The 9 Building Blocks of Solid Wealth Protection [in 2024]
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Contents
- What is Wealth Protection?
- Why is Wealth Preservation So Important Now?
- Who Needs Wealth Protection?
- Wealth Protection Building Blocks
- 1. State and Federal Government Protections
- 2. Liability Insurance
- 3. Bank Safety
- 4. Asset Protection for Traditional and Alternative Assets
- 5. Retirement Planning
- 6. Wealth Management
- 7. Tax Reduction Opportunities
- 8. Anti-inflation Strategies
- 9. Personal Freedom through Second Residencies and Second Passports
- How to find the right Wealth Protection Expert
- The Top 3 Tips to Wealth Protection in 2024
Imagine your finances as a delicate garden. Every decision you make serves as a nurturing hand that helps it grow, keeps it healthy and bearing fruit. Wealth protection is the fence you put around it to protect it from threats: pests, bugs, birds and even a bulldozer.
In today’s world, there are more threats than ever. The fences that make up your wealth protection plan need to be stronger, thicker and higher.
That’s what we do for clients – build walls around their finances that are very hard to break. But in a way that doesn’t block the sun. Because wealth preservation isn’t just about “locking things down.” It’s about locking things down in a way that still allows your garden to grow and thrive.
What is Wealth Protection?
To many people, wealth protection planning may seem overwhelming. Words like “multi-member LLCs”, “tax mitigation,” and “durable power of attorney” are common… and confusing.
But the concept is pretty simple if you think about it. It’s about building a wall around your source of income and assets; your garden. The more luscious your garden, the more pests it will attract, which means you’ll need a stronger wall.
If your garden is small or new, it’s not likely (yet) to attract a lot of pests. You won’t need such a big, thick wall. You might get away with a basic picket fence.
In fact, wealth protection planning is NOT about building the biggest wall just because. It’s about building the best wall for your needs.
That’s because building your wall costs money. The bigger the wall, the more it will cost to build… and to maintain.
As 2024 flies by, here are a couple of some of the building blocks you need to build that wall. But first…
Why is Wealth Preservation So Important Now?
The last few years have been rough for many people in different ways.
- Investment growth can’t be taken for granted. In 2022, stocks and bonds both fell sharply – something the “experts” say isn’t supposed to happen. The S&P 500 lost 17.8% and long-term Treasuries fell a shocking 29.6%. Stocks recovered in 2023, but as the Federal Reserve kept hiking interest rates, bonds continued to fall. As the population ages, it’s not clear where future growth is going to come from.
- Inflation is getting better but still higher than it should be after having seen a spike to its highest in 40 years. It might just stick around for a while yet.
- Government continues to intrude ever more into our lives.
- People with money – and that’s not just the “millionaires” of old, but anyone with assets – are more of a target than ever.
We expect to see these long-term trends continue to get stronger. With technology making it amazingly easy for ne’er do wells to find targets with assets, your wealth protection plan will become ever more important.
Who Needs a Wealth Protection Plan?
At its simplest, a wealth protection plan is for anyone who wants to:
- Preserve what they have.
- Continue to grow it safely over time to keep up with inflation.
The tools needed to do that will differ from person to person and group to group. At The Nestmann Group, we tend to work with the following groups:
High Net Worth Families and Individuals
This group has at least $1 million in liquid assets not including the home they live in. They tend to have a wide range of assets – both traditional and alternative… and have access to opportunities not available to the general public.
Because of their wealth, frivolous lawsuits can be a problem. Estate planning is usually more complex. Specialized asset protection may be necessary. And there are often tax reduction opportunities.
Retirees
Retirees are often focused on wealth preservation. They usually have a nestegg but not a lot of income, so keeping what they have is very important.
When we work with such clients, we put a heavy focus on eliminating risk from their lives. Anti-inflation strategies, making full use of government protections, and specialized insurance play their part.
Depending on how far the client is into retirement, pensions and estate planning often need to be considered.
Business Owners
We work with many business owners who are asset-rich but cash-poor. They often have a big chunk of their wealth tied up in their business and/or the building it’s in and/or the land it sits on.
