You work hard to grow your wealth and acquire your assets. So what can you do to properly ensure those investments are never at risk? You certainly need to have a plan in place in case things go wrong. But what is the most effective strategy

That answer lies within asset preservation.

Asset preservation defined

Asset preservation is a strategy you can take to protect your accumulated wealth from creditors, lawsuits, judgments, and divorce. It can also protect your assets from counting toward the Medicaid asset cap for nursing home eligibility. This way, you don’t have to spend down your funds on long term care.

There are many strategies within the preservation strategy to consider, and they vary as much as your investments do. So let’s start with an overview of options available to you.

How to protect your assets

When we talk about assets, we essentially mean everything you own. This includes your savings, retirement/pension plans, other investments, your home, car, or even high-value home goods or jewelry. They’re items that can often generate future cash flow when you need it, and because of that, they should be protected.

So, how can you protect your assets? Let’s take a look at options based on circumstances.

Protection from lawsuits

Extra or expanded insurance coverage is an essential first step to preserving your assets. With the proper insurance, you could avoid a lawsuit altogether, which can mean the difference between settling out of court or costly litigation. Think car insurance in the event of a tragic accident or homeowner’s insurance if someone slips on the ice in front of your property. Either of those events can trigger a lawsuit. So what can you do now to protect yourself?

Let’s consider your home. Homeowner’s insurance should be taken seriously. Don’t purchase a basic policy to keep your monthly mortgage costs low. Instead, be sure you have enough liability coverage in the event someone has an accident on your property and decides to sue you. It also doesn’t hurt to have umbrella insurance, which can take over after exhausting your coverage limits. 

Shielding assets from creditors

Now, what if you’ve fallen on hard times, and you’re at risk of losing your home. There are a few strategies you can consider.

  1. Homestead exemption — a legal provision that helps shield a home from some creditors following the death of a homeowner spouse or the declaration of bankruptcy. It cannot prevent foreclosure, but it can block the forced sale of a primary residence. It can also help shield a portion of the home value from property taxes. 
  2. Tenants by entirety — this is a property title option that says each spouse has an indivisible share of the property. This means that both of you must consent to any sale or conveyance. So, a creditor cannot sell your home without your spouse’s permission.
  3. Asset protection trust or APT — this is a self-settled trust where the grantor is designated as a permissible beneficiary and allowed access to the trust funds. If the APT is adequately structured, its goal is that creditors won’t be able to reach the trust’s assets. They’re rather complex tools that are typically used by the wealthy.

Getting through divorce

Divorce can pose a significant threat to your wealth and assets. After all, your former spouse is far more aware of what’s at stake compared to creditors. It’s a sensitive and emotional occurrence to plan for. Still, it’s worth your time and effort — especially considering nearly 50% of marriages end in divorce.

Here are a few things you can do, from the most simple to the most strategic tools.

  1. Consider prenuptial or postnuptial agreements — assuming you have not yet tied the knot
  2. Have separate, personal banking accounts
  3. Pay down and close joint credit accounts — the fewer debts you have, the less stressful negotiating will be
  4. Don’t sell any valuables — the court may require you pay the money back
  5. Don’t settle on alimony — it’s taxable income
  6. Get into a domestic asset protection trust or DAPT — this is an irrevocable trust that allows the trust creator to be a discretionary beneficiary. Yet, the trust assets are still protected from the creator’s/beneficiary’s creditors.

Avoiding nursing home costs

Many people don’t realize how quickly their wealth can drain if they need to be placed in skilled nursing or a long-term care facility or need in-home health services. They don’t realize the rules imposed by Medicaid — and what has to happen — before any assistance kicks in.

Here are a couple of ways to protect your assets from long-term care costs.

  1. Purchase long-term care insurance — neither health insurance nor Medicare covers long-term care or facilities costs. In many parts of the country, nursing facilities can run you $100,000 a year. So even though long-term care insurance premiums can be high, the asset protection they offer is very much worth it. 
  2. Choose a Medicaid trust — this is another irrevocable trust option that holds the future nursing home patient’s assets. It must be worded appropriately and have a trustee. The trustee can be your children, other relatives, or an independent third party.

When to begin estate planning

All of the above strategies are important to preserve your assets. Still, equally important is what you’ll do with your estate once you are gone. Enter estate planning or your wishes for who receives your assets.

Estate planning is not something that should be done later in life. That’s a common misconception, and it can be devastating if you were to pass away without having one in place. 

For example, your assets would be distributed according to the probate laws in your state. In many states, if you are married and have children, your spouse and children will each receive a share, which is good unless your children are minors. If that’s the case, the court would control their inheritance. 

In the unfortunate circumstance of both parents dying, the court would appoint a guardian without knowing whom you would have chosen. That’s all unfair to you and to your family.

So take the time to protect your family and preserve your assets, and create an estate plan. Be sure to include things like:

  1. Guardian for your children
  2. Your power of attorney
  3. A detailed list of who should receive what
  4. Advanced directives or living will, documenting your medical treatment wishes
  5. Will/trust information

Revocable living trust

We’ve discussed a couple of irrevocable trust options, but what about revocable living trusts? What are they, and what benefit do they offer?

Simply put, a revocable living trust is a legal document that lists your wishes. It’s an essential part of estate planning, along with your living will and advanced directives. Though unlike the latter, it’s the document that preserves your assets. 

The document must list the trust document’s property, name a trustee, and name who gets what property/assets when the trust maker dies. If real estate is included on the list, the title does need to be updated to reflect the trust name.

A vital advantage of a revocable living trust is that it can be changed throughout your lifetime, so you can change beneficiaries and revise your wishes. Irrevocable trusts, of course, often cannot be touched or amended. 

Another benefit of revocable living trusts is they avoid probate, which is the court-supervised process of wrapping up a person’s estate — a rather lengthy and expensive process.

Using a 1031 exchange

Speaking of real estate, are you an investor looking for ways to protect yourself and your investments? Then this one’s for you. Suppose you’re selling an investment property and are using the proceeds to invest in a new property. In that case, you can be protected from taxes if you follow the rules of a 1031 Exchange.

Here’s how it works. Under Section 1031 of the United States Internal Revenue Code, a taxpayer may defer recognition of capital gains, state, and related federal income tax liability on the exchange of certain types of property. This applies mainly to investment and business properties, though vacation homes may also be considered.

To obtain full benefit, the replacement property must be of equal or greater value, and all of the proceeds from the relinquished property must be used to acquire the replacement property.

Learn More: What is a 1035 exchange?

Asset protection advisors

It’s essential to start planning before a claim arises. Asset protection planning after a claim arises will only make matters worse. This is simply because each state has laws that protect a judgment creditor against people who transfer their assets out of their names with the intent to hinder, delay, or defraud a creditor.

So, make today the day you’re proactive about preserving your assets. Give one of our advisors a call and learn about the different strategies we can take to protect your wealth.