reviews regularly. As net worth grows, planned protections will need adjustments.
- Combine asset protection with estate planning. Trust funds are a great way to make sure your clients’ dependents will have access to the wealth they are creating.
- Keep it simple. Complex protection plans can cause confusion and might be viewed as attempted fraud by some judges. If your client is called to give a legal statement on the state of their holdings, a simple plan makes giving an honest statement easier.
Annuities are an effective way to keep assets safe from legal demands. Speak with your clients about how annuities and other financial strategies can protect their personal and business investments.