With such clients, reducing risk plays a big necessity. But there’s a lot of opportunity too – business owners have the chance to reduce their tax burden in a way other groups don’t have.
Expatriates
Americans living overseas have some unique problems that those living stateside don’t have to deal with.
As it relates to wealth protection, the biggest is never-ending reporting to Uncle Sam on almost any asset held overseas – from bank accounts to stocks to foreign property not held in your own name.
When we work with such clients, we often have to focus a lot on compliance and reporting issues. But there are also some opportunities – most notably substantial tax breaks Americans living overseas can access that others can’t.
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Wealth Protection Building Blocks
As mentioned above, a proper wealth protection plan is simply about building the right wall to protect your garden. The building blocks (or bricks if you like) are the tools that will help you do so.
Some of these tools are low-cost or even free. Others are strong but come with a high price tag.
We highly recommend that you work with a qualified advisor to figure that out… especially when it comes to the more expensive (and legally complicated) ones. But for the rest of this article, we’ll discuss some of those building blocks.
These are the same building blocks we use when building Private Wealth plans for clients.
Let’s jump in.
1. State and Federal Government Protections
Statutory protections make up the foundation for most wealth protection planning.
In fact, both the federal government and state governments offer a number of helpful programs for any American looking to build a plan without investing a lot of money.
And they all happen to be free.
Here are just a few to consider…
A) Check Homestead Provisions in Your State
This is government-given protection for your property against lawsuits of every kind. Effectively, if someone comes after you, a certain amount of your equity is protected by law in case you lose in court.
How much that is varies widely from state to state. In some places, it can be very small. In others, quite a lot.
A few states like New Jersey, have no homestead exemption. Other states protect your home from creditor claims with no limit to total value. These states are Arkansas, Florida, Iowa, Kansas, Minnesota, Oklahoma, South Dakota, and Texas.
B) Social Security Protections
Did you know that your Social Security payments are actually protected under federal law? If you receive them directly to a chosen bank account, they cannot be seized by private creditors for up to 60 days.
You lose these protections once you move it out of that account. But this can be quite helpful if you need this income to live on.
C) Retirement Fund Protections
401(k)s and IRAs have different degrees of protection. There are federal protections and possibly state level as well.
The starting point here is a federal law called the Employee Retirement Income Security Act (ERISA). It protects assets in employer-sponsored retirement plans (called “qualified plans”) from ordinary creditors. That includes creditors in a bankruptcy proceeding. There is no upper limit to this protection.
That said, there are a few exceptions. Spousal and child support claims, IRS claims, and federal judgments aren’t protected under this law.
However, many types of retirement plans are not ERISA-qualified, including IRAs.
At the federal level, these plans are protected against creditors up to a value of $1,512,350 (2022 limit, adjusted every three years for inflation).
But you must declare bankruptcy to gain this protection.
Many states also have laws to protect both ERISA and non-ERISA retirement plans… and you don’t have to declare bankruptcy. But again, these protections vary widely.
In Arizona, for example, IRAs are “exempt from all claims of creditors of the beneficiary or participant.”
But California protects only retirement assets that are “reasonably necessary” for your support. If you have other assets, a judge might decide to give your non-ERISA retirement plan to your creditors.
Of course, we suggest that you find out what protections apply in your state and build these into your wealth protection plan.
2. Liability Insurance
A good wealth preservation plan usually involves insurance. In fact, liability insurance is often the most cost-effective way to protect your assets from many different threats. Especially lawsuits.
The problem is, it’s hard to know what type of coverage you really need and even harder to then buy it. Most of the liability insurance policies out there are riddled with exclusions. If you’re sued and lose, and the loss isn’t covered, you’re out of luck.
You also need to consider the insurance company business model: they make a profit by collecting as much money as possible through premiums and paying out as little as possible in claims. Which means that there’s a temptation for them to look for ways not to pay out claims.
When we work with clients in the Private Wealth program, we usually suggest:
A) Purchase Umbrella Insurance
Umbrella insurance is probably the best wealth preservation tool you have. It will cover you in all sorts of “black swan” type events that might overwhelm insurance on other products like home or car.
