Asset Protection Strategies for the Average American

Joe’s an average American guy. He and his wife Jane live in a three-bedroom tract home in the suburbs with a couple of children. Joe has a middle-class occupation. So does Jane—they both have to work to pay the bills.

Joe and Jane don’t worry much about asset protection, privacy, and have never invested a dime outside the United States. But one day, they read an article stating that more than 50,000 lawsuits are filed every day in the United States. But they ignore it, because they “know” that there’s nothing “average people” can do to protect themselves.

Fortunately, that’s a misconception. Joe and Jane, and most “average Americans,” can benefit from a program that protects wealth and privacy too. And they don’t need to spend a fortune to enjoy these benefits—either domestically or offshore.

“Free” Asset Protection in the United States

The US is very “creditor-friendly.” But, there are many opportunities for wealth preservation, especially at the state level. These laws vary from state-to-state as to what assets are protected and under what conditions. If you live in a state with strong asset protection laws, they may provide an important first line of defense to protect your wealth. 

Here’s a brief summary of what’s available:

Radical New Approach to Asset Protection & Privacy

In 2006, more than nine million Americans had their identity stolen and approximately 1.8 million were sued. Laws like the USA PATRIOT Act greatly expand warrantless searches. They also allow government property seizures without proof of wrongdoing.

Big Business and Big Brother want to keep you and your wealth in plain sight, to be profitably tracked and conveniently seized. But you can still legally create international ‘lifeboats’ of wealth and privacy that are practically invulnerable to snooping or confiscation.

#1: Liability Insurance

Your first line of defense is to buy liability insurance for their home and especially, your vehicles. Don’t stop at the minimum limits, either. If you can buy an “umbrella” policy with limits of US$1 million or more, do so.

But liability insurance will not protect against libel, slander, or harassment. It also won’t cover punitive damages, damages from your violation of any law or regulation, or injuries from your intoxication or use of any illegal drug.

#2: Homestead Laws

If your state has such a homestead law, you won’t lose your home, up to whatever dollar limits are in effect, even if you lose a judgment or declare bankruptcy. Homestead limits are very low in most states with only $5,000 or $10,000 protected. But a few states, such as Texas and Florida, protect your home from the claims of creditors, with no limit to total value.

There are important limitations to homestead laws. Mortgages are exempt. In many states, so are criminal fines and punitive damages. Also, certain intentional wrongs, like deceit, fraud, or libel, are exempt. 

Homestead laws don’t protect against federal civil or criminal forfeiture. They also don’t protect against claims by the IRS or claims under federal bankruptcy. These claims make alimony, maintenance, and child support non-dischargeable. 

Also, the 2005 Bankruptcy Reform Law limits the value of any state homestead exemption to $125,000. This applies if you have owned the residence for fewer than 1,215 days (three years and four months) before filing for bankruptcy.

#3: Life Insurance and Annuities

Almost every state protects the death benefit of a life insurance policy from creditors where a spouse or child is the beneficiary. But the cash value of a life insurance policy may or may not be exempt. The same is true for stocks or other investments bought through life insurance. They may or may not be safe from creditors.

Annuity payments are protected by most states, but the proceeds must generally be payable to someone other than the contract owner; e.g., your spouse or partner. Again, there are limitations. The protection may not cover alimony or child support. It also may not cover criminal fines, punitive damages, or federal tax claims. There are also other possible exemptions.

#4: Pension and Retirement Plans

Federal bankruptcy law exempts pensions, employer-sponsored retirement plans, and Social Security from creditors. It also exempts other age-, illness-, or disability-related benefits. But, you only get this protection if you declare bankruptcy. There is no limit on the amount that can be protected, except that IRAs are limited to US$1 million.

There are important limits to this protection. Only funds “reasonably necessary” for your support and that of your dependents are protected. So, protection for plans much larger than US$1 million may be mostly illusory. Further, spousal and child support claims are not exempted; nor are claims from the IRS. IRAs may also be seized in criminal forfeiture cases.

#5: Domestic Trusts

An irrevocable domestic trust can provide significant asset protection. The greatest protection is in a properly drafted irrevocable spendthrift discretionary trust, in which you’re not named as a beneficiary. So long as the assets remain in trust, creditors of trust beneficiaries can’t reach them.

State legislators have created various exceptions to the spendthrift trust rule. Both the states and federal government may be able to attach a beneficiary’s interest in a spendthrift trust to satisfy that beneficiary’s tax obligations. Many states also provide exceptions for alimony or child support payments.

#6: Domestic Limited Partnerships and Limited Liability Companies

Limited partnerships consist of limited partners with their liability limited to the amount invested in the partnership and at least one general partner who assumes unlimited liability for the partnership’s activities. Limited liability companies (LLCs) give all owners (members) limited liability, regardless of their management participation.

