Little-Known Asset Protection Strategies
Though there are many legal tools to help protect personal assets from predatory litigation, it’s important to first shield assets you own personally from your business activities.
The three best asset protection strategies involve firstly diversifying your assets by spreading them out across multiple structures and jurisdictions.
Then, in addition to offshore banking, we also recommend you use offshore trusts. The third strategy is to look at ways to combine all your financial goals into a single asset protection plan that includes things like obtaining a second citizenship so you can change your tax residence and enjoy the maximum possible degree of diversification – citizenship diversification.
First Things First…
There’s nothing wrong with being paranoid. If you’re worried someone might try to come after your wealth, it doesn’t mean you’ve done anything wrong, it just means you’re being pragmatic.
And if you’re reading this article it’s safe to assume you’ve already seen the danger and you’re looking at ways to head off trouble before it happens, so we can help you with that.
And that’s the key point here – being proactive, being prepared, dealing with the problem before it occurs because you won’t be able to do any of this after the fact. Some people might be hoping to find ways to quickly move things offshore before the powers that be catch up with them – but we’re here to tell them it doesn’t work that way.
This article is not for people with something to hide. It’s for people with something to lose.
It’s for people who have worked hard for years to generate wealth and build up their businesses and who are terrified that they’ll lose through no fault of their own. It might be because of a divorce or other family issues, it might just be to some shifty, ambulance-chasing lawyer or, for that matter, it might be because of something the government does.
In all instances, this fear is due to a very real belief that the domestic system no longer serves entrepreneurs and investors, so it’s time to take preventative measures. It’s time to make a plan.
Asset Protection Planning
Before we get deep into the different methods, the first step of any comprehensive asset protection plan is getting the right insurance coverage.
If you have a business, you’ll need professional liability insurance and you’ll want to make doubly sure you understand the policy correctly, and if you don’t, talk to your insurance company and get clarification.
Having liability insurance will help shield you from lawsuits but they can still present a danger to you, your assets and even to your home.
One of the biggest concerns is that of losing your home to a lawsuit. And while it’s true that some states offer high levels of homestead protection (e.g. Florida homestead protection is 100%) to prevent a debtor’s primary residence from being seized and sold off to pay debts, not every state offers a homestead exemption. New Jersey, for example, has no such protection.
So once again, understanding the financial risks and knowing the limitations of the available protections is the first step, but for more effective asset protection, one has to look at more advanced strategies and then later find clever ways to combine them all together in a way that best suits your needs.
Limited Liability Companies (LLCs)
When it comes to protecting assets and achieving financial goals, how you structure things makes all the difference. So before we get into our asset protection strategies, a word about how to best separate your assets.
Small business owners ought to take particular care about how they structure their business and the degree of legal separation they create between their personal and their company assets.
By choosing the correct business entity the worst dangers can be avoided.
If you run a business, setting up a limited liability company makes sense. As a sole proprietor, there is no separation between your business and your personal assets. Partnerships are potentially worse since they meant that you’re on the hook for your business partner’s debts and so having the wrong business partner could end up costing you dearly.
But with limited liability, you don’t have to worry about such nightmare scenarios since your personal assets are completely separated from your business operations.
By establishing the legal ownership of assets, you can ensure they remain off-limits and draw a clear dividing line between your personal and your business assets which cannot be easily crossed.
LLCs exist as separate legal entities which can also hold assets. The use of LLCs, therefore, can help not only completely shield against creditors and litigation, but since limited liability companies can be used as holding companies to hold assets and/or to operate subsidiary business entities you can enjoy greater compartmentalisation of your business assets and personal assets.
Using multiple subsidiary LLCs means not having to worry about holding large numbers of assets in your own name. Instead, you can create a network of legally distinct subsidiaries, so if one runs into trouble, it doesn’t affect any of the others and should in no way affect your personal situation.
By structuring your business and your assets in this way, you need never worry too much about contagion.