For most clients, we recommend $1 million or the value of your net worth, whichever is higher.
B) Use Riders to Protect Yourself
Insurance companies do their best to reduce payout risk. As we just mentioned, one way they do that is through exclusions that limit what they have to pay out for and how much they have to pay.
For example, let’s say you work from home and have clients visit. If they hurt themselves while on your property, your homeowner’s insurance might not cover you.
The solution is to purchase riders – extra insurance to cover aspects of your life not covered by your general policy.
C) Don’t be Cheap
As with many things in life, when it comes to insurance, you tend to get what you pay for.
It’s often a bad idea to work with insurance companies that offer very low rates to get your business. These ones are the most likely to engage in something called “post-claim underwriting”. In simple terms, the insurance company will try to prove you lied on your application in some way so they don’t have to pay out.
It can make you think you’re covered when, in fact, you’re not.
3. Bank Safety
2023 reminded us of just how fragile US banking really is. The collapse of Silicon Valley Bank, First Republic, and Signature Bank was just the tip of the iceberg.
These failures reminded us that bail-ins — the ability for a bank to effectively “steal” your savings — is a real and ever-present risk.
So bank safety is a critical part of any wealth protection plan. Some suggestions:
A) Keep an Eye on the Health of Your Bank
Keep tabs on the financial health of your bank. Two services that can help include Weiss Ratings and Veribanc.
Another place to look is the bank’s annual report. A key metric to watch for is the Tier-1 capital ratio which answers the question:
- If the bank gets in real trouble and needs to liquidate assets, how much could they turn to cash in a very short period of time?
The higher this ratio, the more trouble the bank can absorb without going bust.
B) Don’t Keep More Than $250,000 in Each Bank Account
FDIC insurance covers up to $250,000 per bank account. Officially, if your bank goes broke, even that amount may be bailed-in. Then again, it would have a big political cost and likely one the politicians wouldn’t want to pay.
More likely — at least initially in a future banking crisis — FDIC insured deposits would be bailed-out and anything above that subject to a bail-in.
If you have more than $250,000, spread the money around. Use multiple banks and accounts. You might pay a bit more in fees, but it’s a small price to pay for peace of mind.
C) Keep Short-Term Funds with the Treasury
The Treasury can also be quite helpful – a way to keep cash on hand, earn interest and bypass bank risk entirely.
It has a program called Treasury Direct that lets you invest in US Treasury securities online. They are as safe as it gets – Treasury bills, notes, and bonds backed by the “full faith and credit” of the US Government. You can invest for as little as 28 days. And you earn much higher interest rate than you can get from most banks.
Now, we don’t think Uncle Sam will be able to pay its debts over the long-term. But we don’t think it will go belly-up in the next 28 days.
4. Asset Protection for Traditional and Alternative Assets
The tools of “asset protection” cover a wide range of options… some that cost a few hundred dollars, others a few thousand and a few even more.
Most people thinking about wealth protection usually start here. It’s the wrong approach, but understandable because most professional services fall into this category.
(Put another way, most professionals can’t make any money reminding you about bank safety or government protections. So they don’t.)
In the US, the simplest asset protection involves ring-fencing certain assets to keep them away from each other. Going back to our metaphor, if your wealth protection plan is the big wall around your garden, asset protection involves the areas of the garden kept separate from each other using smaller walls, fences, and firebreaks.
The goal is this: if a pest does make it through the wall, we work to make sure they don’t destroy the whole garden.
Just remember: any asset protection plan MUST be matched to the threats you face. You don’t need firebreaks in a swamp.
All of these solutions involve set up and maintenance costs. If you don’t need it, don’t pay for it.
That said, here are some tools that most people should consider:
A) Use Trusts instead of Wills
A trust is a legal contract that, depending on the way it’s written, can offer the following benefits: estate planning, asset protection, privacy, and sometimes even tax advantages.
For the vast majority of clients with more than $100,000 net worth, it makes a lot of sense to have a trust instead of a regular will.
