Financial advisory clients are routinely concerned about lurking threats to their hard-earned wealth in the form of a large unforeseen judgment on a liability claim. While asset protection is a popular planning topic for High-Net-Worth (HNW) and ultra-high-net-worth clients, those who are not HNW are susceptible to the same threats to wealth. However, while some protection options come with a high cost (that might not be practical for non-HNW clients), asset protection can come in many forms, some of which do not involve excessive fees or complexity. Which means that by taking into account a client's net worth, realistic liability risks, and level of sophistication, advisors can help assess what types of strategies may be appropriate for the client to explore.
Notably, certain client assets have built-in creditor protection without the use of (often expensive) products or tools. For instance, qualified plan assets (e.g., 401(k) and 403(b) plans) offer purportedly unlimited creditor protection for plan participants, meaning that if an individual were to be sued or file for Federal bankruptcy protection, balances in these accounts would not be at risk. However, these benefits do not automatically extend to other types of retirement accounts (such as IRAs), the protection for which varies by state. Other sources of (often) built-in protection include homestead protection for a primary residence (some exemption is offered by most states, though not always automatically in place) and the benefits of joint account ownership (e.g., tenancy by the entireties and community property).
For other assets, insurance can represent the first line of defense against liability for a client, with other tools to fill in the remaining gaps, insulate assets from each other, and protect against any judgments that exceed coverage limits. For instance, an umbrella insurance policy can be an effective way to protect against significant personal liability claims in excess of any existing coverage the client possesses. Beyond insurance, advisors and their clients can also consider options such as the use of corporate entities such as Limited Liability Companies (LLCs) for business interests, and estate tax planning tools such as Spousal Lifetime Access Trusts (SLATs) that can offer both estate planning and asset protection benefits for married couples.
In addition to helping clients identify which assets might already have creditor protection and selecting the tools and products that could help protect other assets, advisors can play an important role in ensuring that asset protection plans do not run afoul of the law or are not subject to reversal. For instance, because most states have adopted the Uniform Fraudulent Transfers Act (UFTA), any transfers made less than 4 years prior to a creditor claim in those states may be reversed, which means that if a client gives something away (or transfers it for less than fair market value) with the intent to 'outsmart' creditors by transferring or hiding assets, then a judge can order the transfer undone and the asset returned to be used to cover the creditor claim (assuming the claim is made less than 4 years after the transfer).
Ultimately, the key point is that financial advisors can play an important role in helping their clients protect their assets, both in terms of educating clients on the protections they currently have and the options available to protect other assets, as well as in helping them avoid pitfalls that could put their asset protection plan at risk. Which means that knowing how to use the pantheon of strategies and understanding existing laws can help an advisor provide clients with the highest and best asset protection for the peace of mind their clients seek!
Welcome back to the 349th episode of the Financial Advisor Success Podcast!
