Is there a single “magic bullet” to protect your money and property? Let’s look at the most common options that are marketed as “asset protection.”
Will a domestic asset protection trust protect your money and property?
Let’s look at the most commonly referenced way to protect your money and property: domestic asset protection trusts. We will discuss domestic asset protection trusts later. However, for now just know that an asset protection trust will probably protect you if you are sued in one of the minority of states that permit them, and on condition that your domestic asset protection trust is more than 10 years old so it cannot be unwound in a bankruptcy proceeding.
However, your domestic asset protection trust will most likely not protect you if you are sued in one of the states that explicitly forbids them under state law. It will also not protect you in bankruptcy court. It will not, by itself, protect you in a divorce in a community property state.
Will life insurance protect your money and property?
Will life insurance protect your money and property? Well, life insurance can protect you from certain creditors if it’s structured and owned the right way. Term life insurance probably cannot be seized by your creditors, since it has no cash value. Whole life insurance can be protected from your creditors if it is owned in an irrevocable trust that is outside your estate. Depending on your state, the beneficiaries of your life insurance may be able to receive the insurance proceeds without being liable to your creditors. You can also maintain life insurance in order that your wealth is not taken by creditors or the tax man when you die.
However, life insurance will not protect you from being sued for causing a car accident. It will not protect you from a contract dispute. It won’t protect your kids from squandering their inheritances. And it certainly won’t protect you from making bad investment choices. Thus, life insurance offers a partial solution, but not a complete solution.
Will liability insurance protect your money and property?
“Surely liability insurance will protect your money and property!” you say. After all, it protects you from “liabilities.” And, in fact, liability insurance will protect you with a defense attorney if you are sued. And if the person suing you is successful, and if the type of judgment against you falls within the scope of coverage for that particular liability insurance policy, and assuming the amount of the judgment (minus the costs of paying the attorney to defend you) do not exceed the amount of the judgment, then you can consider yourself protected.
However, if you are a business owner or professional, common types of claims may not be covered by your liability insurance. Liability insurance will not protect you from contract disputes. It will not cover sexual harassment or employment-related claims against you. It will not cover environmental torts. It will not cover most intentional acts (such as criminal conduct or slander). It will not cover losing your assets in a divorce, identity theft, or being scammed by a con artist.
In short, there is no one solution that will protect your money and property.
Why I founded Sudden Wealth Protection Law
I founded Sudden Wealth Protection Law because one of the ways in which families commonly lose money is in the process of transferring wealth from one generation to the next. The gold standard of estate planning right now is to successfully pass a clients’ wealth to the next generation while avoiding probate and possibly minimizing taxes.
And if the next generation happens to squander that inheritance, the professional advisors involved all shrug their shoulders and say that there was nothing that could have been done. After all, how could it possibly be predictable that some portion of beneficiaries don’t know how to manage their money? Nevermind that it is common knowledge in the estate planning and financial planning community that beneficiaries often blow their inheritance. We will be discussing the issue of lost inheritances and Sudden Wealth Syndrome in the future. I raise the issue here merely to give an example of an obvious way in which a family’s wealth can be lost that is typically overlooked.
Professional advisors tend to want to sell transactional solutions.
It’s easier to sell you what you want to hear rather than tell you the truth. It’s easier to sell you a diet supplement than to say you need to stop eating potato chips, drinking sugary drinks, and lift weights at the gym. The diet supplement sounds much easier. (Never mind that it can cause its own health problems and you’ll simply gain back the weight once you stop taking the pills.)
Similarly, the solutions that are often peddled to you are transactional solutions. Buy some life insurance. Buy a will and trust package. Buy an annuity. Buy a fancy asset protection trust.
Let me give you a graphic analogy. Transactional solutions when it comes to protecting your money and property is like buying a fancy bullet-proof vest and heavy safe. The bullet-proof vest may look good, but it certainly doesn’t cover your whole body. I’m not sure I’d want to go into gun battle with just that. And the safe may protect the contents from a fire and from theft. But you need to actually put things inside the safe. You can’t put your home and business in the safe.
Ok, that might have been a crazy example. But the point is that true protection is not done with one or two “magic bullets.”
How can you even know what protect your money and property?
Many professional advisors use words that sounds confusing. Life insurance agents sell life insurance and they call it asset protection. Financial planners invest your money and call it estate planning. Estate planning lawyers provide wills and trusts that govern how your property is distributed and managed after you die. But they give little thought to whether the inheritances actually benefit the next generation. Other insurance agents sell property and casualty insurance or liability insurance and tell you things that make you feel good and think that you’re protected. But they don’t tell you all the exceptions and limitations to the insurance policies.
Meanwhile, none of these professional advisors typically talk to each other. And typically, once they have sold you their product, they rarely talk to you on a regular basis. As a result, most families only thrive financially for a generation or two. But meanwhile, some wealthier families have figured out how to survive for multiple generations, almost indefinitely.
What is missing for most families?
I believe that wealth protection should be done holistically. For example, many asset protection companies only protect your money and property from lawsuits during their lifetimes. No attention is given to what happens after you die. As a result, the creditors can simply wait until you die and then get paid out of the probate.
Money is like water.
I’ve come to believe that money is like water. It’s the type of energy that comes and goes, and if you want to preserve and protect your wealth, it’s like holding water in a bucket. All it takes is one tiny hole in that bucket to eventually lose all of your money, so asset protection must be done holistically. Addressing a single concern of the moment is like plugging one hole in your bucket and assuming everything is perfect. Meanwhile, your money and property are leaking out of all the other holes that no one thought about plugging.
Keep following our future blog posts
In upcoming blog posts, we will be addressing the various ways that you and your family can lose money and property. Then you can decide for yourself whether your assets are truly protected.