What Is Asset Protection Planning?

A critical component of planning your estate is ensuring your property goes to the people or places you want it to. However, another important strategy is protecting your assets from outside sources and events, including former spouses, creditors, and lawsuits.

In this article, we’ll highlight the role of asset protection in the context of estate planning, including a detailed definition and an outline of the various strategies you can use to carry out this practice. We’ll also explain how a professional can help protect your property and design your holistic protection strategy that aligns with your estate plan.

Overview of Asset Protection Planning

Asset protection planning is a holistic strategy that allows you to secure your assets from creditors, former spouses, or litigation. If you have valuable investments or are a high-net-worth individual, your assets will face significant scrutiny in the event of your passing. In some cases, they might also be a target for lawsuits or creditors. Specifically, these individuals or organizations may want to stake their claims and prevent your property from going where you desire.

As mentioned, asset protection is an effective strategy if you have a high net worth, own valuable securities, or work in a profession with a risk of scrutiny. According to the American Bar Association (ABA), some common examples include healthcare positions, real estate investors, or entrepreneurs.

Types of Asset Protection Strategies

Though asset protection is a broad concept, there are several different approaches you or an estate planner can put into practice. While one of the most common is a trust, other options, such as establishing a limited liability company (LLC) and insurance, are also effective.

Trusts

One of the most beneficial techniques for safeguarding your wealth in your estate is creating a trust. This is a legal arrangement where you place assets in the care of another individual or organization, known as a trustee, to pass to a beneficiary.

There are two types of trusts where you can place your assets, revocable and irrevocable. As their names suggest, you can cancel the former while the latter is permanent. For asset protection purposes in estate planning, the most ideal is an irrevocable trust. This is because your assets now legally belong to an intermediary in the name of any beneficiaries you designate. Since you no longer have access to them, it is more difficult for entities, such as creditors, to come after them.

If you want to protect your assets while alive, you can also set up an asset protection trust. This is a type of irrevocable trust where you also act as the beneficiary, receiving your money after a specified time. These can be foreign (held in other countries) or domestic. Per the ABA, only 14 states, allow the creation of domestic asset protection trusts. Therefore, it’s a good idea to consult a legal professional and your state’s laws to verify its viability.

LLCs, Corporations, and Family Limited Partnerships

Another typical asset protection strategy is establishing an LLC or corporation. With this, you can transfer ownership of certain assets, such as real estate, to your business. Therefore, this creates a buffer between what you own, which could be vulnerable to lawsuits or creditors, and what your company owns.

You could also create a family limited partnership (FLP), a type of company that allows you to give money to relatives and fund business ventures. Like an LLC, this divides your personal assets from what the entity owns, affording you protection from creditors.

Tenancy By the Entirety

Tenancy by the entirety (TBE) is an arrangement where you and your spouse hold full ownership over a piece of real estate. Then, if one of you passes away, the other retains their 100% stake, thus allowing the property to avoid entering probate. Because of this, the surviving spouse can’t lose their ownership if outside entities or individuals attempt to use the home to pay off debt in the wake of the other person’s death.

Prenuptial Agreement

Signing a prenuptial agreement before marrying is another way to protect your wealth. If you get a divorce, a prenup acts as a written contract stipulating the ownership rights and division, if any, of assets and clearly outlines boundaries for debts.

While prenuptial agreements can vary, they can be a good asset protection strategy because they specifically state financial parameters for each person. For instance, if your spouse tries to sue you for assets they believe they have rights to, your signed prenup acts as a legal device to protect you and your property.

Umbrella Insurance

Holding an umbrella insurance policy is a method of securing your assets. In short, this is a type of insurance that exceeds other insurance — including auto, home, and renters — when you must cover additional costs. If you see any potential of getting caught up in lawsuits where your assets may be at risk or you could incur high legal fees, an umbrella policy can provide coverage and a layer of protection.

Qualified Retirement Plans

Allocating funds to retirement plans can also grant you protection from the efforts of debtors, creditors, and businesses. Specifically, the Employee Retirement Income Security Act of 1974 (ERISA) exempts qualified retirement plans from creditors and debtors. Qualified plans include defined benefit plans, such as pensions, and defined contribution plans, such as 401(k)s and some 403(b)s.

Retirement accounts not covered under ERISA can be fair game for outside sources. Examples include IRAs, Roth IRAs, 457(b)s, and some types of 403(b)s. We recommend consulting with a financial professional or a plan administrator to learn if ERISA covers your plan.

If you have a plan that qualifies, you can protect a portion of your money by contributing to your account. But keep in mind that there are annual contribution limits, and you won’t be able to see your money until you near retirement without a penalty. Even so, this can be an advantageous place to store funds because of the growth potential from compound interest and investments. They also allow you to designate beneficiaries. So, if you pass away before seeing your money, it can go to an individual, organization, or trust.

How Professionals Can Help

In the previous section, we outlined several strategies people use to protect their assets. However, putting them into practice can be overwhelming and challenging for the average person to handle alone. Many involve nuanced legal agreements or vehicles and may require a certain understanding to set in motion.

For that reason, it’s smart to seek the services of an estate planner, legal professional, or financial advisor. Depending on the complexity of your situation, it may even make sense to have all three.

For example, an estate planner can help ensure your assets go where you envision them going and not into the hands of others. On the other hand, an attorney would be able to assist you with putting together legal documents and establishing businesses. Finally, a skilled financial advisor would likely be able to provide insight into asset allocation strategies and the nuances of which retirement plans would qualify for exemptions.

Frequently Asked Questions

What is an example of asset protection in practice?

Consider that you’re a wealthy property owner, and one or more tenants decide to sue you. If you lost, you could stand to lose hundreds of thousands. But because you’ve transferred ownership of your real estate to an LLC you own, you won’t personally be affected financially by the lawsuit. Rather, your business takes on the burden of the lawsuit and the following decision.

What is the difference between estate planning and asset protection?

Both are important concepts and involve protecting your assets and, in some cases, allocating them so that they’re safe. However, estate planning relates more to ensuring your wealth takes a preferred journey after you pass away, whether that means going to family members or somewhere else. Asset protection planning, conversely, involves keeping your wealth safe both while you’re living and in the estate process through various methods. An effective protection plan will overlap with your estate plan, as it means your money can go where you want and not to debtors or outside parties.

Which states allow irrevocable domestic trusts to protect your assets?

According to the ABA, there are currently 14 states that let you establish a domestic asset protection trust, including:

• Alaska
• Delaware
• Hawaii
• Missouri
• Nevada
• New Hampshire
• Ohio
• Oklahoma
• Rhode Island
• South Dakota
• Tennessee
• Utah
• Virginia
• Wyoming