B) Use Limited Liability Companies (LLCs) instead of S Corp or C Corp Companies
While there are different structures available here in the US to hold assets, when it comes to business, we almost always recommend LLCs. Why?
Because LLCs offer something called a charging order. The charging order makes it difficult, if not impossible, for creditors to take your company to satisfy a debt. That’s not true of corporations… shares can be foreclosed upon but your interest in an LLC generally cannot be, especially if you’re not the only owner (i.e. “member”) of the LLC.
C) Keep the Planning “Clean”
Some years ago, a client came to us in a panic. His father had passed away and left him more than $1,000,000… spread out over 42 structures.
Even for a really wealthy client, 42 structures is a lot. In this case, the cost of keeping all those LLCs and trusts in good order was costing our client many thousands of dollars in legal and accounting fees.
After a thorough analysis, we were able to reduce the structures to just three – giving the client the same level of asset protection as 42 but without the complexity.
We can’t stress enough – don’t add complexity for the sake of it. There will always be people who are happy to sell you something to “protect your assets”. But the truth is, most cases are pretty simple.
Unless you have an active business, are a high-risk professional, or some really unique circumstances, there’s a good chance the best structures for you can be counted on just a few fingers.
5. Retirement Planning
Most wealth protection plans have an element of retirement planning in them for one obvious reason – the people most interested in wealth preservation happen to be closer to retirement.
For that reason, retirement planning is usually a part – if not the outright goal – of most of our planning. Sometimes there’s an element of estate planning too, but not always.
Here are some of our top recommendations:
A) Put a Durable Financial Power of Attorney in Place
A power of attorney (POA) gives authority to another person to manage specific matters in your place. These matters can include finances or healthcare.
If a power of attorney is durable, it continues to be valid even if you aren’t able to make decisions due to sickness or accidents.
Durable powers of attorney help in preparing for medical emergencies and cognitive decline. Putting these documents in order aids in avoiding confusion and doubt. This is especially important when relatives must take charge of financial affairs or make difficult medical choices.
This document can also protect you from America’s corrupt guardianship system.
State courts appoint guardians to make important decisions on behalf of adults found to be legally incompetent.
But while most court-appointed guardians are honest, some aren’t.
B) Update Your Will or Trust Beneficiaries
I feel almost silly for including this… And yet, you might be shocked how often we get clients with retirement and estate plans years, or even, decades out of date.
Every year or two, we recommend taking a look to see:
- Your beneficiaries are up to date.
- Your end-of-life-requests are still in good order.
- How your planning may be affected by new assets (especially in other jurisdictions) you’ve collected since your plan was last updated.
- How your planning may be affected by new government rules or the expiration of old ones.
6. Wealth Management
Wealth Management usually comes into play when a client has more than $1,000,000 in net worth. A wealth manager is a professional who is given the job by the client to do the following three things:
- Don’t lose money
- Maintain the purchasing power of the nest egg
- Grow the nest egg
How they do that depends on a number of things. Investment approach, risk management, tax considerations, asset protection, and estate planning can all play a part.
But for our purposes, this section of a wealth protection plan focuses mostly on investments.
Now, many factors can play a part in how those investments are managed. Some clients can handle more risk and don’t mind “losing” money in the short-term if there’s the chance of making it big in the long-term. Others can’t stand to see any losses at all.
But by and large, the goal is always the same – to grow savings without exposure to too much risk.
When it comes to this topic, we recommend:
A) Diversify Offshore
We all know not to keep all our eggs in one basket. But what about in the same country?
If you have at least $500,000 of investible assets (cash, stocks, and bonds), consider moving it offshore. Outside the United States, you’ll have access to investment opportunities that simply don’t exist domestically. Overseas investments can also:
- Protect you from a drop in the value of the dollar
- Reduce portfolio risk
- Increase privacy
- Keep your investments safe when domestic markets are disrupted.
B) Consider a Private Placement Life Insurance Policy
If you have the assets, it’s worth looking at a Private Placement Life Insurance Policy.
They are very tax efficient, offer amazing asset protection, and are very private. They are also quite expensive to set up and maintain, which is why we recommend this to very wealthy clients — $10,000,000 and up. They’re available both in the US and offshore.