They say don’t put all your eggs in one basket, with LLCs you can put as many eggs in as many baskets as you choose, each with its own bank account and separated business assets, while still being fully in control of each.
We’ll come back to this point about eggs and baskets again and again throughout this article, but for now, just keep in mind that LLCs can be used to hold companies and liquid assets, they can also be used to hold other assets such as patents and other forms of intellectual property. Again this can prove hugely valuable by adding protection against litigators looking to sue you just to try and gain access to your IP.
Real estate investors also use LLCs as it allows them to hold properties without needing to worry about personal liability since property owned by an LLC is legally distinct from any property you own personally.
So if you own any rental properties, and you’re worried about litigation, it makes sense to set up some form of corporate structure which you can use for the purposes of managing your properties while reducing your personal legal exposure.
Of course, as you shall learn, offshore LLCs are just one type of structure you can use for asset protection.
3 Ways To Protect Assets – Overview
The creation of proper asset protection strategies means combining together three core elements in a way that best suits your specific needs.
Diversify your assets
Use an offshore trust
Create an asset protection lifestyle plan
Each of the following strategies will work to protect your assets but the true magic happens when you find a way to combine them together that works best for you.
Asset Protection Strategy 1 – Diversify Your Assets
While having personal liability insurance can shield you from some lawsuits it doesn’t necessarily mean you may not be held personally liable in some cases.
Before we continue on this point, it should go without saying, you of course need excess assets before diversification is a strategy for you; if you have little, diversification will not make sense.
It goes without saying you need to have a good lawyer or a firm that you trust to represent you properly, in case someone does come after you with a lawsuit which could potentially cause you to suffer significant financial damages.
Creditors and predatory litigators are one concern, though not the only one. Sometimes even the government makes mistakes.
In the US, and indeed other countries also, it’s possible to have your account frozen on an erroneous basis.
It happens more commonly than you might think and can be really frustrating, as you have to sit tight and wait for them to fix the mistake and we know how long it takes governments to do things. All because some anonymous bureaucrat wasn’t paying attention.
But if you have your money spread out in other jurisdictions, this becomes less of a problem. Sure, it’s still frustrating, but at least you have access to other funds so you can continue to cover your expenses and do your business deals, because your money is offshore in places where your home government cannot directly interfere with.
From a litigation standpoint, if you have money in a foreign bank account somewhere else, it’s harder for anyone else to screw with you, and if you have it spread your money out more, in various places, it’s even harder still.
Same story if you run a business as an offshore corporation, but still live in your home country – yes you still need to pay tax where you live – but your business has an additional asset protection, this works particularly well if you run an online business.
This type of setup doesn’t just help to save you on taxes – you could potentially reduce them by as much as 80-100% – you also get to take advantage of enhanced asset protection.
Asset Protection Strategy 2 – Use An Offshore Asset Protection Trust
The practice of setting up irrevocable trusts is commonly used in estate planning since an irrevocable trust cannot be altered once they have been set up. Also, all of the assets transferred into the trust become property of the trust itself after its formation and are therefore no longer considered to be your personal property.
In other words, if creditors and/or litigators want to gain access to those assets, they will be unable to, even while you are alive. Instead, they will eventually become the property of your chosen beneficiaries – this is a useful way of keeping assets “in the family” and ensuring a smooth transition of your estate.
An asset protection trust, meanwhile, is, as its name suggests, a type of trust created specifically for the protection of assets. Using an asset protection trust can help shield your assets from creditors as well as litigation.
Many financial advisors will recommend that you set up a domestic trust, but we consider them a half measure.
Although you may, of course, choose to set up a domestic asset protection trust, domestic asset protection trusts don’t offer anywhere near the same levels of robust protection that offshore asset protection trusts provide. Plus, setting up an offshore asset protection trust, also allows you to open offshore bank accounts, so you can enjoy the benefit of both at the same time.
There are many reasons why offshore trusts offer the best asset protection, but the main point is that they make it virtually impossible for creditors and/or litigators to seize trust assets due to multiple rings of protection surrounding them.
