Key Takeaways:

  • Get asset protection strategies in place before you need them.
  • Evaluate and stress-test your various types of liability coverage.
  • Make asset protection efforts part of an overall wealth planning strategy.

If you’ve got substantial assets, you may be more likely to be targeted by lawsuits because of your accomplishments. That can be especially true if you’re a successful business owner or highly compensated professional.

Of course, anyone can be sued. And even when a lawsuit is unfounded, as is often the case, it can result in financial loss along with considerable aggravation and stress.

That’s why it’s so important to create barriers to protect your wealth.

Enter asset protection planning—which employs legally accepted concepts and strategies, as well as specific financial products, to ensure a person’s wealth is not unjustly taken from him or her. The goal is to motivate litigants and creditors to settle amicably. Well-done asset protection planning is often an effective way to avoid litigation entirely.

Important: Asset protection planning is not about hiding assets, avoiding paying taxes or defrauding creditors. It is a legitimate subspecialty of wealth planning.

But asset protection can be a tricky business. Make the wrong move—knowingly or accidentally—and you can easily blow up the wall you’re trying to build around your wealth. With that in mind, here are five major mistakes that we see commonly made when the affluent engage in asset protection efforts—and how to avoid them so your wealth is safeguarded to the greatest extent possible.

Mistake #1: Starting asset protection planning after you are aware you can be sued

While there are quite a few ways to protect your wealth, they tend to be ineffectual if they’re done too late. Move assets around after you are aware a claim can be made against you— into a trust, for example—and you’ll learn a new vocabulary term: fraudulent conveyance. That strategy will likely be reversed by the courts.

There are two types of fraudulent conveyance:

  • Actual fraud involves intent and occurs when someone transfers assets to a person they can strongly influence, resulting in not having any resources to pay creditors. Still, the person “informally” maintains control of the assets.
  • Constructive fraud is about the economics of the transfer of assets, not the intent behind the transfer. If the asset transfer was done relatively quickly when the person was in a financially distressed situation, it might be considered constructive fraud.

Note: When it comes to intent, it is often impossible to know what someone was thinking. But courts do look at so-called badges of fraud, which are circumstantial evidence of actual fraud. Some examples of badges of fraud include:

  • Current or likely litigation
  • Assets transferred to family members, enabling the person to still “control” the assets
  • Transfers conducted secretly

The way to avoid this mistake is to engage in asset protection planning as early as possible. Without question, you want to do asset protection planning before you need the protection.

Mistake #2: Not having enough (or the proper) liability insurance

Part of effective asset protection planning is ensuring you have the right kinds and amounts of liability insurance. Most people could, for instance, benefit from larger umbrella liability policies. They don’t think of this, however, nor do their property and casualty brokers. A further complication: Many property and casualty brokers are limited as to the amount of coverage they can provide because of the insurance companies they work with.

Additionally, we see that many accomplished business owners have substandard general liability coverage. A good number of these business owners might also benefit from higher- quality (and more customized) directors and officers liability coverage.

The good news: Liability insurance is relatively inexpensive. After avoiding lawsuits (generally beyond your control), it can be considered the first line of defense in an asset protection plan. Therefore, periodically stress testing your liability coverage is usually a smart move (see page 5). Doing so will enable you to uncover and correct any gaps in coverage.

Mistake #3: Failing to approach asset protection planning synergistically with your other wealth planning efforts

Comprehensive wealth planning encompasses a variety of specializations, including estate planning, income tax planning and—yes—asset protection planning. While it’s possible to engage in these types of planning independently of each other, there are often considerable benefits of thinking about your planning holistically—so that all the components of your financial life work together in concert, seamlessly.

Very often, a holistic approach to wealth planning enables you to understand the trade-offs you are making—as well as any risks that you might otherwise overlook.

Example: Gifting to heirs can be a good estate planning solution, but it might be considered a fraudulent conveyance when it comes to asset protection.

Reviewing the structure of potential inheritances from your parents is also important. If Mom and Dad have significant assets or still own part of the family business, receiving that inheritance in a properly structured trust will protect the assets in the trust from creditors, including divorcing spouses. Your estate plan, done properly, can protect your children from creditor claims as well.

By approaching your planning as comprehensive wealth planning instead of piecemeal planning focused on one area, you will often end up with solutions that work best for you and your loved ones—and that are most cost-effective.

Mistake #4: Not understanding what you did and why you did it

If you cannot explain the intended results of your asset protection planning and why you did what you did—at a big picture level, at least—there is a pretty good chance your planning will not deliver the protection you seek. In legal depositions, for example, there is a strong possibility a court will become suspicious and set aside asset transfers if you cannot explain the what and why.

Important: Asset protection planning can become quite complicated because of the complexity of a person’s financial and personal situation. You don’t need to be an expert on the strategies and financial products, but you should be able to explain in broad terms the reasoning behind the actions taken.

Mistake #5: Failing to work with a skilled professional

There are a lot of professionals who profess expertise when it comes to asset protection planning. Trouble is, many of them are not very adept. Some are so-called Pretenders: They know just enough about asset protection strategies to get themselves—and you—in trouble. Others are Predators, who prey on your fear of litigation and deliver ineffectual asset protection solutions. There are even Exploiters who provide asset protection strategies but at egregious prices and that are often inappropriate to the situation at hand. Each of these three types of professionals will probably end up doing you more harm than good.

In order for you to get the optimal benefits of asset protection planning that you may seek, you need to work with a true authority in the field—someone who is recognized by financial professionals as an expert on asset protection planning.

Pro tip: In keeping with our belief that asset protection should be just one part of a larger wealth planning initiative, we suggest working with a wealth manager who has an asset protection specialist on his or her team (either internally or externally).

Action step

If you think you or a family member could potentially benefit from asset protection strategies, contact your legal or financial professional to explore the topic further.

VFO Inner Circle Special Report

By Russ Alan Prince and John J. Bowen Jr.

© Copyright 2021 by AES Nation, LLC. All rights reserved.

No part of this publication may be reproduced or retransmitted in any form or by any means, including, but not limited to, electronic, mechanical, photocopying, recording or any information storage retrieval system, without the prior written permission of the publisher. Unauthorized copying may subject violators to criminal penalties as well as liabilities for substantial monetary damages up to $100,000 per infringement, costs and attorneys’ fees.

This publication should not be utilized as a substitute for professional advice in specific situations. If legal, medical, accounting, financial, consulting, coaching or other professional advice is required, the services of the appropriate professional should be sought. Neither the authors nor the publisher may be held liable in any way for any interpretation or use of the information in this publication.

The authors will make recommendations for solutions for you to explore that are not our own. Any recommendation is always based on the authors’ research and experience.

The information contained herein is accurate to the best of the publisher’s and authors’ knowledge; however, the publisher and authors can accept no responsibility for the accuracy or completeness of such information or for loss or damage caused by any use thereof.

Unless otherwise noted, the source for all data cited regarding financial advisors in this report is CEG Worldwide, LLC. The source for all data cited regarding business owners and other professionals is AES Nation, LLC.

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