Personally, we prefer the offshore variety because the investment minimums are lower and the asset protection benefits are often better than those available domestically.
7. Tax Reduction Opportunities
By and large, this area of a wealth protection plan can offer some of the best opportunities and biggest threats.
The opportunities are to legally minimize taxes. The threat is that overly-aggressive tax planning will create a problem with the IRS.
So how do you do that safely? Well, there is no easy answer. Different professionals have different risk tolerances.
We tend to be quite conservative. Most wealth protection and wealth preservation plans are supposed to reduce risk; aggressive tax planning increases it.
That’s why, so far as tax planning is involved, we stick to tried and true programs with a lot of backing from both the courts and the IRS itself. That includes:
A) Set up your own 401(k)
If you own a business, or have a side gig to generate income beyond what you earn in your regular job, a solo 401(k) may be worth a look. It offers many benefits including:
- Much higher contribution limits than other programs.
- You can also rollover from other retirement accounts.
- You have greater investment options.
- In many states, you get better asset protection than an IRA
Now, you don’t want to do this on your own. Rather, work with an advisor to ensure such a plan is a good fit for your business. And you’ll want someone to help set up and maintain it.
But again, if you have a business, a solo 401(k) one of the easiest ways to reduce your tax burden over the long term.
B) Foreign Earned Income Exclusion (FEIE)
Uncle Sam imposes tax on the worldwide income of US citizens, even if you live in another country. However, the Tax Code allows you to earn up to $126,500 per year tax-free (2024, adjusted annually) if you live and work full-time outside the United States. This benefit is called the foreign earned income exclusion (FEIE).
To qualify, you must pass either of these tests:
- The Physical Presence Test: You must be in a foreign country for at least 330 full days within a 12-month period. This doesn’t have to be a calendar year. Any 12-month period will do as long as the 330 days fall within it.
- The Bona Fide Residence Test: It’s not just about the number of days you spend abroad. You must also show you’ve established a permanent home in a foreign country. This is usually for an entire tax year.
If you think you qualify for the FEIE, consult a tax expert to understand these tests and how they apply to your situation.
8. Anti-inflation Strategies
Just a few years ago, most people weren’t thinking much about inflation. That has changed a lot now that we’ve just experienced the fastest inflation in four decades.
For us, however, inflation has always been a consideration because even at a low level, it still steals the value from your nest egg.
So how do you protect yourself against inflation? Here’s what we recommend to clients:
A) Permanent Portfolio
The Permanent Portfolio is a simple investment strategy. Designed by economist Harry Browne in the 1970s, it consists of four equally-weighted assets: stocks, long-term bonds, cash, and gold. Each asset corresponds to a different economic climate:
- Stocks tend to thrive in economic expansion.
- Bonds tend to do well with deflation,
- Cash is helpful in a recession
- Gold provides a hedge against inflation.
This portfolio aims to perform well in all economic conditions. People tend to underestimate it, but its long-term performance is impressive. In the 53 years since Browne conceived it, its averaged a return of 8.5% per year.
Also important, this strategy would have largely preserved the purchasing power of your assets at a time when the real inflation rate is much more than the official Consumer Price Index.
Even when the Federal Reserve kept interest rates at or near zero from 2008-2021, this strategy still gained an average of 7% annually.
To be fair though, this strategy had a terrible year in 2022, falling in value by 11.6%. It’s the worst performance by far in the history of this strategy and the only double-digit loss. But it still did better than stocks or (especially) long-term bonds.
But in 2023, the Permanent Portfolio recovered, sporting a very respectable 11.4% return.
B) Bulk-Buy Non-Perishable
Bulk buying non-perishable goods is a smart move against inflation. When prices rise, buying in bulk can save money. You pay less per unit, stretching your budget. This strategy is especially useful for items you use regularly.
Non-perishable goods like canned food, cleaning supplies, and toiletries are all standard options. Some of our clients also stand by the “3 B”s — Beans, Bullets and Bullion.
9. Personal Freedom through Second Residencies and Second Passports
People sometimes find it strange that our wealth preservation planning includes second residency and a second passport from another country.
