How can people with significant assets protect their wealth?
The short answer is that someone's money can never be completely protected from creditors, but there are steps that can be taken to discourage people from pursuing you.
"There is no such thing as asset protection," said Jason Cain, head of the family wealth planning group in the central region for Credit Suisse Private Bank. "What there is, is good business and estate planning that as a byproduct insulates your assets from future, potential creditors."
While this may sound like the realm of just the truly wealthy, asset protection is something that people with a nice home and a couple of cars should consider, particularly if they can imagine being sued. So how should people think about what they might need?
Umbrella policy: Insurance is the first level of protection. After the necessary home and auto policies, the most crucial thing is to have an umbrella policy that limits liability. Think of it as protection against the unexpected, like someone falling down your stairs or being hit by the car driven by your child.
"We view lawsuits as probably the most dangerous thing that our clients face," Jeremiah Hourihan, executive vice president at Chartis Private Client Group, said. "The No. 1 risk is a car accident where you or a family member causes harm to someone else. Those are the most frequent incidents we see."
He said the company's most common liability policy was for $10 million. Depending on how many homes and cars people have, he said, it generally costs about $2,000 to $3,000 a year for $10 million in umbrella coverage. He said yachts, boats or Jet Skis increased the cost.
These policies can also be written to include separate coverage for legal fees from a lawsuit as well as to protect people who serve on nonprofit boards and fear the group's coverage is inadequate if they are sued, Hourihan said.
Trusts for heirs: Money put in trusts for heirs is another way to shield assets.
People who work in certain professions, like lawyers, architects and engineers, also face liability by the nature of their work. They could be named as a party in a lawsuit, even if they did nothing wrong.
In this, doctors are a category of professionals uniquely at risk. Cain said he made a point of telling physicians that they needed to have their strategy in place long before there was a lawsuit.
Many asset-protection strategies fail because they are created at the moment someone is being sued or fears a lawsuit is coming. Done that way, they run the risk of being considered a fraudulent transfer and disallowed.
Asset-protection trusts: The truly rich have the option of setting up asset-protection trusts in states like Alaska or Delaware that have laws allowing these shelters, or can go to offshore jurisdictions, like the Cayman Islands.
The onshore versions are relatively new, with most dating to the 1990s. Because of this, they have not yet been legally tested. Heather Flanagan, senior wealth planner at PNC Delaware Trust Company, cautions clients to use these trusts as true shelters.
Amy Jetel, a partner in the law firm of Beckett, Thackett & Jetel in Austin, Texas, said she counseled people who have at least $3 million to put that much in an asset-protection trust offshore to make sure the assets are beyond the reach of United States creditors.
She said that the cost, about $25,000, to set up one of these trusts was the same offshore or onshore (though the tax-reporting costs are higher offshore).