Wealth is vulnerable in many ways, and some of the most significant threats are lawsuits, divorces, and creditors.
While asset protection has sometimes been associated with hiding wealth in the past, we believe in legitimate arrangements that take into account all involved interests and preserve wealth.
Old tricks will not cut it since your specific economic and legal environment will shape the rule set for asset protection. Furthermore, your wealth and assets' nature will further determine the available protection options.
Following our recent post about Switzerland and Liechtenstein's legal framework for asset protection, we will guide you through some practical cases to protect wealth against risks and cover the critical components of an asset protection strategy.
Asset protection definition
Asset protection is an arrangement to safeguard wealth from future claims and creditors' access.
This happens either by ultimately disposing of wealth or encumbering it so that it's no longer relevant for potential creditors.
In general terms, to achieve legitimate asset protection, you have to separate from specific assets early enough, ensure there are no pending claims at the time of disposition, and you have to remain solvent for a particular period following it.
We highlight the term legitimate since the effectiveness of such structures also depends on your reasons.
Even if you follow the strict wording of the law but are driven by the wrong motivations, your arrangements may remain subject to creditors' contestation.
Usually, a typical wealth owner's objective is to safeguard assets for long-term preservation.
In this way, family wealth can be transferred over generations, and family members can hedge it against entrepreneurial and professional activities' risks.
Let's now outline some asset protection approaches.
Asset protection examples
In principle, legal environments offer several opportunities to protect assets from creditor access.
Unfortunately, in reality, there is a fine line between legitimate wealth preservation and creditor defraud.
That's why the right guidance and strategy are essential.
Many legal environments safeguard wealth only under certain conditions.
For example, it's legitimate to separate business and private wealth by exercising the business with a corporation.
In such a scenario, you will not be personally liable for claims arising from the corporation's course of conducting business.
Business and entrepreneurial activities come with risks that can spill over into personal assets.
Therefore, the legal form should be chosen carefully, making provisions for potential liability claims against shareholders and managing directors.
Combined with liability insurance coverage, a business corporation is a simple yet very effective way to protect your private wealth from lawsuits and bankruptcy proceedings.
Another example is the protection of family homes in some jurisdictions. This asset will not be subject to creditor forced execution and bankruptcy proceedings.
If you live in such a country, you have an excellent opportunity to preserve wealth for further generations irrespective of your risk exposure.
Let's take the example of a surgeon performing complicated specialist surgery.
Her exposure to professional liability claims is significant. She has accumulated substantial wealth over the past years and wants to protect and preserve it for her children.
Her oldest son already works in her practice and is supposed to take it over in the future. Her other two children prepare for their careers, and she wants to ensure that they can complete studies and have sufficient means to start their own business.
First, it is advisable to transform the surgeon's medical practice from a sole proprietorship into a corporation.
Although she has professional insurance coverage, this will direct potential professional liability claims to the corporation rather than to her.
Furthermore, it reduces the risk of patients seeking legal action against her private wealth.
The possibility of liability for culpable conduct remains, and in such a case, the corporate structure would not provide complete protection.
The following paragraphs will assess which measures and arrangements can further enhance our surgeon's asset protection framework and strategy.
A trust for asset protection
Trusts have a long tradition to safeguard family wealth over generations. With such an arrangement, you can transfer legal ownership of wealth to a trustee to benefit specific beneficiaries.
Here, the issue is creditor access and the taxman's attitude. To achieve adequate protection, you will have to give up ownership and control over wealth.
In legal terms, you will neither be the legal nor the economic owner of the assets contributed to the trust.
An irrevocable trust sees the settlor definitively stripped of her assets.
In principle, she no longer has any rights or obligations concerning the trust assets. In such an event, the settlor has no access to the trust assets through legal or economic arrangements.
This includes that the settlor is neither the trustee nor the trust's beneficiary.
Discretionary trusts may also protect the beneficiaries' wealth from creditor access. Only abstract classes of beneficiaries are typically designated in the trust deed.
The decision of who will ultimately benefit from the trust is left to the trustee.
At the time of the discretionary trust's settlement, the beneficiaries are not entitled to any distributions since it is not yet sure which persons will benefit from the trust fund, to which extent, and at what time.
The rights of a beneficiary are therefore merely of an expectant nature.
Only a genuine separation from her wealth will lead to asset protection for the settlor.
That's why it's not recommended to exercise control over protectors that monitor the trustee's activities or influence investment management decisions.
Next to the above, a trust allows for flexible and confidential transfers of wealth. Thus, lengthy and public probate procedures can be avoided.
Privacy doesn't mean that you can hide from creditors but protect your and your family's legitimate interests.
Just think about countries where kidnapping and blackmailing are widespread. In such scenarios, privacy and banking secrecy hedge against those risks.
Our surgeon wants to make sure that her medical practice will be maintained and run according to her wishes in the future.
For this purpose, she transfers the shares in the company into an irrevocable trust with her children as beneficiaries.
With such an arrangement, current and future beneficiaries will not be able to dispose of the business.
Furthermore, the business is protected from her and the beneficiaries' creditors' claims, although they may seize eventual distributions out of the trust.
Asset protection life insurance
Life insurance policies are the most versatile to protect, preserve and grow wealth. In particular, private placement (PPLI) and universal life insurance offer many advantages for wealth owners.
Private Placement Life Insurance (PPLI)
A PPLI is a single premium unit-linked whole-of-life insurance where death cover depends on the value of the funds held under the life insurance policy.
