High-Net-Worth Asset Protection Strategies: What You Need To Know
Wealth protection can be a complicated endeavour for virtually all earners, regardless of whether you’re on a five-figure salary or a six-figure one.
But once you amass a net worth of over $10 million (and become a High-Net-Worth Individual or HNWI), the process of wealth management and wealth protection can become even more of a challenge. Not only do taxation rates climb exponentially, but events like divorce proceedings or other forms of litigation could also pose a significant threat to your wealth retention. And after years if not decades of hard work, you naturally deserve to enjoy all the fruits of your labours.
Thankfully, with the right wealth protection strategies for HNWI in place, you can conserve and even comfortably grow your net worth both over the course of your lifetime, and for your children and grandchildren to enjoy as well.
If you’re seeking to establish tailored asset protection systems and infrastructure for yourself and your family, then this is the guide for you. Read on, as we’ll be outlining some of the tops recommended wealth management strategies for higher-income earners today.
Asset Protection Trusts
Asset protection trusts (APTs) and family asset protection trusts (FAPTs) are innovative and specialized types of premium trusts that can be used to keep your assets secured in the event of aggressive legal proceedings (like divorces or liability suits). Asset protection trusts are particularly effective at securing assets as they’re irrevocable trusts. Simply put, this means that the trust cannot be changed or altered by the trust’s settlor immediately following the establishment of said trust.
When established correctly, APTs and FAPTs allow the trust settlor (or the establisher of that trust) to relinquish management control over those assets to an independent trustee. Beneficiaries of the trust are typically also children of the settlor rather than the settlor themselves, as this further complicates the ability for creditors or litigators to legally access those assets. Establishing a spendthrift clause can help further strengthen the integrity of your APT or FAPT and reduce the risks of creditors being able to access your assets through payments made to beneficiaries.
HNWIs also have the option to establish offshore asset protection trusts. Allocating assets in offshore asset protection trusts can provide an additional layer of legal protection in the event of domestic legal concerns. Similarly to offshore bank accounts, however, you want to ensure that your offshore trusts comply with all relevant legal and financial (i.e. tax) obligations that pertain to those regions or sovereign states. Be sure to speak with your lawyer about offshore wealth management and whether this strategy is the right solution for you and your family.
High-net-worth insurance is a highly specialized type of insurance cover that has been developed to cater to HNWIs specifically. Generally, high-net-worth insurance can consist of the following different forms of coverage:
- Business liability coverage – insurance cover designed to protect businesses and business owners if an injury or accident occurs as a direct result of your company operations or on company premises
- Professional liability coverage – insurance cover designed to protect professionals if the services provided result in injury, accident, or financial loss to clients. Professional liability coverage can also be tailored to select industry professionals (i.e. medical malpractice cover for doctors).
- Personal liability coverage – insurance cover designed to protect asset owners if an injury or accident occurs on their personal property or as a result of using their personal property (i.e. car accidents that involve your vehicle).
- Umbrella insurance coverage – designed to offer additional coverage on top of other forms of personal and professional insurance. Umbrella insurance policies effectively help boost the total coverage of your insurance. This makes umbrella insurance coverage a vital investment for HNWIs.
Taking out high-net-worth insurance policies can also be considered to be a form of asset conversion, as HNWIs can use liquid assets to purchase these specialized insurance policies. Be sure to consult your legal team before and following your discussions with insurance brokers to ensure that your insurance policies are tailored to your unique wealth management requirements.
Limited Liability Company (LLC)
Like business liability insurance cover can protect your business in the event of legal action taken against the enterprise, setting up a limited liability company (or LLC) can also help further protect your assets from potential business liabilities. But this only just skims the surface when it comes to the potential for LLCs to help protect your assets.
Like trusts, you can establish LLCs and FLPs (family limited partnerships) so that assets belong to those legal entities rather than being owned directly by you. This allows assets to be distributed directly by LLCs and FLPs, reducing the risk of creditors being able to seize these assets to cover your liabilities.
Once again, LLCs and FLPs must be established correctly to ensure that they are effective asset protection resources for yourself and your family. This means making sure that these legal entities are established by all level jurisdictional requirements, and with proper structuring.
Although advanced estate planning is a key concern for all HNWIs looking to safeguard their assets, it’s important to remember that another element of high-income asset protection is to simply ensure that HNWIs can also enjoy their wealth over their lifetime. For this reason, one of the most potent methods for safeguarding your wealth and thus maintaining your quality of life as you age is to simply allocate assets towards a secure retirement account like a 401k.
There are estimates that around 50-55% of the total wealth possessed by HNWIs in the US has been placed in retirement accounts like 401ks and 403bs. Contributions to 401k and 403b retirement accounts also happen to be tax deductible in most states, which means that you can claim back on your voluntary contributions to these accounts. This is yet another reason why retirement accounts are amongst one of the most popular asset protection strategies for high-net-worth individuals in particular.
Remember, however, that 401ks, IRAs, and other types of specialized retirement accounts can offer varying levels of protection depending on your state of residence as well as the particular type of account you’ve established. If you’re concerned at all about creditors or litigators accessing your retirement accounts, then express these concerns to your legal counsel so that any necessary measures that pertain to your unique wealth management needs can then be made promptly and efficiently.
Another key method for reducing your taxable income every year is to simply make gifts in the form of payments to your children and other family members or to report any gifts you receive yourself in your next tax return. As of 2023, the lifetime gift tax exclusion is now $12.92 million, up from $12.06 million in 2022. This means that you can give $12.92 million in gifts before those gift payments become taxable.
Using your lifetime gift tax exemption can be an easy, low-maintenance method for protecting your financial assets annually. Be sure to consult with your taxation agent when organizing your lifetime gifting measures every year. In doing so, you can reduce your risks of miscalculating and going over the lifetime gift tax exemption limit. Your financial advisors may also be able to support you in establishing an irrevocable gift trust to further support this particular asset protection strategy.
As you can see, asset protection for HNWIs requires a multi-faceted strategic approach. Because of this, the best solution for conserving your wealth as a higher-income earner is to simply utilize more than just one of the strategies that we’ve outlined above. In other words, just as you would diversify your investment portfolio, so too should you diversify your asset protection infrastructure.
Be sure to consult with your financial advisors and legal counsel before establishing any of the asset protection strategies we’ve outlined above. Once again, with the right approach in place, you can ensure that these asset protection strategies are primed to deliver superior results in the realm of wealth management.