Firstly, popular offshore trust jurisdictions, such as The Cook Islands or Saint Kitts and Nevis, have legal systems that generally tend to favor those who establish trusts in their territory. (Which makes sense from a business perspective.)
Also, creditor claims against trust assets are moot since they do not recognise foreign judgements in these jurisdictions. If you set up a trust on home soil it’s significantly easier for people to gain your trust’s assets. All it takes, potentially, is for a judge to rule against you and then you risk losing them to litigation.
But by going offshore this risk is mitigated. The fact that foreign judgements are not recognised means that anyone looking to gain access to your assets would need to hire a local lawyer and fight a prolonged legal battle on foreign soil.
And if they are unsuccessful, they are then liable to pay your legal fees.
Put it all together and you can see why these type of offshore trusts are so popular. Though, as always, you need to know what you’re doing and, as a US citizen, you will need to take particular care to ensure you’re fully compliant with federal law.
As with having foreign bank accounts, having an offshore trust can have unforeseen fiscal consequences and the last thing you want is to find some nasty surprises on your tax bill.
Asset Protection Strategy 3 – Have A Personal Asset Protection Lifestyle Plan
This means mapping out a new life with asset protection at its core. You should have a home and another property because who knows what could happen with your assets in your country long term. If you’re an American, the fact that people are now literally talking about the prospect of a second civil war in the US, not to mention the so-called “end of globalization”, should give you pause for thought.
As governments become more aggressive and insular, they’ll want to raise your taxes and, in extreme cases, may even decide to confiscate your property
Maybe you’re tired of your home country and want to leave or maybe you just want to have a plan b. And this is where we get to the crux of the matter – the most airtight asset protection method of all.
It’s all well and good having good insurance and dependable lawyers, setting up a carefully constructed network of LLCs and multiple offshore trusts, but as long as you still have just one citizenship you will always be at the mercy of that one country’s government.
And if they do decide to enact policies that hurt you, be they higher taxes, trade or travel restrictions, or in extreme cases, they may even decide one day to help themselves to your assets just because they’re the government and they can, you’ll be powerless to stop them.
So just as we advise our clients to diversify their assets and to use multiple offshore structures and multiple offshore bank accounts to spread their exposure out as wide as possible, we also recommend they do the same thing with their citizenship.
Protect Your Business & Personal Assets
We often talk about so-called “shiny objects”, things that people become obsessed with having because they like the sound of them, despite not understanding exactly how they work, what the long-term implications are and whether or not they have any true value.
When it comes to asset protection, many people are looking not merely for shiny objects but for shiny suits of armour, hoping for a single, unified layer of protection that will shield them from absolutely everything.
But we’re here to tell you no such solution exists. Besides, armour is heavy and cumbersome and doesn’t allow any level of movement. What you really need is asset protection chainmail, interlocking rings of protection that join together to provide you with the utmost flexibility and strength.
If you need more information, contact LupoToro directly. Our holistic approach and thanks to our global network of trusted financial professionals, we can connect you to the world’s best jurisdictions, giving you even more ways to bank and invest.
What Are The Best Asset Protection Strategies?
The best asset protection strategies are those which take a broad, interlocking approach, rather than relying on a so-called one-size-fits-all solution. This means diversification not just of investments, but by spreading your wealth across multiple jurisdictions and even securing second citizenship. Using limited liability companies (LLCs) once again spread globally, will help differentiate assets, allowing you to spread them out across various corporate structures.
The use of offshore trusts and similar legal tools for the purposes of asset protection can add even tougher layers of protection, though the most important thing is to start thinking of ways you can include asset protection strategies in all your planning from now on, so whatever happens, you’re prepared for the worst.
Which Is Better An Offshore Or A Domestic Asset Protection Trust?
Domestic asset protection trusts will always leave you at the mercy of local laws, local judgements and, of course, your home government, while offshore trusts in popular offshore jurisdictions like the Cook Islands provide considerably more layers of protection, meaning your assets are safe from predatory litigation.
