For many affluent and successful individuals who are concerned about losing their wealth in unfounded or frivolous lawsuits, the answer might be asset protection planning. According to Homer Smith, Director of the DK Family Office Practice, Founder of Konvergent Wealth Partners, and co-author of Optimizing the Financial Lives of Clients: Harness the Power of an Accounting Firm’s Elite Wealth Management Practice, “A formal body of law called asset protection planning does not exist. Instead, asset protection planning is a subcategory of legal risk planning, which is a subcategory of risk management. Asset protection planning aims to discourage a possible lawsuit before it begins or to motivate creditors to agree to a favorable settlement.”

Where possible, you want to eliminate or mitigate possible litigation. Irrespective, you are looking to minimize your loss of wealth. Specifically…

Asset protection planning is pre-litigation planning intended to deter lawsuits and if that is not possible promote favorable settlements.

Asset protection planning can be thought of as your last line of defense. “Before people take steps to legally insulate their wealth, they should probably consider all the various forms of liability insurance available,” says Cliff Oberlin, Chairman and CEO of Oberlin Wealth Partners and co-author of Family Fortunes: How Family Enterprises Thrive Across Generations. “For example, most people can increase their personal umbrella policies to equal or exceed their net worth. This is usually the least expensive and highly effective risk management solution. High-quality business liability insurance for entrepreneurs is often a very good approach.”

The most potent asset protection plans are never even contested. Litigation is avoided or everything is settled before there are any judgments. When there are judgments, does the asset protection plan make collection difficult if not impossible?

“From a creditor’s perspective, not only must he or she win in court, but also will he or she be able to collect the judgment?” says Aaron Yen, Senior Partner, Ascendant LLP. “If there is high uncertainty about the ability to collect the judgment, then it is increasingly likely there will be a favorable settlement for the defendant. Add to the calculus the time involved in going through the courts and the costs of litigation. So, good asset protection planning thereby motivates settling.”

The rationale: Without question, effective asset protection planning is not secrecy. On the contrary, for asset protection strategies to work, creditors must be well aware of them. With the concept of secrecy out of the way, effective asset protection planning provides a strong explanation for taking the legal actions you took. Be aware that the law is not all that accommodating with the idea of insulating assets from legitimate creditors except for cases of bankruptcy. 

Just saying you want to protect your wealth from creditors is many times not a viable rationale. “Judges and juries do not commonly view getting over on other people favorably. The idea that a person set up an asset protection plan because of imminent impending or current trouble does not work,” says Vince Annable, CEO and Founder of VFO Advisory Group and co-author of Your High-Performing Virtual Family Office: Maximizing Your Financial and Personal Lives. “More specifically, fraudulent conveyance, also referred to as fraudulent transfer, is transferring assets with the intent of dodging creditors. If a transfer is deemed fraudulent, then an asset protection plan can be negated. Also, the perpetrators including the advisors can potentially be charged with contempt, fraud, and civil conspiracy.”

When done well, asset protection plans are a consequence of other needed and desired wealth planning. For example, estate planning is often the transfer of wealth. A number of the strategies, techniques, and tools of estate planning also provide creditor protection. The same can be said for succession and other types of business planning. Creating and implementing these plans can also provide you with asset protection. 

There are three other aspects of asset protection planning that are important:

  • Being as flexible as possible: To the extent possible, your asset protection plan should be modifiable. You want to be able to adapt as laws and circumstances change.
  • Using multiple asset protection strategies: It is often wise to implement several different asset protection strategies. Redundancies tend to provide a greater possibility of effectively insulating your wealth.
  • Being cost-effective: The costs of asset protection planning are the initial expenses in the planning and implementation. Some strategies have ongoing costs. It is smart to understand all the costs and to make sure that there are no other approaches that will produce comparable results for less.

Regularly review your asset protection plans: At any time certain asset protection strategies are seen in certain ways. There are asset protection strategies that are known to either work or not and under what conditions. This is based on established law. Other asset protection strategies are untested and in the minds of some professionals questionable. Then there are those asset protection strategies at the cutting edge. There are generally unknown and can therefore be very effective. 

Asset protection planning is regularly in a state of flux. Erudite professionals are consistently seeking ways to legitimately shield the wealth of the wealthy. At the same time, creditors and their advisors are always looking for ways to collect. All along, changes in laws and regulations can enervate some asset protection strategies as well as set the stage for others. Therefore, by regularly reviewing your asset protection planning, you are making sure you are doing everything possible to legally nullify or mitigate the impact of unfounded or frivolous lawsuits.

RUSS ALAN PRINCE is the Executive Director of Private Wealth magazine (pw-mag.com) and Chief Content Officer for High-Net-Worth Genius (hnwgenius.com). He consults with family offices, the wealthy, fast-tracking entrepreneurs, and select professionals.