The Sliding Scale of Asset Protection
Asset-protection advisors measure the legal protection afforded a client’s assets by using a sliding scale. This scale represents a continuum of protection. Some assets are completely unprotected and others are highly protected.
—Susan Brousseau CLU, ChFC, CFP®
Some of the most common questions that arise around asset protection planning are in regard to which assets are protected, to what degree, and which are not. Asset-protection advisors measure the legal protection afforded a client’s assets by using the sliding scale of asset protection in which some assets are completely unprotected and others are highly protected. There is a range of financial products and services that can protect assets in varying degrees. (See Table.)
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Asset,Individual Name,Revocable Trust, Irrevocable Trust, LLC’s, FLP’s, GRIT’s GRAT’s GRUT’s, Qualified Personal Residence Trust
Second Home,-3, -3, +3, +3, +3, +3, +3
Second Home Occasionally Rented, -3, -3, +4, +4, +4, +4, +4
Rental Property, -5, -5, +5, +5, +5, +5, +5
Investment Account, -5, -5, +5, +5, +5, +5,+5
Checking Account, -5, -5, +5, +5, +5, +5, +5
Retirement Account, +4, +4, +4, +4, +4, +4, +4
IRAs, +3, +3, +3, +3, +3, +3, +3
Autos, -4, -4, -4, -4, -4, -4, -4
Planes Boats ETC., -5, -5, -5, -5, -5, -5, -5
Other Assets, -5, -5, -5, -5, -5, -5, -5
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The Sliding Scale and Scores
The sliding scale runs from -5 (completely vulnerable) to +5 (superior protection). It is not uncommon for a client to begin with overwhelmingly negative scores. The reasons for these negative scores vary. Typically, personal assets are owned jointly (-3) or in the client’s own name (-5). Both of these ownership forms provide little protection from lawsuits and also have negative tax and estate-planning implications.
One of the most risky ways to operate a business or title an asset is as a general partnership
(-5). For all other business entities, liability from operations is always a concern. For this reason, it is generally not advisable to own any business assets within an operating business. (-3).
Before asset-protection specialists can achieve a high level of protection for a client, high-risk assets must first be eliminated or transferred to safer havens. There are many ways to protect these assets, but one of the most efficient is to utilize exempt assets.
Federal and State Exempt Assets
Each state legally identifies assets that are exempt from creditor claims. Federal law also exempts certain assets. Because these assets are inherently protected by law, they enjoy the highest level of protection, a +5 score on the sliding scale.
Examples of how state laws can protect assets can be found in Texas and Florida. In both cases, homestead exemptions are generally unlimited for personal residences, with some exceptions. Similarly, the cash value in a life insurance policy is completely protected. At the Federal level, bankruptcy law generally affords full protection for retirement plans such as pensions and 401(k) plans (+5).
Basic Domestic Legal Tools
In many other states the list of exemptions is not as generous. Even in those states where the exemptions are broad, it is important to make sure that asset-protection goals are balanced with wealth-accumulation and investment goals.
Two basic asset-protection tools are Family Limited Partnerships (FLP) and Limited Liability Companies (LLC). FLP’s and LLC’s provide good asset protection against litigation. They also allow the investor to maintain control of the assets, and can provide income and estate-tax benefits. Family limited partnerships and LLC’s can provide asset-protection scores that range between +1 and +3.
For many investors, the cost of an advanced asset-protection structure is worthwhile because of the significant benefits that can be achieved. Advanced strategies can offer a +4 or +5 asset-protection score. These can include:
•Innovative insurance planning;
•Innovative tax planning;
•Sophisticated ownership structure for personal and corporate assets;
•The use of various types of revocable and irrevocable trusts;
Asset-protection planning, like any sophisticated multidisciplinary effort, can achieve varying degrees of success. In your asset-protection plan, make sure you understand the cost and benefits of the various tools you employ. This understanding will help you protect the wealth you have obtained and enhance your wealth for retirement, future generations and charity.
Susan Brousseau CLU, ChFC, CFP®, is Senior Vice President and Wealth Advisor for Blackhawk Capital Partners. You can reach her at (480) 505-2011, or email@example.com.
Kevin B. Perlberg, Donald (Trace) W. Tendick, Tom Kueht, and Christopher Nei are registered representatives offering securities through United Planners Financial Services, member FINRA, SIPC. Advisory services offered through Blackhawk Capital Partners. Susan Brousseau and Michael Miller offer Advisory Services Only. Blackhawk Capital Partners and United Planners Financial Services are independent companies. *Neither United Planners nor Blackhawk Capital Partners offer tax advice. Please consult your tax advisor for specific guidance.
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