Asset Protection

Top Estate Planning Tools for Asset Protection

I was on a Discovery Conference with a client a few days ago who had recently signed up for our elite Private Wealth service. For most clients, the Discovery is a chance to be really clear what they are hoping to get from the planning. In this case, they wanted estate planning that offered asset protection while they’re still alive.

In this article, we will talk about some of the asset protection strategies I introduced to them; the same ones you can build into your own wealth protection plan. We’ll talk about what works in today’s world. And you’ll get a clear idea of the pros and cons of each.

But first, let’s talk about…

The #1 Secret to Successful Asset Protection with Estate Planning

Quite simply, it’s to focus on your goals and not the tools. There are plenty of tools out there to help you protect your assets – whether for estate planning purposes or not.

Some will fit your situation. Some will not.

It’s very important that, before you start to implement, to be clear how they can fit into your situation.

There’s no real value in running out to set up a trust, or an LLC, or something else without knowing if it’s going to be right for you.

Of course, wealth protection planning is our specialty. We’ve been at it since 1984. So if you need some help after reading this article, please book a free no-obligation consultation with one of our Associates to see how we might be able to help.

Estate Planning with Domestic Asset Protection Strategies

Limited Liability Companies (LLCs)

It’s quite possible that LLCs are the most flexible and most cost-effective asset protection option out there.

They can be used to separate and protect personal assets from business risk. You can separate certain higher-risk assets (like a business) from personal savings.

If someone sues you because a high-risk asset causes an injury, and that asset it held in an LLC, your personal assets are normally protected against that claim.

And if you’re sued for something that doesn’t involve an injury caused by a high-risk asset, creditors can’t generally seize the assets in your LLC. This makes it really frustrating to lawsuit seekers.

If structured right, LLCs can also make your assets quite private.

Key Advantages:

  • Easy and generally low-cost to set up.
  • Can fit into many sorts of estate plans.
  • Offer strong asset protection (to what degree varies from state to state).
  • Segregate different risks from each other, making it less likely a creditor can take everything you own.
  • Tax neutral.

Key Disadvantages:

  • Are more complicated than owning assets in your own name.
  • Commits you to annual maintenance fees.

Homestead Exemptions

Homestead exemptions provide an important means of protecting the equity in your family’s primary residence from creditors. Depending on which state you live in and what sort of property you own, they can offer no protection, a little protection, or virtually unlimited protection. This protection is free and well worth having if you qualify for it.

Key Advantages:

  • It costs nothing to put into place.
  • It makes you less of a target.
  • Most states let you keep the homestead exemption if you use a revocable trust (the most popular trust for estate planning purposes, though with no asset protection.)

Key Disadvantages:

  • State protections vary widely. New Jersey and Pennsylvania have no homestead exemption at all. In other states like Florida and Texas, it’s effectively unlimited.
  • Depending on your state’s exemption, you may need to consider other strategies if you want to protect your home from lawsuits.
  • You may lose the homestead exemption within a protective structure like an LLC.

The Homestead Exemption: Proven Protection in Bankruptcy (and Beyond)

You can find more information here: homestead bankruptcy exemption.

Retirement Accounts

They’re not glamorous, but “lowly” retirement accounts like IRAs and 401(k)s don’t offer just tax benefits; they can be excellent tools for asset protection in estate planning too.

Federal law offers extensive protection for retirement assets:

  • Employer-sponsored 401(k)s (traditional and Roth), defined benefit plans, and comparable plans offered by government agencies are protected without dollar limit in most circumstances. This protection applies whether or not you declare bankruptcy.

  • IRAs (traditional and Roth) are protected up to $1,512,800 per person (as of 2022). This limit is adjusted for inflation every three years. Protection only applies in a bankruptcy proceeding.

Fortunately, most states protect IRAs without a bankruptcy declaration. But the degree of protection varies significantly. Some states like California offer very little protection outside bankruptcy. In others, like Arizona, protection is virtually unlimited.

Key Advantages:

  • Employer-sponsored plans offer virtually unlimited protection.
  • Some states also offer certain protections for IRAs that don’t need you to claim bankruptcy first.
  • Easy to pass down to beneficiaries, making it a useful estate planning tool with asset protection benefits. Whoever you name as a beneficiary will inherit whatever assets are left in the plan.

Key Disadvantages:

  • Federal protection is only available it you declare bankruptcy.
  • Unless you set up a self-directed account, your investment options may be limited.
  • Protections aren’t applied as a blanket across all retirement accounts. Different accounts have different levels of protection under state and federal law.
  • Once you hit a certain age, certain accounts are subject to Required Minimum Distributions. This can complicate planning in some cases.

Domestic Trusts

When we talk about estate planning and asset protection, many people think of trusts. But you need to be careful what sort of trust you get. 

