By: Kate Stalter, Paul Curcio, and David Tony, Featuring Asher Rubinstein, Partner Gallet Dreyer & Berkey, LLP
Businesses and high-net-worth individuals have plenty of reasons to shield their assets. They’re frequently magnets for lawsuits or people claiming to be rightful heirs. Creditors may also make claims that could disrupt business operations or target personal wealth. For individuals and businesses who want and need to protect their assets, we’ve outlined several key strategies that can help accomplish that goal.
What is asset protection?
Jeremy Babener, founder and consultant at Structured Consulting in Portland, Oregon, said asset protection is a legal strategy to safeguard an individual’s or business’s assets from unanticipated liabilities and financial threats.
It often involves trusts, insurance and proper business structuring,” Babener said. “Asset protection is critical to avoid being wiped out financially in a worst-case scenario,” he added. Babener noted that using multiple asset protection strategies, including legal entities and insurance, is generally a wise move. “This is especially important when your assets are needed for basic living and medical expenses,” he said. It’s not just the stereotypical notion of the well-to-do who may need to consider these steps. “Ironically, an injured victim who receives money in a lawsuit has a particular need for an asset protection trust because a lawsuit against them by someone else could wipe out their medical funds,” Babener said.
Importance of asset protection
The threat of lawsuits drives many to consider mitigating their financial risks. “Asset protection is important because we live in a very litigious society where anyone can sue anyone else on the flimsiest of claims and potentially seize assets and property to satisfy a court judgment,” said Asher Rubinstein, partner at law firm Gallet Dreyer & Berkey in New York City. Rubinstein said asset protection is advisable for people who have accumulated significant assets. “Ideal candidates for asset protection include people who are in high-liability professions and anyone with assets who may be viewed as a ‘deep pocket’ and vulnerable to lawsuits,” he added.
Asset protection strategies
Fortunately, there are several ways to shield assets from potential litigants and others who believe they have a claim on property.
- Limited liability companies (LLC): An LLC can protect assets by separating personal and business liabilities. For example, if a business faces legal action or debts, the owner’s personal assets are generally not included in the list of assets available to creditors or to satisfy judgments.
- Umbrella insurance: These policies provide additional liability coverage beyond what you’ll find included in standard policies. Umbrella insurance can protect personal assets from large claims or lawsuits, such as those that may result from a car accident or an injury on someone’s property. It also covers legal fees, damages and settlements that exceed the limits of underlying insurance. Businesses can also buy umbrella policies.
- Family limited partnerships (FLP): This entity, which allows family members to manage and protect their assets, also comes with tax advantages, such as reducing a taxable estate. Rubinstein advised putting a personal residence and liquid assets into an FLP. “You can be the general partner and retain control over the FLP and its assets,” he said. Other family members may be limited partners. “If someone sues you and wins a judgment against you personally, he or she will not be able to penetrate the FLP and take FLP assets to satisfy the judgment,” Rubinstein said.
- Trusts: “Trusts are a more advanced way of protecting your assets. While not for everyone, there are certain trusts that can aid in liability protection by transferring assets out of your name,” said Joe Schmitz, a certified financial planner (CFP) who’s CEO of Peak Retirement Planning in Columbus, Ohio. For example, irrevocable trusts can shield assets from creditors and legal claims since the assets are no longer part of a personal estate. Trusts can also offer greater control over how and when assets are distributed, ensuring they are passed on according to your wishes, potentially avoiding disputes.
- Home mortgages: “Because the home is security for the mortgage, the home is less attractive to a creditor because the bank’s security interest comes before the creditor,” Rubinstein said. For additional asset protection, he suggested putting proceeds of the mortgage into an asset protection trust (APT). “You have essentially stripped the home of its equity, made the home less of a target and protected the equity separately,” he said.
- Prenuptial agreements: This is an often controversial approach that spells out what assets each spouse brings to a new marriage and how assets should be treated if there’s a divorce or if one spouse dies. As the name suggests, a prenuptial agreement is inked before a marriage takes place. Many people object to these agreements, believing they get a marriage started with a lack of trust.
What is an asset protection trust?
An APT is a particular type of legal entity that’s often used to shield assets, including an estate, from creditors, claims or legal actions. When assets are transferred into an APT, they are no longer part of the original owner’s estate. This can provide an extra measure of protection. The use of these trusts has evolved over time, Rubinstein said.
