The steel magnate Andrew Carnegie, reputedly the world’s richest man in the late 19th century, had some advice for anyone who wished to follow his example: “Put all your eggs in one basket,” he said, “and then watch that basket.”1
Watching those eggs—aka asset protection—may no longer be that simple, if it ever was. But it’s no less of a concern for anyone who has managed to amass some wealth. Making money is one thing; keeping it may require an entirely different set of strategies.
Deposit and Securities Insurance
On the most basic level, asset protection can include simple safeguards such as deposit insurance on bank accounts and the equivalent for brokerage accounts.
For example, the Federal Deposit Insurance Corporation (FDIC) covers money in member banks for up to $250,000 per depositor, per bank, and per “ownership category.” So, for example, you might have $250,000 each in an individual account, a joint account, an IRA, and a trust account and be covered for the full $1 million, all at one bank. There are several other ownership categories besides those four, and, of course, no shortage of banks.2
The Securities Investor Protection Corporation (SIPC) insures your cash and securities in member brokerage houses against the firm’s failure and, in some instances, theft from your account.3 The maximum coverage is $500,000, but, as with the FDIC and banks, you can structure your accounts in different ways (the SIPC calls this “separate capacity”) to multiply your total coverage.4
Personal Insurance
Perhaps a greater risk to your personal wealth than the possibility of a bank or brokerage failure is a costly lawsuit. That’s where other types of coverage come in.
Liability Coverage
Making sure that you have sufficient liability coverage for your home, auto, and business, if you own one, is a good place to start. In the case of a car, for example, you might be sued if you or a family member are involved in an accident, and someone is seriously hurt. Most states require automobile owners to have a certain minimum level of bodily injury coverage, but it’s unlikely to be enough.
In many states, the minimum is $25,000 or less, which obviously won’t go very far if you’re sued.5 You can raise your coverage to several hundred thousand dollars with many insurance companies. Even that amount may be insufficient, however, especially if you have substantial assets to target.
Umbrella Insurance
An umbrella policy takes up where your home and auto insurance stop coverage. For example, a $1 million umbrella policy would extend your liability coverage to that amount, for a cost of about $150 to $300 a year, according to the Insurance Information Institute (III). The institute says an additional million in coverage might run you $75 a year, with each additional million adding another $50 or so.6 Of course, this is all on top of what you’re already paying for your home and auto insurance.
Professional Liability Coverage
Medical malpractice insurance may be the most famous example, but whatever your field, you might need professional liability insurance. The most vulnerable professions, according to the III, are:
- Accountants
- Architects
- Engineers
- IT consultants
- Investment advisers
- Lawyers
- Real-estate agents.
Your professional association is likely to be a good source of information on the kind of insurance you need and where you can buy it.
Business Liability
What you’ll need will depend on the size and nature of your business. One option for small and mid-sized companies is a business owner policy (BOP), which includes property, liability, and other types of coverage all rolled into one.
Directors and Officers Insurance
If you serve on a board, even as an unpaid volunteer for a nonprofit, you could face a personal lawsuit. If the organization doesn’t already provide directors and officers (D&O) liability insurance for you, it’s worth investigating.
Trusts and Other Legal Options
After you’ve consulted with an insurance broker or two, your next stop might be a lawyer’s office to discuss other ways to shield your assets from possible risks. Remember that some of your assets may already be off-limits to creditors in most circumstances. Those generally include your 401(k) plan and, in some states, your IRA.7 At least a portion of your principal residence’s equity is protected under many states’ laws.
Transfer Some Assets
You might consider transferring assets to a spouse or children to protect what’s left. However, both of those moves have significant risks of their own—divorce in the case of a spouse and loss of control of the money in the case of children, to name just two. With children, you’ll also face possible gift taxes, which kick in if you give a child more than a certain amount in any year (the limit is $17,000 for 2023, up from $16,000 in 2022). Your spouse can also give a like amount, increasing to the total exempt amount to $34,000 ($32,000 in 2022).8
Create a Trust
A properly written trust can help achieve the same asset-protection goals without those issues. But note that you need to set up your trust before anything bad happens that could lead to a claim against you, even if you haven’t actually been sued yet. If you attempt to establish a trust after that, it may be considered a fraudulent transfer to avoid paying creditors, creating a whole new set of legal problems for you.
Hire a Lawyer
A knowledgeable lawyer can walk you through the types of trusts and make recommendations based on your circumstances. One option you’re likely to hear about is a domestic asset protection trust (DAPT), a relatively new variety. Sometimes referred to as an Alaska trust, after the first state to legalize them, it essentially allows you to put assets into a trust, with yourself as a beneficiary, that’s out of the reach of creditors.9
What Is the Lifetime Gift Tax Exemption for 2023?
You can give a maximum of $12.92 million over your lifetime in gifts without being taxed.8
How Much Money Can Be Legally Given To a Family Member as a Gift?
You can give as much as you want to a family member as a gift. However, any amount over the annual limit of $17,000 (in 2023) per recipient might trigger taxes. A married couple can give one person $34,000 in one year without incurring taxes. If you give more than this, you can add it to your lifetime exclusion amount of $12.92 million and not be taxed.8
How Does the IRS Know if You Give a Gift?
The IRS doesn’t automatically know you gave someone a gift. However, it’s in everyone’s best interest to report the gift so that your recipient doesn’t need to report it as taxable income. They’ll likely report it as a gift to avoid taxes, so it’s also best to report it on your tax filing.
The Bottom Line
Asset protection is not the only aspect of wealth management. Still, conserving and shielding assets is a critical consideration in any financial plan, especially for someone with a significant portfolio. You can’t take it with you—but you don’t want to lose it, either.
See the article here.
By Greg Daughtry
Updated November 4, 2022