For most successful entrepreneurs, doctors, and other high-net-worth individuals, asset protection requires a multilayered approach. Although some tools are certainly stronger than others, it's oftentimes wise to use multiple types of asset protection to double down on security and guarantee that lawsuits, creditors, and other greedy opponents won't get access to your liquid capital or real estate.
Today, let's break down some of the most common asset protection examples and examine whether those strategies and tools are truly effective or little more than wastes of your valuable time.
Why Opt, for Asset Protection?
Asset protection isn't just reserved for the super-rich. In today's world, anyone who owns assets faces risks. A single lawsuit has the power to erase a lifetime of savings. Individuals working in high-liability professions such as medicine, law or construction face risks.
Minor incidents or disputes can spiral into expensive legal conflicts. Additionally, asset protection is a strategy. By planning, you can safeguard your assets from events like divorce, business setbacks or economic fluctuations.
This offers a sense of security knowing that your earned wealth is protected regardless of lifes uncertainties. The objective is to maintain your heritage and ensure that your assets are passed down to your family of being claimed by creditors or legal expenses.
Insurance Policies
Insurance policies are popular defensive tools for doctors, business owners, and other professionals. In a nutshell, the right insurance policy will cover the legal fees or damages you may be forced to pay in the event of an adverse legal judgment.
In theory, an insurance policy will take the brunt of a financial attack, leaving your actual valuable assets safe. For example, if you have malpractice insurance as a surgeon, your personal assets will be safe if a patient sues you for injuries or pain.
Many professionals also take out umbrella insurance policies, which supplement any liability coverage you already have with a homeowner’s policy, auto insurance policy, or so on. Umbrella insurance policies can be effective if you have multiple possible avenues of liability you need to account for.
Is it Effective?
In general, insurance policies are good ideas. But they aren’t truly effective for comprehensive asset protection.
Most insurance policies only kick in under specific circumstances. Furthermore, insurance policies are limited by design. Say that you have a malpractice insurance policy that covers you for $250,000. What happens if you are sued by a patient for $2 million instead?
It’s best to think of insurance policies as supplementary asset protection tools rather than cornerstones of your overall strategy. They can be useful, but they should be leveraged in conjunction with other, more robust methods and plans, which Dominion can help with from day one.
Retirement Plans
Many high-net-worth individuals also use retirement plans for asset protection. That's because many retirement plans, like employer-sponsored 401(k)s or IRAs/individual retirement accounts can't be accessed by creditors, even if you are found responsible for various claims or debts.
Say that you’ve saved up millions of dollars in a 401(k). However, you default on a loan. If a creditor comes after you for money, they shouldn’t be able to access the funds in your 401(k) according to state and federal laws.
Is it Effective?
Sometimes, but like with insurance plans, retirement plans shouldn’t make up the primary element of your asset protection strategy.
That’s because retirement plans can be breached by creditors under some circumstances; for instance, if you owe back taxes or your alimony payments are past due, creditors can still take money out of your retirement account, particularly if it’s an IRA or some other self-managed plan.
Prenuptial Agreements
Prenuptial agreements or prenups are popular among people who start engagements with significantly more money than their soon-to-be spouses. Put simply, a prenuptial agreement outlines asset and liquid capital ownership in the event of a divorce.
So if you sign a prenup with your fiancé/e, you can have a legally binding document that says they do or do not get a certain amount of money from you, they do or do not get ownership of certain assets you already owned prior to the marriage, etc.
Is it Effective?
Not really. Though prenuptial agreements are supposed to be legally binding, case precedent and the reality of the legal system in America mean that prenups are only as effective as the judges that enforce them.
It’s more than possible for a judge, for example, to side with your soon-to-be ex-spouse during a divorce and decide that your prenup favors him or her instead of you, regardless of what the letter of the prenuptial agreement says.
Therefore, you shouldn’t only rely on a prenup to protect your assets in the event of a divorce. There are plenty of other instruments that will provide better long-term benefits and greater peace of mind.
