March 27, 2018

Building Walls of Financial Protection

There has been a lot of talk about building walls lately. Regardless of whether you are in favor of building physical ones, you ought to consider building some legal and financial ones, as we are each surrounded by potential liability threats. While the odds of any of these liability threats becoming a liability claim are incredibly low (the odds are about 1 in 2,000 that someone will have a serious slip and fall in the shower, for example), the impact these events have when they do happen can be profound (especially if that person fell in a shower at an apartment that you rented to them). Properly constructed walls can shield assets and provide a level of protection from claims.

There are two basic sets of liability protections: those that are built to protect assets during an individual’s lifetime, and those that are built to protect assets for (and from) beneficiaries after someone dies. Lifetime protections often come in the form of trusts. When using trusts for asset protection, the basic concept is that if you give enough of your rights in an asset away, your lack of sufficient control over that asset will prevent a creditor from attaching the asset to satisfy a debt or a claim for damages. The amount of control you give up generally correlates to the amount of protection you receive.

For example: If I establish a revocable living trust, where I maintain the ability to withdraw 100% of the assets any time I want to, creditors will likely be able to make a claim on those assets the same way they could make a claim on my bank account. On the other hand, if my trust is an irrevocable one and I only receive distributions from the trust at an independent trustee’s discretion, a creditor is going to have a more difficult time reaching those funds. Some clients will go a step further and establish trusts in foreign jurisdictions, where the assets may be further protected by local laws, treaties the U.S. has with the host country, and the prohibitive cost of traveling abroad to litigate a trust dispute.  

Other commonly used protection strategies during a person’s lifetime include tactically separating assets between spouses, creating business entities to limit liability to the amount an investor has invested, and purchasing insurance policies (umbrella and/or professional liability are the most common) to cover the cost of a claim.

Trusts are a handy tool at death as well – a properly constructed trust may protect assets from claims by an heir’s future ex-spouse(s) or other creditors, may incent the heir to be a productive member of society, and may provide protection in the event the heir has an issue with drugs or alcohol. As parents, we have remarkably broad space to “control things from the grave” – as long as we make those plans ahead of time.

Those business entities that protect assets during our lifetime can also protect them at death by providing a clear picture of who is supposed to take over the business operations, inherit the assets, or both. The key here is the same as with trusts – you have a lot of control to set the plan up while you are alive and well. If you wait too long or never get to it, assets will be distributed according to the statutes and taxed appropriately. 

Examining asset protection strategies is a part of the planning we do with all of our clients at Arnerich Massena.  If you have questions about how you may best protect your assets, we’re happy to help.