In 2022, 370,685 cases of personal bankruptcy were filed in the USA. This means that about 0.11% of the entire population filed for bankruptcy. Can this be prevented from repeating itself in 2023? Yes, by looking into asset protection.
There are certain circumstances when your wealth may be at risk, such as when you are involved in a civil lawsuit, getting divorced, or struggling with debts. Without asset protection planning, you could lose everything you own in court, through bankruptcy, or to creditors.
The idea is to protect your assets from the beginning so that even if you find yourself in any of these situations, you will not have to give up everything you own. This is a crucial step in securing your financial future.
In this article, we will discuss asset protection, the common threats, and possible solutions. We’ll also look at how to identify the best asset protection strategies.
What is Asset Protection?
Asset protection is a wealth preservation technique for securing one’s wealth against risk via legal measures. It is an important aspect of retirement, investment, and estate planning. Strategies like trusts or limited liability entities can help to safeguard your wealth so that it’s available to support your retirement goals.
Common Threats to Assets
When it comes to preserving your wealth, it’s important to know what threats you could be up against. These include.
Market Volatility and Asset Protection
Events such as a recession or market downturn can cause a significant drop in the value of your investments, which may be difficult to recover from with some form of security in place.
Inflation and Asset Protection
Inflation erodes the real value of investments. It can even lead to financial problems unless you have a strategy in place to help balance things.
Lawsuits and Asset Protection
You may have to abandon your retirement plans if a lawsuit results in bankruptcy or liquidation. While insurance policies can help with many of these problems, you should also have a backup plan in place.
Fraud and Asset Protection
Fraud is another dangerous threat to wealth preservation. Unethical activities, embezzlement, or other accounting problems can drastically impact your net worth. Tailored financial planning, however, can help shield your wealth from the effects of fraud.
Types of Asset Protection Strategies
The following strategies can help secure your assets from creditors, lawsuits, and other claims.
Diversification for Risk Management and Asset Protection
A fantastic strategy for risk mitigation is to put your money in many investment vehicles—portfolio diversification—spanning multiple industries and locations. This way, if one investment takes a hit, others can keep your portfolio intact.
It is important, however, not to spread your asset allocation too thinly.
This over-diversification can dilute potential returns. You should also watch out for how these investments move in relation to one another. An ideal situation is to avoid a positive correlation between classes.
Insurance Policies for Asset Protection
Insurance can also provide a safety net against unexpected events.
- A life insurance policy can guarantee a family’s financial security if the major earner dies.
- Disability insurance can protect against the financial effect of an injury that stops the policyholder from working.
- Liability insurance can safeguard against the financial effects of a lawsuit.
- Long-term care insurance can cover the high expenses of long-term care, which can swiftly deplete wealth and fortune.
Note though, while insurance can mitigate financial risks and preserve wealth, it cannot fully protect you. You need to put proper safeguards into place.
Trusts for Asset Protection
Trusts are legal agreements for handling assets based on certain laid-down provisions. These assets are protected from creditors, lawsuits, and other legal claims. Trusts also facilitate asset transfers outside of probate, saving legal fees. They can also be used as identity theft and fraud prevention tools.
There are disadvantages to using trusts though, including costs, complexity, and taxes implications. It’s therefore, important to consult with a professional before establishing one.
Limited Liability Entities for Asset Protection
Because limited liability entities like LLCs, LLPs, and corporations are separate legal entities from the owners, they provide legal protection for the debts, obligations, and lawsuits of the business. There can be exceptions though, especially in the case of personal guarantees on loans or wrongful acts by the owners.
Choosing the Best Asset Protection Strategy
So, now that you know how important wealth planning is and the options available, how do you choose the best one for your situation?
Factors to Consider for Asset Protection
Factors that can inform your asset protection strategy include.
- Risk tolerance ─ Decide how much risk you can take. For high-risk businesses, an LLC is ideal.
- Investment goals ─ Consider investment goals when choosing an asset protection strategy. If your goal is retirement planning, then active strategies may be necessary.
- Tax situation ─ Certain structures like LLCs or S-Corporations offer pass-through taxation. This can be good for tax planning purposes.
- Legal structure ─ The legal structure of your business, such as sole proprietorship or partnership, affects the choice of strategy. Each one has a particular level of security it offers.
Consider combining passive and active strategies to strike the right balance between protection and growth. Passive strategies may include setting up an LLC or trust, while active strategies may include insurance coverage or diversifying investments.
It is also important to seek professional advice to ensure that your chosen strategies are legally compliant and effective.
Professional Advice for Risk Management and Asset Protection
The place of professional advice when doing wealth preservation and asset protection planning cannot be overemphasized.
These experts can offer value-based advice and help you create a customized plan for your situation. Of course, you may do it yourself, but this is not recommended. You may overlook a few crucial details, jeopardizing all you’ve fought so hard for.
Asset protection is crucial for inheritance planning and investment management. It helps safeguard wealth against potential lawsuits and creditors. It’s, therefore, crucial to begin planning early and to frequently assess your plans to make sure they’re in line with your current needs and goals. Not doing so can lead to significant financial losses and could hinder retirement and investment plans.
If you need professional advice for asset protection planning, the financial advisor estate planning team at Interactive Wealth can help.
Don’t leave off wealth management until it’s too late.
Get in touch today.