While this offers you a variety of investment options for the insurance premium, you run the risk of markets' downside movements, and the investments are not guaranteed.
Universal Life Insurance
Another option is universal life insurance, where a high death benefit is a core. Such a policy allows for the growth of wealth to maximize the amount to be transferred to the beneficiaries.
The wealth preservation benefits of life insurance policies
Depending on the jurisdiction, such life insurance policies allow you to protect wealth from your creditors if you irrevocably designate the beneficiaries.
This is the case under Liechtenstein and Swiss law, and your creditors cannot enforce their claims against the life insurance policy.
Under Liechtenstein law, even the beneficiaries are protected from bankruptcy and enforcement proceedings if they are spouses or descendants of the policyholder.
Furthermore, you can protect your wealth against tight liquidity situations to cover inheritance tax bills with life insurance.
In particular, if your wealth is mainly illiquid, the life insurance death benefit can be used to cover the costs of inheritance, including inheritance taxes.
Finally, suppose you don't distribute your wealth equally.
In that case, life insurance can balance your entire estate, e.g., a family business is transferred only to selected family members, and life insurance compensates excluded family members.
If we return to our surgeon's example for a moment, she could buy a life insurance policy for each of the three children.
Since only one child will assume a leadership role in the family business, she may compensate the other two children with a higher death benefit.
She can also plan for liquidity if the family business transfer under the trust structure would trigger inheritance taxes and cause a liquidity constraint for her children to settle taxes.
She could protect the assets under the life insurance policies from access by her potential creditors by irrevocably designating her children as beneficiaries.
If the life insurance policies are governed by Liechtenstein law, her children would also enjoy wealth protection regarding their beneficial interests.
Other asset protection vehicles
Although similar to a trust, foundations are legal entities without shareholders, members, or stakeholders.
Foundations are established to fulfill a specific purpose and are represented by the foundation council.
The founder defines the purpose, appoints the foundation council, and designates the eneficiaries. With that, the foundation can exist in perpetuity.
Foundations are highly customizable and can be established for a variety of purposes.
Giving up control over a foundation can ensure that assets owned by the foundation will not become part of a bankruptcy or enforcement procedure against the founder.
Again, similar to life insurances, Liechtenstein law extends such protection also to family members as beneficiaries under certain conditions.
Asset protection and estate planning
Estate planning should also focus on maintaining the integrity of family wealth and avoiding inheritance disputes. Wills are often challenged in court, but asset protection vehicles can prevent disputes among beneficiaries.
There are various reasons:
- The trustee's jurisdiction and applicable law combined with the custody location can scare off beneficiaries willing to dispute.
- Succession laws may not be enforceable anymore since wealth has been transferred during a lifetime and is in line with specific laws applicable at the time of transfer.
- Some arrangements even penalize beneficiaries that attack the scheme by reducing or eliminating their beneficial interest.
Alternative dispute resolution can achieve similar results within a formal family governance framework. However, there may still be a dispute, but not in public courts.
An often-overlooked mechanism to protect assets for future generations is to reserve a part of the estate for the next generation's children.
By skipping a generation, you can already provide for your grandchildren without having to worry whether your children will preserve wealth.
Within your overall estate planning arrangement, assets can be consolidated and preserved for the family.
If a family business is involved, particular attention should be placed on fencing it against creditor claims and disputes within the family.
Specific estate planning vehicles such as trusts and foundations can limit the beneficiaries' immediate access to wealth and prevent them from spending everything at once.
Asset protection and divorce
Relationship breakdowns regularly put the family wealth at risk. One thing to avoid from the outset in this context is uncertainty.
That's why prenuptial or postnuptial agreements, as a minimum, should clarify applicable laws and court jurisdictions. The more can be solved upfront, the better if things go wrong.
Again, family governance can mitigate many risks. A family may, for instance, develop principles on how to formalize relationships - not the most romantic approach but effective to preserve family wealth.
A practical way to fence wealth against a potential divorce can be the settlement of specific trusts before any marriage.
Furthermore, all existing family arrangements such as trusts and life insurance policies should consider the specific treatment of spouses and partners during and eventually after the relationship with a family member.
Asset protection strategies
To develop a solid asset protection strategy, you first need to assess your initial situation in detail to spot potential risks.
Several correlated threats are deriving from your business, professional activities, investments in high-risk countries, your family during and after your lifetime, to mention a few.
Why do you need asset protection?
Ask yourself why you want to achieve asset protection? Your why will tell a lot about the risks to manage.
You can then define them according to their probability and magnitude.
The next step is to put them in context with your present and future wealth to develop an asset protection strategy.
This includes an analysis of the nature of the assets and the available wealth structuring options.
The asset protection plan
With the baseline study of current threads and those on the horizon, proactive planning will develop a comprehensive framework of specific arrangements and vehicles.
It would be best if you shifted between approaches to achieve diversification.
Depending on your assets, various tools to structure businesses, real estate, and financial wealth may be required to achieve optimal results.
Furthermore, engaging your family in the process will ensure awareness and alignment to protect wealth for the long haul.
Long term asset protection
Starting early with asset protection and conducting ongoing wealth planning analysis with regular reviews enables a solid asset protection plan that keeps family wealth safe in turbulent times.
Your circumstances and wealth may change over time, and thus, being prepared for risk events is crucial.
It will help if you are stuck with your strategy for the long haul and play it safe enough to tackle current and future risks.