People love discussing asset protection. It’s one of those things that make you feel good about your accomplishments in life in that you have something worth protecting. This makes Asset Protection prone to being filled with flim-flam men and “experts” looking to sell you overpriced strategies that aren’t nearly as fool proof as advertised. Being familiar with what I consider the basic fundamental strategies can make navigating the area much simpler and avoid getting taken. Be sure you are familiar with what happens when you can’t pay your debts.

1. Insurance – The number one asset protection strategy that should be implemented before any other is adequate insurance coverage. Unless you are a chronic alcoholic with a violent temper who frequently beats up strangers or the like; it’s much more likely that a chronic long term disability will lead to financial ruin rather than legal obligations. Insurance is also much more foolproof than legal methods. There may be some workaround to a trust, but insurance companies typically will honor their obligations in normal circumstances. Insurance also typically has far fewer legal and procedural paperwork requirements.

In addition, as a practical matter lawyers almost reflexively will settle for insurance policy limits and typically will assume you are uncollectible (IE you are broke) and not want to investigate if you have assets. Even if you appear rich, most lawyers will assume it’s because you are deeply in debt.  Also, insurance companies will frequently defend you using their lawyer, which are usually a good deal and quite competent. The insurance companies purchase legal services in bulk and know what they are doing in making sure a lawyer doesn’t run up their bill.

2. Legally Protected Assets – This strategy puts assets into accounts like IRA and other accounts that are protected in the event of bankruptcy. It could also involve using an asset protection trust. This strategy lags insurance because you could still end up with a judgment against which is annoying at minimum and can seriously interrupt any financial affairs. In addition, there’s always a possibility that there could be some claim you improperly moved assets into protected accounts.

Also, for most people it’s most likely that financial stress will come as a result of a business slowdown or disability. With virtually all asset protection strategies there will be ways of accessing the assets. It would be rare business owner that had the discipline to avoid dipping into earmarked assets in order to save a cherished business.

3. Making it look like you don’t have assets. – This strategy can range from gifting assets with the understanding they would be used to your benefit to having corporations hold assets. This strategy can work quite well, but also can be risky both in a legal and ethical standpoint. If you make a gift with an understanding, that understanding will almost certainly not be legally enforceable. Similarly, if you have a large cache of gold coins hidden in the yard it could be stolen or a judge could find out you didn’t declare it and possibly throw you in jail.

 

4. Own assets that are difficult to collect on. – Most lawyers are lazy. This means that things that can’t be sold at auction can be in an imperfect way protected. Shares of partnerships with restrictions on sales also fall in this category. If your assets have a high degree of leverage this can also greatly reduce the risk that a creditor would try to seize them since the costs of sale could be higher then the resulting equity.

So if you’ve evaluated your financial situation as one where asset protection is a real concern then keep the above in mind. I would avoid purchasing trust or estate planning documents with asset protection elements over around two thousand dollars unless specifically recommended by a trusted (hopefully fee based) financial planner.