Knowing how to protect your assets and estate is vital as a high-net-worth individual. After all, the more money you earn, the more you’ll discover that there are numerous creditors, lawsuit plaintiffs, and others who want to take that hard-earned cash.
Things can get complicated, however, because there are multiple asset protection strategies you can pursue. Some of these are certainly better than others, and if you’re new to this topic, you might not know which to use. Let’s break down the good, bad, and ugly of asset protection strategies and explore which ones you should prioritize with Dominion’s help.
Excellent Asset Protection Strategies
The absolute best asset protection strategies include:
- Offshore asset protection trusts
- Family limited partnerships
- Certain insurance policies
However, note that these strategies only protect certain types of assets or are appropriate in some situations.
Offshore Asset Protection Trusts
Offshore asset protection trusts are specialized vehicles where you place assets to protect them from legal threats, creditors, and more. When you put assets into such a trust, you no longer own them, so a creditor or court can’t order you to give those assets up for whatever reason – it’s not in your power to comply, even if you wanted to.
Even better, a US court will not have the jurisdiction to order the trustee of your asset protection trust to give up the assets either. Since the trust is offshore, meaning that it’s in a jurisdiction other than your own, it won’t be beholden to US courts or case precedents.
Because of this, it’s far superior compared to a domestic asset protection trust. Even if your domestic asset protection trust says that it’s irrevocable and can’t be changed, it’s still possible for a motivated judge to break down the proverbial walls of your trust fortifications and get to the goods within.
How Does an Offshore Asset Protection Trust Work?
An offshore asset protection trust works similarly to other trusts, featuring a grantor (you), the trustee, and any beneficiaries. The key difference is that it’s set up or drafted in some other jurisdiction than your home jurisdiction, like Nevis, the Cook Islands, Panama, or elsewhere.
The offshore aspect of the trust is the key element. It prevents it from being subject to US court orders or rules. By the same token, an offshore asset protection trust isn’t as vulnerable to creditor claims against your wealth or estate. Sure, a creditor could try to convince an offshore asset protection trust trustee/manager to give up your wealth, but that trustee wouldn’t have any reason to do so.
It's because of these reasons that high-net-worth individuals often use offshore asset protection trusts to defend their estates for decades. If you set up your trust properly, with the assistance of Dominion, you can even invest your assets smartly enough that they build up wealth over time (rather than just sitting in the trust doing nothing).
Limited Liability Companies
While offshore asset protection trusts are the overall best tools for asset defense as a high-net-worth individual, you should also look into limited liability companies if you haven't already.
An LLC limits your personal liability related to lawsuits or creditor claims against your company. When you form an LLC, any lawsuits against your company or bills against your company can’t be brought against you as well.
Say that an injured customer blames one of your products for their injuries and wants to sue you for medical damages. They can sue your company, but any assets under your personal name might be safe if the lawsuit is successful.
LLCs rarely stand up to any legal scrutiny, however - even a single instance of “piercing the corporate veil” (like swiping your business card at a gas station for personal use) completely invalidates this protection. So, unless you plan on never using your personal cell phone for business work, you shouldn’t regard your LLC as an asset protection plan. It’s just an efficient business entity.
Still, setting up an LLC should be one of the first things you do as an aspiring or initially successful entrepreneur thanks to its structural advantages. Of course, you can also set up different types of companies as your business expands and as you bring more people into the fold, like corporations.
Family Limited Partnerships
Family limited partnerships or FLPs are somewhat similar to LLCs, though they are meant for family members who want to go into business together. Put simply, with an FLP, family members can pool funds together to create a new business. The creators of an FLP can determine things like:
- Which family members/investors have control over the company
- Who receives distributions or dividends from the company and its success
- And more
Family members can be made limited partners in an FLP, and an FLP can be used to manage estate taxes. Most importantly, you can use an FLP to determine who gets ownership or control of the business after you and/or your spouse passes away. Thus, an FLP could be the prime tool to protect your estate if you want to pass down the family business to the right people.
An individual wants to establish a luxury apartment complex, a project estimated at $1 million, including working capital. The projected annual income is $200,000 before interest, mortgage payments, and taxes.
With a required down payment of 50% ($500,000), they decide to invite family members to invest. An FLP is created, issuing 5,000 limited partnership shares at $100 each.
The agreement stipulates a minimum six-year holding period for these shares and a 70% payout of cash earnings as dividends. The initiator, as general partner, invests $50,000 for 500 shares, with the rest purchased by family members.
This structure provides the FLP with the initial $500,000, allowing the general partner to secure a mortgage for the remaining amount.
As the venture generates rental income, the mortgage is gradually paid off, profits and dividends are distributed, and all family members share in the financial success.
Insurance Policies
Insurance policies, of course, can also be good asset protection tools to have in your repertoire. A comprehensive insurance policy can even be thought of as a necessary step if you are a certain type of professional, like a surgeon.
Practically all surgeons are required to have malpractice insurance policies. If someone sues you because they blame you for injuries or mistakes, your malpractice insurance policy will prevent you from having to pay everything they win in a lawsuit (if they happen to win, that is).
Insurance policies can also be purchased wisely. For instance, you can purchase an umbrella policy and have several different insurance coverage types at once. That can be very effective for entrepreneurs or business owners who want to successfully shield themselves against many kinds of claims.
