Andrew Carnegie, a steel magnate and reportedly the richest man in the world in the late 19th century, offered the following advice to those who desired to emulate him: Put all of your eggs in one basket, he advised, and keep an eye on it.
If it ever was, watching those eggs, or asset protection, might not be as easy as it once was. Anyone who has managed to accumulate some fortune should be concerned about it anyway. Making money is one thing, but maintaining it may call for a completely different set of tactics.
Insurance for Deposits and Securities
Asset protection can start out with straightforward measures like deposit insurance on bank accounts and something similar for brokerage accounts.
As an illustration, the Federal Deposit Insurance Corporation (FDIC) insures the funds in member banks up to a maximum of $250,000 per depositor, per bank, and per “ownership type.” So, for instance, you might have $250,000 in each of your individual, joint, IRA, and trust accounts and have $1 million in insurance coverage via one bank. In addition to those four ownership classifications, there are numerous others, and banks are in plentiful supply.
Your money and assets held at member brokerage firms are protected by the Securities Investor Protection Corporation (SIPC) against the failure of the company and, in some cases, theft from your account.
Although the SIPC refers to this as “separate capacity,” you can structure your accounts in multiple ways to increase your overall coverage. The maximum coverage is $500,000, just like with the FDIC and banks.
A pricey lawsuit may pose a risk to your personal fortune bigger than the potential for a bank or brokerage failure. Other varieties of covering can help in this situation.
- Liability protection. A smart place to start is to confirm that you have adequate liability coverage for your residence, vehicle, and business, if you have one. For instance, if you or a family member is in a car accident and someone is gravely injured, you may face legal action. Most states mandate that auto owners carry a minimum amount of bodily injury protection, but this usually isn’t enough. The minimum is typically $25,000 or less in many jurisdictions, which clearly won’t go very far if you’re sued. With many insurance providers, you can increase your coverage to several hundred thousand dollars. However, even that amount might not be enough, especially if you have significant assets to protect. In that case, you should also research the four insurance options given below.
- umbrella coverage Your home and auto insurance stop where an umbrella policy begins. The Insurance Information Institute estimates that a $1 million umbrella insurance would increase your liability coverage to that sum and cost between $150 and $300 annually (III). According to the institute, an additional million in coverage may cost you $75 a year, with each further million costing an additional $50 or so. Of course, this is in addition to the premiums you currently pay for your auto and house insurance.
- Coverage for professional liability The most well-known instance of professional liability insurance is probably in the field of medicine, but you may require it in any industry. Accountants, architects, engineers, IT experts, investment advisers, lawyers, and real estate brokers are among the most vulnerable professions, according to the III. Your professional association is probably a good place to start if you want to find out what kind of insurance you require and where to obtain it.
- The amount of business liability you’ll require will depend on the size and type of your enterprise. A business owner policy (BOP), which combines property, liability, and other forms of coverage into one, is one choice for small and mid-sized businesses. See Asset Protection for the Business Owner for additional suggestions.
- insurance for directors and officials. You can be subject to a personal lawsuit as a result of serving on a nonprofit board, even if you do it as an unpaid volunteer. It’s worth looking into if the company doesn’t already offer you directors and officers (D&O) liability insurance.
Trusts and other legal remedies
After speaking with a few insurance brokers, you could decide to visit a lawyer’s office to learn about further strategies for protecting your assets from potential threats. Keep in mind that in most cases, some of your assets may already be off-limits to creditors. Your 401(k) plan and, in some states, your IRA are typically included in this category. Many state laws additionally preserve at least a portion of the equity of your primary house.
You might think about giving assets to a spouse or children to protect what’s left. However, each of those actions come with a number of hazards of their own, including, to name just two, the possibility of divorce in the case of a spouse and the loss of financial control in the case of children. If you give a child more than a particular amount in any year (the cap is $15,000 for 2019 through 2021) you may be subject to gift taxes. Your spouse may contribute a same amount, bringing the total exempt amount to $30,000 as a result.
The same asset-protection objectives can be accomplished with a properly drafted trust without those problems. But keep in mind that even if you haven’t been sued yet, you still need to establish your trust before anything negative happens that could result in a lawsuit against you. If you try to create a trust after that, it might be viewed as a fraudulent transfer to avoid paying creditors, which would put you in a whole new set of legal issues.
An experienced attorney can explain the various trust types to you and offer suggestions depending on your own situation (see How to Protect Your Assets from a Lawsuit or Creditors). A domestic asset protection trust, or DAPT, is one choice you’re probably going to hear about. It effectively allows you to place assets into a trust with oneself as a beneficiary that is out of the reach of creditors, and is sometimes referred to as an Alaska trust because it was the first state to legalize such.
Wealth management involves more than just protecting one’s assets. In fact, a study of high net worth investors called “The 2017 U.S. Trust Insights on Wealth and Worth” discovered that 50% of them gave asset growth a greater priority than asset preservation.
However, protecting and preserving assets is a crucial factor in any financial plan, particularly for someone with a sizable portfolio. You are unable to take it with you, but you also don’t want to misplace it.