“For many years, the law was that a person could not transfer assets to a trust, benefit from that trust and then argue that his or her creditors could not reach the assets in the trust,” he said. “The logic was that if you benefited from the trust assets, then those assets should be available to satisfy a court judgment against you,” he added. More recently, some jurisdictions began to allow self settled trusts, or trusts where the person who establishes the trust is also a beneficiary. In legal parlance, that person is known as the “settlor.”
“Originally, foreign jurisdictions like the Cayman Islands and Liechtenstein began to allow self-settled asset protection trusts,” Rubinstein said. As of January 2024, 21 states allow these self-settled asset protection trusts, also called domestic asset protection trusts. “Delaware, Wyoming, Nevada and South Dakota are prominent asset protection trust jurisdictions,” Rubinstein said. “By conveying assets to trustees in these states, the trust property is protected from creditors and litigants, while the settlors can still enjoy benefits from these trusts.”
Asset protection insurance policies
Insurance is another way of protecting assets or transferring risk by covering potential financial losses from events such as accidents, lawsuits or property damage. “One of the most common forms of asset protection is insurance, including auto, home, life and umbrella,” Babener said. “The purpose is for the insurance company to step in to cover your liabilities so that you don’t have to sell your assets.”
- Umbrella insurance: Umbrella insurance offers an extra layer of liability protection beyond standard policies, safeguarding assets against significant claims or lawsuits. It covers situations such as personal injury, property damage and even defamation, which may be excluded from or exceed the limits of typical home or car insurance. Umbrella insurance often includes legal defense costs to cover costs of a legal battle.
- Annuities: Annuities are insurance contracts that are not subject to probate with a named beneficiary. They are usually protected from creditors and lawsuits. “Today’s environment has never been better to consider certain annuity solutions,” said Eric Elkins, CEO and founder of Double E Financial Solutions in Mt. Pleasant, South Carolina. “Annuities historically have received some bad press, but if you enjoy checks deposited into your bank account each month for the rest of your life, then you should consider investigating this asset protection strategy,” he added.
- Long-term disability and long-term care insurance: “This isn’t a glamorous asset protection strategy but one of the most important strategies to consider,” Elkins said. He noted that people insure homes, cars and boats but forget to insure and protect themselves against adverse events. “The number of people needing long-term care or going out on disability is at an all-time high,” he said. “If you no longer had a paycheck coming in and you were sick or disabled, could you continue paying your bills and supporting yourself and family with what you have saved thus far?”
- LLCs for asset protection: Business owners often structure their firms as LLCs to shield themselves from lawsuits that may put personal assets, such as homes or savings, at risk. “LLCs are a great and inexpensive option when looking to protect yourself from liability,” Schmitz said. “If you own real estate, for example, holding the real estate in an LLC is a great way to ensure that if you are sued, the person suing you can only come after assets owned by the LLC, not by you personally,” he said.
Frequently Asked Questions
How can prenuptial agreements help in asset protection?
A prenuptial agreement, signed before a marriage takes place, outlines each spouse’s assets and how these assets would be treated in the event of a death or divorce. The idea behind prenuptial agreements is to prevent future disputes over the distribution of assets.
What is the benefit of using an LLC for asset protection?
An LLC is a type of legal entity that separates a business’s assets from the owner’s personal assets. An LLC shields the owner’s assets from litigation or other claims. It’s a common structure in industries such as financial services, where the owner faces a higher-than-normal risk for lawsuits.
Can one asset protection method be sufficient?
In many cases, multiple asset protection strategies, including insurance, legal entities (such as trusts or LLCs) or contracts (such as prenuptial agreements) are necessary. The number and types of asset protection methods vary depending on each situation. Legal and financial counsel can help answer questions about which specific asset protection methods are best in any given case.
What are the benefits of offshore trusts for asset protection?
High-net-worth individuals often seek protection from an offshore trust. “This is where you transfer your assets into a trust in a foreign jurisdiction,” Schmitz said. “These trusts typically come with lower tax obligations which make them popular for those with high net worth.”
Offshore trusts may be suitable in situations where individuals seek benefits in addition to protection from lawsuits or creditors. For example, some may turn to offshore trusts if they want privacy or a more stable political environment than in their home country.