Timothy McNeely

Timothy McNeely

If you’re a high-income or high-net-worth individual, you probably know you’re an attractive target for frivolous or unfounded lawsuits in our litigious culture.

But what have you done to reduce your risk of losing your wealth if you get sued? In our experience, far too many affluent families and individuals don’t take necessary measures to protect their assets and livelihoods.

Fortunately, there are many strategies that can safeguard your wealth against those who would unjustly take it. Let’s take a look at the world of asset protection planning and how you can use it to your advantage.

THE AIM OF ASSET PROTECTION PLANNING

Formally, there is no body of law called asset protection planning. The category is actually known as legal risk planning, which falls under the umbrella of risk management (see Exhibit 1).

While there are many strategies for asset protection planning, there are two desired outcomes:

1. Deterring a possible lawsuit before it even begins. The most powerful asset protection plans we’ve seen are never even contested. Litigation is either avoided or everything is settled before a judgment.

2. Motivate creditors to agree to a settlement that’s favorable to you. If a lawsuit does move forward, you want to minimize losses. If there is a judgment, for example, a powerful plan can make it extremely challenging for a creditor to collect the money from you should they win in court. If a creditor knows that the ability for them to collect is highly uncertain, your odds of getting a favorable settlement rise significantly. If a creditor is faced with exorbitant time costs, and therefore financial costs, they will be motivated to settle or even walk away with nothing.

FIRST STEPS

Before you even start asset protection planning, you need to consider the following options first:

Increasing your personal umbrella policy to equal or exceed your net worth, if possible. This is often both highly effective and relatively inexpensive.

Obtaining high-quality business liability insurance if you are an entrepreneur.

TIPS FOR EFFECTIVE ASSET PROTECTION PLANNING

True asset protection planning isn’t about “hiding” your wealth. On the contrary, it must be done transparently and out in the open to be effective. The reason for this is simple: By having everything out in the open, creditors or other parties will quickly grasp how difficult a legal path they’ll have to traverse to get to your wealth. This will do much to deter a lawsuit in the first place or persuade them to settle in a way that’s favorable for you.

Caution: Some strategies touted as asset protection strategies are promoted under the guise of secrecy. These aren’t true asset protection solutions. More likely, they are risky strategies that may be illegal and could land you in serious trouble with the IRS.

Transparency will help you in cases where you must convince governmental authorities of the legitimacy of your motivations. Having a clear and viable explanation of your actions in court will keep you safe from the powers that be.

Another important step: Implement these strategies as soon as possible. In order to be effective, most of these strategies must be done before trouble arises. Otherwise, you risk them being negated by a judge, who may judge them as performed with intent to dodge creditors. You can also be charged with contempt, fraud or civil conspiracy for engaging in “fraudulent conveyance.”

Evidence of intent is very difficult to prove, so judges will look for “badges of fraud,” which may be:

Was the asset transferred to an insider, such as a family member?

Did the person become insolvent because of the asset transfer?

Was the asset transfer hidden from current or potential creditors?

Was there an existing claim at the time of the transfer?

Was there a threat of litigation before the transfer?

Are the assets still available for use after the transfer?

THE THREE KEYS

Your asset protection plan should have three notable aspects:

Flexibility. The plan must be modifiable so it can be adapted to changes in laws and circumstances.

Overlap. Redundancies increase your ability to effectively insulate your wealth. Asset protection can be tackled in multiple ways. For example, some estate planning strategies whose primary goal is to transfer wealth to heirs also provides some creditor protections.

Cost-effective. Some asset protection solutions have upfront costs, including initial planning and implementation. Some will also have ongoing costs. Get a good idea of the full range of these costs before moving forward to determine if the benefits justify the expenses.

FINDING HIGH-QUALITY GUIDANCE

When creating an asset protection plan, it’s imperative you work with an expert you trust — some of these solutions are more solid legally than others, as we’ve demonstrated. Ultimately, you must find someone who is highly capable and who can clearly show you how a solution will succeed in a variety of circumstances. Ideally, your expert will be able to share real examples of how such solutions he/she has recommended have worked in the past with previous clients.

REGULARLY REVIEW YOUR ASSET PROTECTION PLAN

Like any fundamental part of a broad wealth management plan, asset protection plans are not “set it and forget it” solutions. They are dynamic; they must be flexible to compensate for changes in laws or circumstances. You must revisit your plan regularly to ensure you are best protected. Planning experts are constantly seeking ways to effectively shield the wealth of the affluent, while creditors and their professionals are always looking for ways to collect.

An asset protection plan isn’t something you want to create and then let sit on a hard drive for the rest of your life! Any time major circumstances change — such as new tax laws or when your own personal or wealth situation changes — is a time to revisit your plan.

If it’s been more than five years since you last reviewed it, it’s probably time to do so again. If you’re not sure if your plan is structured after your specific goals, consider stress testing it by asking your adviser to review how it is likely to behave in various scenarios you may face in the future.

NEXT STEPS

Contact your financial professional to discuss your asset protection needs and how to address them. It may save you a pile of money someday.

Tim McNeely is CEO of The LifeStone Companies. He works with a select group of high-net worth individuals and families by helping them make smart decisions with their money. You can reach him at 661-368-0947, via email at tim@lifestoneco.com or on Twitter @timmcneely. If you email him, he will send you a copy of “Becoming Seriously Wealthy” for free.

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