Don’t needlessly put your wealth at risk

For many people, building wealth represents years, often decades, of hard work, discipline, and sacrifice. What sometimes receives less attention is the reality that accumulated assets can also create new vulnerabilities.

In conversations with successful families and business owners, one concern comes up often. The possibility of being targeted by lawsuits or legal claims. Litigation can have serious financial consequences.

That is why protecting wealth can be just as important as building it. Without thoughtful preparation, financial security for both individuals and families can be exposed to unnecessary risk.

Yet many affluent individuals do not have a clear strategy in place.

Research from CEG Insights, which surveyed more than 1,200 affluent investors with net worths ranging from $100,000 to $25 million, found that fewer than 20 percent had established a formal asset protection plan. Even among those with $10 million to $25 million in net worth, only about 28 percent had taken those steps. The survey also showed that 40 percent operated without umbrella insurance coverage, potentially leaving themselves financially vulnerable.

Asset protection planning, as it is commonly defined, focuses on putting safeguards in place before a problem arises. The goal is to deter litigation when possible and encourage more favorable outcomes if disputes do occur.

Asset protection is not about hiding assets. In fact, transparency can be part of the strategy. The idea is to create a legal structure that makes assets more difficult to reach, which may discourage claims or encourage settlement rather than prolonged disputes.

Five Asset Protection Steps to Consider
1. Put protections in place before a claim arises.
Asset protection strategies are generally most effective when implemented before any legal exposure exists. Once a claim develops, options can become much more limited because of laws surrounding fraudulent conveyance. Similar to insurance, protection is most valuable when established in advance.

2. Cover the basics first.
Evaluating liability insurance and related coverage is often a foundational step. Umbrella policies can provide an additional layer of protection. In some cases, ownership structures or asset titling decisions may also play a role.

3. Explore additional strategies where appropriate.
Depending on individual circumstances, this may include reviewing insurance types, using state law exemptions, considering business restructuring, evaluating gifting strategies, or planning inheritances in ways that reduce exposure to potential creditors.

4. Work with qualified professionals.

Because these strategies can be complex, coordination among knowledgeable professionals is often important. Attorneys, financial professionals, and insurance specialists may all play roles in developing a cohesive approach. Without proper structure and expertise, protections may not hold up when they are needed most.

5. Avoid common mistakes.
Some asset protection strategies require careful planning and execution. If structured improperly, they may not provide meaningful protection. Assumptions about safety can create a false sense of security if plans are not implemented correctly.

Planning Ahead Matters
Ultimately, the purpose of asset protection is not fear. It is preparation. Just as individuals insure homes or businesses against unexpected events, protecting accumulated wealth is about preserving what has been built over time.
For those who have worked to achieve financial success, understanding this topic can be an important step toward long term security and peace of mind.

Thomas M. Dowling, CFA, CFP®, CIMA® is the Head of Wealth Management at Alliance Global Partners of the Lowcountry on Hilton Head. Reach him at infohh@allianceg.com.