While these are all excellent asset protection strategies, remember that they are best used in combination with each other. No single asset protection strategy will be able to defend you from every possible threat or hazard you encounter, especially if you plan to grow your business or brand around the world.
When you contact Dominion, we’ll go over all the different tools and strategies you can employ to maximize your defense and wealth generation.
Bad Asset Protection Strategies
Other asset protection strategies are less than stellar. These include:
- Domestic asset protection trusts
- Prenuptial agreements or prenups
- Retirement funds or accounts
- Annuities
- LLCs, which don’t offer true asset protection
While these instruments have some limited use cases, you can't rely on them for well-rounded, long-term asset protection against all manner of legal threats you might encounter as a high-net-worth individual.
Domestic Asset Protection Trusts
Domestic asset protection trusts are much more limited, and much more vulnerable, counterparts to offshore asset protection trusts. As their name suggests, domestic trusts are drafted in the US, so they are completely subject to US courts and legal jurisdictions.
You can already see the problem. If a court orders you to access the assets within a domestic trust, you’ll have no choice but to do so. Even if you don’t have ownership of the assets, any trustee you’ve appointed will have to abide by court orders. Therefore, domestic asset protection trusts are far from reliable when it comes to safeguarding your estate against lawsuits and creditors.
You can still use domestic asset protection trusts for some limited cases, especially in terms of estate planning. But these should not be used as your primary tools against legal attacks or creditor-related threats to your estate.
Prenuptial Agreements
Prenuptial agreements are special contracts you sign with your fiancé. When you and your fiancé sign a prenup, you both agree on things like:
- Who gets what in terms of wealth and assets if you both divorce
- Whether or not you split each other’s wealth during marriage
- And so on
When drafted properly, a prenup could prevent you from having to pay your divorcing spouse any of your income or net worth. However, prenups are far from ironclad or airtight, and certain judges can interpret prenuptial agreements such that you still have to pay your ex-spouse a certain proportion of your estate. Don’t rely on these to totally guard your assets in the event of a divorce.
Retirement Funds and Accounts
Retirement funds and accounts are popular choices to “protect” your assets until the time you retire. In a nutshell, you put money into these special accounts, where they accumulate value or appreciate based on how you invest that money.
Retirement funds and accounts are great for protecting or, more specifically, growing your assets so that you have a good nest egg when the time comes for you to retire. Still, just like the above less-than-stellar asset protection strategies, retirement funds and accounts shouldn't be relied upon to save your wealth against lawsuits, creditors, ex-spouses and divorce settlements, and so on.
Use these as ancillary tools in conjunction with asset protection trusts for the best results.
Annuities
There are also annuities, which are financial contracts signed with insurance companies. In exchange for paying a premium, you get guaranteed payments sometime later. These can be helpful when funding your retirement, but aren’t the best choices for overall protecting your assets or wealth against the financial dangers you might encounter as a high net worth individual.
Just Plain Awful Asset Protection Strategies
There are a few truly terrible asset protection strategies and methods you can pursue, including:
- Homestead exemptions
- Emergency money your asset transfers to a friend or family member
However, given these strategies’ weaknesses, we can’t recommend them except in very specific, limited use cases. And in the case of emergency transfers, we can’t recommend that in any situation whatsoever!
Homestead Exemptions
Certain states have so-called homestead exemptions, which allow you to register your primary residence as a “homestead.” When you do this, your homestead can’t be claimed by creditors or lawsuit plaintiffs, as doing so would theoretically leave you without a home.
However, you can only protect one resident as your homestead, and you need to prove that you live in the property as your primary residence for it to qualify. These exemptions don't protect the rest of your estate or assets, and they are only available in some US states.
Because of these weaknesses, you shouldn't rely on homestead exemptions as cornerstones of your asset protection strategy under any circ*mstances (especially when other asset protection strategies can do the same thing but better).
Emergency Transfers to a Friend or Family Member
Emergency funds or asset transfers to a friend or family member aren’t just risky. They are potentially illegal!
In a nutshell, if a court thinks that you transfer money or ownership of property to someone else right before you have to pay a bill or damages from a court case, you could be accused of fraudulent conveyance. Fraudulent conveyance means you undertake a transaction with the intent of defrauding someone you owe money to.
Here's an example: you owe a creditor $10,000, and you know that they will send you the bill next week. To avoid paying this bill, you give your brother $10,000 in money right away, so that when a creditor comes knocking, you don't have enough cash left over to pay the bill.
The creditor will sniff that out, take it to a judge, and then you'll have to pay the $10,000 anyway, plus extra fees for trying to break the law. When it comes to asset protection, early strategies and investments are always better than last-minute fixes. If you have to scramble to protect your money from a creditor or lawsuit, you're (most likely) already too late.
Contact Dominion Today
At the end of the day, the best thing you can do to protect your assets from now into the future is to set up an offshore asset protection trust with the assistance of Dominion. Our experienced, highly knowledgeable loan officers and financial advisors are experts in this arena – we've helped business owners and other high-net-worth individuals just like you protect their assets in the past.
More than that, we can help you craft a perfectly tailored, individualized asset protection strategy for whatever your goals might be. Let’s get started today – contact us to learn more.
