Asset Protection for High Net Worth Individuals Explained

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Andrew Carnegie, the steel magnate who was arguably the wealthiest man in the world in his day, offered some advice for those who wanted to follow in his footsteps: “Put all your eggs in one basket, and then watch that basket,” he said.

Keeping an eye on those eggs, often known as asset protection, may no longer be as simple as it once was. It’s no less of a problem for those who have amassed a significant amount of riches. Making money is one thing; maintaining it may necessitate a completely different set of tactics.

Deposit and Securities Insurance

Simple measures such as deposit insurance on bank accounts and the equivalent for brokerage accounts are examples of asset protection at its most basic level.

The Federal Deposit Insurance Corporation (FDIC), for example, insures money in member banks up to $250,000 per depositor, bank, and “ownership type.” For example, you may have $250,000 in a person account, a joint account, an IRA, and a trust account, all at the same bank, and be insured for the whole $1 million. There are various other types of ownership besides those four, and there are plenty of banks.

Your cash and stocks in member brokerage houses are insured by the Securities Investor Protection Corporation (SIPC) against the failure of that firm and, in some cases, theft from your account. The maximum coverage is $500,000, but you can arrange your accounts in numerous ways (the SIPC calls this “separate capacity”) to multiply your total coverage, just like the FDIC and banks.

Personal Insurance

A pricey lawsuit is maybe a greater risk to your own wealth than the likelihood of a bank or brokerage failure. This is when other types of insurance come into play.

• Coverage for liability: Making sure you have enough liability coverage for your home, car, and, if you own one, your business, is a smart place to start. If you or a family member is involved in an automobile accident and someone is gravely injured, you may be sued. Most states require car owners to obtain a specific amount of bodily injury coverage, but this is unlikely to be sufficient. The minimum in many jurisdictions is $25,000, which clearly won’t go you very far if you’re sued. Many insurance providers will increase your coverage to several hundred thousand dollars. Even that amount might not be enough, especially if you have a lot of assets to target. If that’s the case, you should also consider the four types of insurance outlined below.
• Umbrella insurance: is a type of coverage that protects you against a An umbrella policy fills in the gaps left by your homeowner’s and auto insurance policies. According to the Insurance Information Institute, a $1 million umbrella policy would increase your liability coverage to that amount for around $150 to $300 per year (III). According to the institute, an extra million in coverage may cost $75 per year, with each subsequent million costing another $50 or so. 6 Of course, this is in addition to the premiums you currently pay for home and auto insurance.
• Coverage for professional liability: Medical malpractice insurance is perhaps the most well-known example, although professional liability insurance may be required in any sector. Accountants, architects, engineers, IT experts, financial advisers, lawyers, and real-estate agents are among the most vulnerable professions, according to the III. Your professional organisation is likely to be an excellent source of information on the types of insurance you require and where you can obtain it.
• Business liability: is a different story, and the amount of coverage you’ll need will be determined by the size and nature of your company. A business owner policy (BOP), which combines property, liability, and other forms of coverage into one package, is one alternative for small and mid-sized businesses. See Asset Protection for the Business Owner for more options.
• Insurance for directors and officials: You could face a personal lawsuit if you participate on a board, even if it’s as an unpaid volunteer for a nonprofit. It’s recommended looking into getting directors and officers (D&O) liability insurance if your company doesn’t already have it.

Trusts and Other Legal Options

After speaking with a couple of insurance brokers, your next trip can be a lawyer’s office to negotiate further strategies to protect your assets from potential hazards. Keep in mind that in most cases, some of your assets are already off bounds to creditors. Your 401(k) plans and, in some jurisdictions, your IRA are examples of them. Many states’ laws also preserve at least a percentage of the equity in your primary residence.

Consider moving assets to a spouse or children to protect what’s left. Both of these actions, however, have major risks of their own, including divorce in the case of a spouse and loss of financial control in the case of children, to mention a few. When it comes to children, you may be subject to gift taxes if you give them more than a particular amount in any one year (the cap is $15,000 for 2019 through 2021). Your spouse can double your gift, bringing the total exempt value to $30,000.

Without those concerns, a clearly written trust can help accomplish the same asset-protection aims. However, even if you haven’t been sued yet, you should set up your trust before anything unpleasant occurs that could lead to a lawsuit against you. If you try to set up a trust after that, it could be regarded a fraudulent transaction to avoid paying creditors, causing you a whole new series of legal issues.

A skilled attorney can explain the various types of trusts and provide suggestions based on your specific circumstances. A domestic asset protection trust, or DAPT, is a relatively new type of trust that you’re likely to hear about. It effectively helps to place assets into a trust, with yourself as a trustee, that is out of the reach of creditors. It can sometimes be referred to as an Alaska trust, after the first state to implement such.

Final Thoughts

Asset protection isn’t the sole consideration when it comes to asset management. In fact, according to “The 2017 U.S. Trust Insights on Wealth and Worth,” a poll of high-net-worth investors, half of them prioritize asset growth over asset preservation.

Nonetheless, protecting and conserving assets is an important part of any financial plan, especially for those with a large portfolio. You won’t be able to take it with you, but you also don’t want to lose it.