Some trusts make estate planning easy but offer no asset protection (e.g. living trusts, also known as revocable trusts). Other trusts offer great asset protection and estate planning benefits, but you can’t be a beneficiary (e.g. irrevocable trusts).

Key Advantages:

  • A very flexible legal tool that can be written to achieve almost any asset protection and/or estate planning goal you have.
  • In most states, you can set up a revocable trust (which offer estate planning benefits but not asset protection) to own your personal residence and still claim the homestead protection.

Key Disadvantages:

  • There’s a lot of bad information out there on how these tools work, which causes a lot of confusion.
  • If you don’t work with a competent professional who understands the rules that apply to your specific situation, you may not be getting the protection you think you’re getting.
  • Paperwork and compliance can be a hassle.
  • If you set up an irrevocable trust for asset protection purposes, you can’t be a beneficiary of it, which is something a lot of people don’t want.

There is one structure that tries to be the best of both worlds and allows you to create an irrevocable trust, name yourself as a potential beneficiary and still have asset protection, It’s called the Domestic Asset Protection Trust (DAPT) and, in some cases, it’s worth considering. But it doesn’t work for everyone all the time.

Learn More About Trusts

  • A revocable living trust is the most popular tool Americans use for estate planning. Our article on the Living Trust will show you why…
  • You may have heard about a family trust. But how does it compare to a living trust? Read our piece on the Family Trust vs Living Trust to see the difference.
  • They’ve become very popular on the Internet, but a Land Trust is not actually that useful in most cases. Learn how to use it, and the two states (and only two states) that properly support it.
  • This type of trust makes big promises in exchange for big fees. But we don’t recommend Bridge Trusts for most clients. You’ll soon learn why.

Estate Planning with Offshore Asset Protection Strategies

1) Offshore Trusts

Offshore trusts with strong asset protection laws (e.g. Cook Islands, Nevis) are probably the best tool in asset protection for US clients. They can also be a very useful estate planning tool. But they are also hard to bank, expensive to maintain, and aren’t ideal for all sorts of assets.

Key Advantages:

  • Arguably the strongest asset protection tool out there, one that has been used to frustrate the full force of the US Government on occasion.
  • They are extremely private — although you must report them to the IRS, it’s quite unlikely anyone outside the government will.
  • If you are in a very high-risk profession (medical specialists and surgeons, for example), they can put your assets held within them out of harm’s way.
  • For estate planning purposes, assets held within these structures can easily be passed onto beneficiaries.

Key Disadvantages:

  • There’s a lot of misinformation about how these work, which causes confusion among clients.
  • There are a fair number of providers who we don’t feel are ethical in the way they recommend such trusts to their clients (oh, the stories we could tell you!).
  • Planning has to be done extremely carefully to make these work for a client; there are a lot of pitfalls to watch out for.
  • You will be subject to international reporting requirements to the IRS and Treasury Department.
  • The fees involved in setting up and maintaining a structure can be substantial.
  • Your annual accounting bill will likely be higher.

2) International LLCs

Like domestic LLCs, international LLCs are a flexible tool designed to help you protect your assets. They can isolate the risk of an operating business and prevent creditors from seizing your personal assets. And if you’re sued personally, creditors can’t generally seize the assets in your LLC.

Setting up one in a country that has strong LLC laws can give you extra protection that you can’t get with a domestic option. And you’ll have greater privacy than with a domestic LLC.

Key Advantages:

  • When set up properly, they add an extra level of protection that’s not available in the US form of the structures.
  • If set up in a place like Nevis, they can be extremely hard (and expensive) to sue. Only the most determined and deep-pocketed creditors will even try.
  • In certain circumstances, you can use an international LLC to operate a foreign business and potentially shield all but 10.5% of the profits from US taxes. (WARNING: This is not something to try on your own.)
  • For estate planning purposes, assets held within these structures can easily be passed onto beneficiaries.

Key Disadvantages:

  • Under the right circumstances, if you don’t properly plan, domestic creditors can get around an international LLC.
  • The fees to set up and maintain international LLCs are higher than domestic LLCs.
  • You will have to file international reporting forms with the IRS and Treasury department.
  • Your annual accounting bill will likely be higher.

Nevis LLCs: Are They Worth It?

The Caribbean island of Nevis offers some of the best asset protection in the world. But are Nevis LLCs a good idea for Americans? Get the full story here: Nevis LLC.

Need help?

In this article, I’ve outlined some of the tools we use to help our clients build strong wealth protection plans that include both asset protection and estate planning.

But what works for you will depend on your goals and the specifics of your situation. This is not a space where one-size-fits-all.

If you’d like to see if The Nestmann Group can help you develop a bespoke plan that meets your needs, the first step is to book in a free no-obligation consultation with one of our Associates. Feel free to do so here.

About The Author

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We have 40+ years experience helping Americans move, live and invest internationally…

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We have 40+ years experience helping Americans move, live and invest internationally…

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