New techniques can help you help them.

    Protection of all sorts is an overriding concern for high-net-worth individuals. First and foremost, they want to protect themselves and their loved ones from harm. As a result, many wealthy individuals and families employ security experts and bodyguards to ensure the physical safety of their inner circle. Next, they want to protect the assets-tangible and intangible, liquid and illiquid-they have amassed over the years from unexpected threats, such as irresponsible lawsuits, or known quantities such as children, in-laws and former spouses.
    As expected, the greater an individual's assets are, the greater the requirements will be for protection. And while the ultra-affluent-those individuals or households with a net worth of $25 million or more-have much to safeguard, they also have sufficient assets to allow a sophisticated and innovative advisor to use cutting-edge financial and legal techniques that are only viable past a certain asset threshold.
    Asset protection should not be approached as a substitute for a financial plan, but rather one component of a broad-based plan that might include such activities as investment planning, tax planning and estate planning. In many cases it should, however, be regarded as prelitigation planning. For the majority of situations, the plan must be complete and the protective structures in place prior to any event occurring that may place the assets at risk, such as a divorce, a failed business arrangement or an accident.
    The preferred scenario for most wealthy clients is to avoid litigation and, in effect, asset protection planning is "insurance" against costly lawsuits in the form of a deterrent. In our experience, the best asset protection measures are never tested in court because the plaintiff concludes that pursuing the lawsuit will be too costly, time-consuming and difficult given the structure of the assets, and opts to settle for significantly less out of court. This is, of course, the desired outcome for anyone who embarks on the asset protection process.

The Basics
    We define asset protection planning as: The process of employing risk management products and legally acceptable strategies to ensure a person's wealth is not unjustly taken from him or her.
    At its most basic, asset protection is a form of legal planning that borrows from several legal fields simultaneously, such as international business law and tax law, to craft a customized solution for a client. Many top-notch asset protection plans capitalize on current tax laws in combination with specific risk management techniques, such as hedging, to create a seemingly impenetrable defense.
    Most financial advisors are in a good position to identify asset protection opportunities for their clients. As they undertake other financial planning activities, they can do so with an eye toward the inherent vulnerabilities of their clients' portfolios. More often than not, devising and implementing asset protection strategies will require the involvement of a specialty attorney, and wealth managers with a network of strategic partners will be prepared to capture the business opportunities as they arise. Delivering a qualified expert to wealthy clients is an expected part of the wealth management experience and will reinforce an advisor's role in managing complex financial affairs.

Select Strategies
For The Ultra-Affluent
    An advisor and a client can explore a variety of methods to protect assets, and a subset of those methods are restricted to use with a sizeable base of assets. The balance of this article discusses three techniques-private agreements for liability insurance, advanced equity stripping and "floating islands"-which can be used by and for the ultra-affluent.

Private Agreements
For Liability Insurance
    The starting point for all asset protection planning is liability insurance, but many wealthy individuals need more coverage than traditional policies can provide. Private agreements are a way to obtain more extensive, highly customized insurance through an arrangement between the insured and a deep-pocketed third party, such as a family office or a hedge fund. Some of the fundamental mechanics include: an upfront appraisal of the risks involved; the escrow of funds, many times in offshore trusts; and hedging the risks against relevant benchmarks. Without question, private agreements can be very complicated to structure and will require the input of a professional advisor, a risk management professional and an attorney. But under the proper circumstances these agreements can prove quite profitable and effective for all parties.
    Private Agreement Example: Piers, an international businessman with a net worth of US$60 million, wanted more liability coverage than was available through conventional products. He found other individuals with similar needs and formed a consortium of six families with an aggregate net worth of US$280 million. Together they established a limited liability company and entered a private agreement with a hedge fund. The fund escrowed US$600 million of its own assets and manages the LLC's money within a specified risk corridor. The agreement allows for automatic adjustments in the LLC's investment strategy when risk-adjusted performance targets are achieved. The escrowed money becomes the "insurance policy," providing the desired amount of coverage for Piers and the other families, and the hedge fund profits from a combination of management fees and the growth of the escrow account.

Advanced Equity Stripping
    The objective of equity stripping is to reduce the net value of assets by securing a loan against them, diminishing their appeal to creditors while still making them accessible to the owners.
    Equity Stripping Example #1: As part of a long-term plan, Gregor placed his personal and commercial real estate holdings and an art collection worth roughly US$50 million in a series of trusts. The assets were appraised, then leveraged in the form of loans from a commercial bank. Gregor invested the loans with a goal of outperforming the interest rates on the assets. In the meantime, the bank sold a promissory note for the loans to a private lender where Gregor was a principal. If he is successful, Gregor will have a net inflow of investment income and direct control of his attached assets, while potential creditors will see only encumbered assets with the commercial bank as the lender.
    Equity Stripping Example #2: Jacqueline has been a successful hedge fund manager for more than a decade and was increasingly concerned about the number of unjustified investor and class action lawsuits. She cross-collateralized her residences and her collection of antique jewelry by taking two loans from commercial lenders. The lenders, in turn, placed the loans in trusts and sold them to the hedge fund where she is a partner. With the help of her financial advisor and his network of experts, Jacqueline established a captive insurance company to hold the assets from the loans and create another level of protection. Jacqueline still uses both her homes and enjoys her jewelry, while the assets in the captive insurance company help her self-insure against personal or professional litigation.

"Floating Islands"
    The objective of the "floating islands" strategy is to continually move assets from one jurisdiction to another while gaining incremental tax-adjusted returns by capitalizing on the different and changing interest rates, tax treaties and exchange rates. The movement is automatic but not regular, and is generally driven by a set of computerized algorithms making it difficult for creditors to track with accuracy.

"Floating Islands" Example
    In her early forties, Beatrice assumed a controlling stake in her family's drilling equipment businesses. After her second divorce, she worked with a team of experts including her counsel, a private banker, a tax specialist and a quantitative professional to develop a program to automate the movement of approximately US$160 million from one offshore jurisdiction to another. This strategy is not about avoiding taxes; Beatrice has homes in three countries and paid taxes in all of them in each of the past five years. The approach has, however, helped her elude the divorce attorneys and forensic accountants hired by her third and fourth husbands.
    For years, high-net-worth individuals have been targets of speculation from those infatuated with the wealth and status of upper crust society. And while most speculation is not harmful, some is, and can breed closer interest and scrutiny than is comfortable. As a result, more and more wealthy individuals are turning to professional advisors for assistance with asset protection planning. An advisor that can deliver fresh thinking, top-notch experts and proven strategies to ultrawealthy individuals will cement their role as a trusted counselor and open the door to bigger opportunities and partnerships down the line.

Hannah Shaw Grove is the author of five books on private wealth and advisory practice management. Russ Alan Prince is president of the consulting firm Prince & Associates.