To prevent the disruption of an ongoing business partnership or LLC by creditors, the charging order concept has evolved to permit creditors of individual partners or members the right to attach future distributions due the partner. But, the creditors may not force the business to liquidate or to make a distribution.

Unfortunately, many limited partnerships and LLCs are marketed as a means of protecting an investment portfolio or even a personal residence, with no business purpose. This structure may deter some lawsuits, but a determined creditor will try to demonstrate to a court that there is no business to protect and that the charging order concept therefore shouldn’t apply. These entities are also vulnerable if there is only a single partner or member, in which case, there are no non-liable owners to protect.

#7: Avoid Fraudulent Conveyance

Creditors can challenge transfers of assets to a trust, partnership, insurance policy, etc. under state or federal fraudulent conveyance statutes. In a fraudulent conveyance suit, the burden of proof is on the creditor to demonstrate that the purpose of the transfer was to “hinder, delay, or defraud” its collection of an existing or known future obligation.

If you can’t demonstrate a legitimate reason for the transfer, other than spiriting your assets away from your creditors, a court may set aside the transfer and order you to pay the money owed a creditor. The court order may be reinforced with fines, foreclosures, seizure of substitute property, and occasionally, even civil contempt citations; i.e., pay the creditor or go to jail.

It’s critical that you get the advice of a qualified professional when transferring personal assets into any of the structures discussed in this article!

Offshore Asset Protection Strategies for the Average American

Many countries have enacted laws and regulations that are much more protective of privacy and wealth than the United States. Each offshore jurisdiction is unique, but in general, they:

• Protect financial privacy much more than the United States. Financial information enjoys far more protection in most other countries than the United States. Even if there are no “bank secrecy” laws in effect, taking your wealth offshore will take otherwise-visible assets off the radar screen of domestic financial investigators.

• Lack US-style “civil forfeiture” laws. Most countries view being deprived of your property as a punishment that can only be imposed in a criminal proceeding. That means, unlike the United States, you and your property are presumed innocent. In most of these countries, you can only be deprived of your property after you’ve been convicted of a crime.

• Have procedural rules that discourage frivolous lawsuits. Unlike the United States, most foreign legal systems discourage or prohibit lawsuits brought on contingency; i.e., where the attorney bringing the lawsuit is rewarded with a percentage of the assets awarded by the court. They also often have a “loser pays” rule in civil litigation and prohibit the awarding of punitive damages without a criminal conviction.

• Have set up laws and regulations that are designed to protect wealth. Some foreign jurisdictions have enacted trust laws that make it very difficult to prevail in any claim against the assets conveyed to a properly structured trust. Others accomplish the same objective through insurance contracts. In virtually all cases, assets are better protected, and less visible, than in the United States.

• Facilitate access to non-dollar-denominated investments. It’s possible (although not always easy) to purchase foreign currency CDs and securities denominated in foreign currencies from a US bank or broker. But many restrictions apply, a consequence of laws enforced by the Securities and Exchange Commission, the Internal Revenue Service and other government agencies. Outside the United States, most of these restrictions don’t exist, or are less onerous.

Here are some ideas for small investors:

#1: Offshore Bank Accounts

It’s still possible to open small accounts in a handful of offshore jurisdictions. While an account of, say, US$20,000 may not be large enough to provide access to the full range of the bank’s services, it will generally be enough to fund investments in savings accounts and foreign currency CDs. Most of these accounts are available at commercial banks, and you shouldn’t expect personalized treatments.

#2: Offshore Safekeeping Arrangements

It’s also possible to use safekeeping arrangements to hold precious metals or other valuables offshore. There is no minimum investment to qualify for such services, as they are strictly fee-based. These arrangements may be legally non-reportable to the IRS or US Treasury, unless the holdings are sold for a profit. But persons with less than $20,000 to protect may find the expense involved in transporting valuables abroad and paying the annual safekeeping fees too high to be practical.

#3: Offshore Variable Annuities 

If you’re looking for an easy way to provide asset protection, currency diversification, and tax-deferred growth, an offshore variable annuity is worth considering. With a minimum investment of around US$50,000, they don’t cost a fortune, either. 

Several offshore jurisdictions provide statutory asset protection for the death benefit and investments held by an insurance policy. It’s also much more expensive for a creditor or disgruntled family member to bring a claim before a foreign court than a domestic court.

One disadvantage of an offshore annuity is that you’re not allowed to manage the investments within it yourself. If you do, you lose tax deferral. But you can usually make a non-binding request to the insurance company to buy particular types of investments or name an outside investment manager.

#4: Invest Offshore Through Your IRA

Offshore investments through a self-directed retirement plan are another option. You can buy offshore stocks and bonds, offshore funds, even offshore real estate through your retirement plan. Unfortunately, most retirement plan custodians won’t permit you to place offshore investments in your IRA, but there are a few exceptions. The minimum investment to make this a viable strategy is approximately US$100,000.

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