Limited Liability Companies
As you research different asset protection tools, you might come across limited liability companies or LLCs. Limited liability companies are popular business structures because they allow you to clearly define managerial duties and rewards among yourself and fellow business owners or partners you work with.
However, limited liability companies also theoretically separate business and personal liability in the event of a lawsuit. For example, a customer might decide to sue your company. But if your company is a limited liability company, your personal assets will be safe and secure if the lawsuit is successful. Only the company’s assets will be at risk.
Is it Effective?
No. Despite what you may think, an LLC is not truly a defensive instrument you can rely on, even in the best of circumstances.
It’s all because skilled lawyers can prove that, at some point in the past, you likely mixed your business and personal assets. In this way, they will claim that you “pierced the corporate veil.” They will argue, oftentimes successfully, that there’s no true legal distinction between you and your business.
This is more common than you may think. For instance, if you’ve ever used your corporate bank account for a personal purchase, no matter how small, a lawyer can show that you should personally be liable for any expenses or damages incurred.
If they are successful, a judge can order you to pay court fees, creditor bills, and other expenses out of your personal accounts and assets. With that in mind, never rely on an LLC to protect your assets.
Domestic Asset Protection Trusts
Domestic asset protection trusts are fiduciary arrangements you can set up in a handful of US states. These operate by taking ownership of key assets in your possession. In doing this, even if a lawsuit against you is successful, the court can’t order you to pay debts or court fees with assets that you don’t legally own.
Is it Effective?
No, unfortunately. Though domestic asset protection trusts have potential, that defensive potential is limited by various federal and state laws in addition to previous case precedents. Over the years, it has become clear that the US is not very friendly to domestic asset protection trusts.
If a judge is properly motivated, and if a creditor is aggressive enough, it will be trivially easy for your domestic asset protection trust to be breached and the assets within seized by your opponents.
Offshore Asset Protection Trusts
Things are different with offshore asset protection trusts. As their name suggests, an offshore asset protection trust is a trust set up in some jurisdiction other than the US. That can be the Cook Islands, Jersey, Cyprus, or elsewhere.
Because the trust is set up in an offshore jurisdiction, it doesn’t have to obey US court rulings, demands, or case precedents. It’s instead beholden to local laws and case precedents – therefore, skilled asset protection experts like Dominion can identify the ideal jurisdiction for an offshore asset protection trust based on the place’s case history for trusts and the assets of high-net-worth people.
Is it Effective?
Provided your trust is drafted with the help of the experts, absolutely. A Dominion-style asset protection trust will be perfectly written, set up in the ideal jurisdiction, and managed by an experienced, third-party trustee with whom you don't have any personal or professional connection outside the trust itself.
Why does it work? In a nutshell, you put valuable assets like liquid capital or real estate into your offshore asset protection trust. When you do this, the trust owns those assets, not you. Therefore, even if a creditor has a valid claim against you or you are found liable for court damages, you cannot be compelled to pay those damages with assets in the trust.
You don’t own them. Even better, the offshore asset protection trust doesn’t have to obey US court orders. Remember, it’s in a completely different jurisdiction.
There are lots of steps you have to take to make sure this instrument is as valuable and durable as we say. For example, you have to form your trust with a bank that doesn’t have any vulnerable vectors, like subsidiary branches that are based in the US.
But with the right legal advisors on your side, it’s certainly possible to create a resilient, effective asset protection trust for long-term prosperity and wealth management. The best trusts can even be used for estate management and wealth growth over time, as well.
Speak to Dominion Today
When all is said and done, offshore asset protection strategies, such as trusts and bank accounts, are the most effective means of asset protection, especially if they’re created with the assistance of experts. At Dominion, our infrastructure and legal advisors can walk you through the process from start to finish and ensure that your assets are kept safe for generations into the future.
Still have questions? Get in touch with one of our representatives today to learn more.
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