But there’s a reason for this: You can never be truly free if you’re stuck in your country of birth.
Remember – your passport doesn’t belong to you. It belongs to the government. And they can take it away any time they like.
Even a quick look through history will show you that governments tend to abuse this privilege.
That’s why we consider this side of things part of any well-rounded program.
Does that mean every client acts on it? Of course not. But it gives them options. It brings them flexibility. And isn’t that a hallmark of a good wealth protection plan?
If you’re interested in having the most flexibility, here’s what we recommend as a starting point.
A) See if You Qualify for Ancestry
Citizenship by ancestry (aka citizenship by descent or jus sanguinis) is a way to become a citizen of a country through your ancestors.
To qualify, you must prove your lineage to citizens of that country, which usually means parents or grandparents. Over 50 countries offer this pathway, each with unique eligibility criteria. Among Americans, the most common paths are through Ireland, Italy and Poland.
Benefits include the right to:
- live, work, and study without a visa,
- seek consular protection,
- travel on a second passport,
- access to social services.
Qualifying involves lots of paperwork. But other than various government fees, it’s technically free.
B) Explore Citizenship by Investment
For those with the means, citizenship by investment is a great way to get a second passport.
There are more than a dozen programs at the moment, all with their own requirements. Current programs include:
- Antigua & Barbuda
- Cambodia
- Commonwealth of Dominica
- Egypt
- Federation of St. Kitts & Nevis
- Grenada
- Jordan
- St. Lucia
- Turkey
- Vanuatu
For the most part, you either invest in real estate and/or a business, or donate to a state development fund.
Minimum investment starts at roughly $130,000 including fees.
C) Get a Second Residency with Minimum On-The-Ground Requirements
This is an easy way to get permission to go live in another country without having to go through the process (or cost) of getting a second passport.
It’s not as “good” as a second citizenship in that you won’t have the same rights as a citizen (or a second passport for that matter). But if you’re looking for a low cost “Plan B”, a second residency is worth considering.
Just keep an eye on minimum residency requirements. For example, some countries like Canada need you to be in the country for at least several months each year. Others, like Panama (our personal favorite for this purpose) – just a day or two every few years.
How to find the right Wealth Protection Expert
You’ll find lots of options out there and it can be tough to know who to trust and who to avoid.
But after 40 years in the business, here’s some of the things we noticed the best have in common.
A long track record
The longer, the better. This business attracts all sorts of unsavory people which are usually washed out over time. The ones who stick around for the long-term are usually more trust worthy.
An understanding of ALL the pieces
Too many professionals are like hammers in search of a nail. They specialize in a certain structure or approach and think it applies to everyone.
The problem is, it often doesn’t. I can tell you from experience the consequences of the wrong solution.
Up front fees
Fees are a funny thing in this business. A lot of the industry works on commission meaning that there’s a temptation from service providers to “recommend” you to whatever is paying the most at the moment.
That’s why we prefer paying fees. There’s a greater chance you’ll get an unbiased opinion on what sort of wealth protection plan is best for you… rather than what’s paying the most out at the moment.
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The Top 3 Tips to Wealth Protection in 2024
You now have quite a few bricks from which to start building the wall around your garden. Maybe you’re a little overwhelmed. So where should you start?
Here are the three top places to start for most people:
- Know where you are: Take a look at your current plan. Does it still protect your needs? Is there anything missing? Anything out of date?
- Identify and manage your risk: Do you even know what your risk is? How is it being managed? Has it changed – gotten more or less? How should that affect your plan?
- Protect your money: Because it costs so little, make sure you’re protected against bank failure. The system is more fragile than most people think and you don’t want to be caught up in any bail-in.
And, of course, we’re here to help.
Since 1984, we’ve helped more than 15,000 customers and clients protect their wealth.
The best way is to schedule a free no-obligation consultation with a Nestmann Associate to get your questions answered and see if a wealth protection plan is right for you.
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We have 40+ years experience helping Americans move, live and invest internationally…
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We have 40+ years experience helping Americans move, live and invest internationally…
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