The Sliding Scale of Asset Protection

• Asset-protection advisors measure the legal protection afforded a client’s assets by using a sliding scale.
• This scale represents a continuum of protection.
• Some assets are completely unprotected and others are highly protected.

Some of the most common questions that arise around asset protection planning are in regard to which assets are protected, to what degree, and which are not. Asset-protection advisors measure the legal protection afforded a client’s assets by using the sliding scale of asset protection in which some assets are completely unprotected and others are highly protected. There is a range of financial products and strategy services that can protect assets in varying degrees. (See Table.)

The Sliding Scale and Scores

The sliding scale runs from -5 (completely vulnerable) to +5 (superior protection). It is not uncommon for a client to begin with overwhelmingly negative scores. The reasons for this negative scores vary. Typically, personal assets are owned jointly (-3) or in the client’s own name (-5). Both of these ownership forms provide little protection from lawsuits and also have negative tax and estate-planning implications.

Before asset-protection specialists can achieve a high level of protection for a client, high-risk assets must first be eliminated or transferred to safer havens. There are many ways to protect these assets, but one of the most efficient is to utilize exempt assets.

Federal and State Exempt Assets

Federal law exempts certain assets. Each state's laws identify assets that are exempt from creditor claims in that state. Because these assets are inherently protected by law, they enjoy the highest level of protection, a +5 score on the sliding scale.

At the Federal level, bankruptcy law generally affords full protection for retirement plans such as pensions and 401(k) plans (+5). Examples of how state laws can protect assets are found in Texas and Florida. In both cases, homestead exemptions are generally unlimited for personal residences, with some exceptions. Similarly, the cash value in a life insurance policy is completely protected.

Basic Domestic Legal Tools

In many other states the list of exemptions is not as generous. Even in those states where the exemptions are broad, it is important to make sure that asset-protection goals are balanced with wealth-accumulation and investment goals. This balance can force the inclusion of nonexempt assets in a portfolio, which necessitates the use of still other asset-protection tools.

Two basic asset-protection tools are FLPs and LLCs. Family limited partnerships and LLCs provide good asset protection against litigation. They also allow the investor to maintain control of the assets, and can provide income and estate-tax benefits. Family limited partnerships and LLCs can provide asset-protection scores that range between +1 and +3.

Advanced Strategies

For many investors, the cost of an advanced asset-protection structure is worthwhile when significant benefits can be achieved. Advanced strategies can offer a +4 or +5 asset-protection score. These can include:

• Captive insurance companies;
• Charitable giving;
• Educational planning;
• Innovative insurance planning;
• Innovative tax planning;
• Sophisticated ownership structure for personal and corporate assets;
• The use of debt to protect assets; and,
• The use of various types of revocable and irrevocable trusts.

Asset-protection planning, like any sophisticated multidisciplinary effort, can achieve varying degrees of success. In your asset-protection plan, make sure you understand the cost and benefits of the various tools you employ. This understanding will both help you protect the wealth you have built and build greater wealth for your retirement, for future generations, for charity, and beyond.

For more information, contact Michael S. Berry, ChFC. He is a financial advisor to MDAlert.com and was recently named one of the “150 Best Financial Advisers for Physicians in 2014” by Medical Economics. You can reach him at mberry@msf-advisors.com or 855 449 7100.

Michael S. Berry is managing member of Michael Scott financial, LLC, and Flagpole Capital, LLC, a registered investment advisory firm. Information presented in this article is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial professional before implementing any financial strategy.