November 08, 2018
One of the essential components of any estate plan—or wealth management plan in general, for that matter—is wealth preservation. To be able to pass on your assets to future generations, you need to ensure that they are properly safeguarded in the meantime. While many people worry that a volatile market environment or bad investment decision will cause them to lose a substantial portion of their assets, as people grow wealthier, they also become more susceptible to lawsuits that attempt to capitalize on their hard-earned wealth.
Fortunately, many wealth transfer concepts also have wealth protection benefits. Thorough estate planning helps preserve your family’s wealth by removing your name from your assets and putting them into legally-protected vehicles, such as trusts or limited liability entities. Certain types of insurance policies can also protect your wealth in the event legal challenges arise. As you go through the estate planning process, the following strategies can help ensure that your wealth isn’t unnecessarily compromised during your lifetime.
1. Asset Ownership
Retitling your assets can help protect them from being seized in the event you become the subject of a legal dispute. While it may not be possible or practical to retitle all of your assets, certain property, such as a home or rental property, can be protected by removing your name from public record.
If you’re married, one strategy you can utilize in certain states is titling your assets as tenants-by-the-entirety with a spouse. Under this type of ownership, the surviving spouse immediately becomes the sole owner of the asset when the other spouse dies. Moreover, assets owned by tenants-by-the-entirety are typically exempt from creditors if a judgement is made against one spouse for his or her sole debts or liabilities. In certain cases, assets owned in qualified retirement plans and IRAs (in some states) may also be protected.
Life insurance can help minimize estate, gift and income taxes when your assets are transferred to your heirs while providing a lump sum of cash to your beneficiaries when you die. Additionally, other forms of insurance, such as property, casualty and liability, offer protection against many legal challenges. If you’re in a profession that tends to be highly exposed to liability and frivolous lawsuits, ensuring that you’re properly covered can be a prudent first line of defense.
3. Limited Liability Entities
Creating a limited liability entity is an effective way to separate your personal assets from those of your business or other income stream, such as a rental property. One of the advantages of doing so is that liability for activity within the entity is generally limited to the assets of the entity. On the other hand, if you fail to separate your assets, a legal dispute brought against your business could cost you everything, as creditors may be able to seize your personal and business-related assets.
4. Irrevocable Trusts
Once you transfer assets to an irrevocable trust, the trust becomes the asset owner and you no longer control how those assets are distributed. Because the trust owns the assets, creditors cannot access them to satisfy a judgement, even if you establish yourself as the beneficiary. However, assets that have been distributed from the trust to beneficiaries will be subject to claims.
5. Asset Protection Trusts
An asset protection trust can be held domestically or offshore. It is an irrevocable, self-settled trust and is one of the strongest tools available to protect your wealth against creditors. While the trust may allow for occasional distributions, these distributions can only occur at the trustee’s discretion. Additionally, since domestic asset protection trusts are only allowed in certain states, they may not be a viable strategy for many people.
Your assets may be compromised for a variety of reasons outside your control, which is why wealth preservation strategies are a critical component of your estate plan and overall wealth management plan. Whichever strategy or combination of strategies you choose to employ, it’s important to implement it well before any legal action is brought against you, as doing so after the fact may present a new host of challenges. Because you have a number of options available to you, discussing these strategies with your wealth advisor or estate planning attorney can be a helpful first step in protecting your family’s wealth.
Cathy Schnaubelt is a senior wealth strategist for CIBC Private Wealth Management's Houston office, with more than 35 years of industry experience. In this role, Cathy is responsible for the development of integrated wealth management solutions and provides comprehensive estate and financial planning services to high net worth clients.
This article originally appeared on Forbes.com on Oct. 4, 2018.
Susan Farris, CFA
August 05, 2016
May 25, 2017
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