Safeguard Your Assets

Safeguard Assets Depending on Life Stage

Safeguard your assets! This is an important consideration for high-income earners.

You work hard to create assets, and you need to keep them! What do you need to
know now to safeguard your assets?

Well, that depends on your age and your stage in wealth creation.

Let’s look at Asset Safeguarding Strategies and determine which are right for you.

Table of Contents
 Gold Mines and Land Mines
 Safeguarding Assets Through the Life Stages
 Asset Safeguarding Strategies for Early Career
o
 Human Capital
 Asset Safeguards in Mid-Career
o Exclusion Planning
 Homestead-
 Retirement Accounts-
 Insurance-
 Miscellaneous-
o TBE
o Additional Mid-Career Considerations
 Safeguarding Assets in Retirement
o Legacy Concerns
o Predators, Creditors, and Long-Term Care
 Trusts for Safeguarding Assets 
 What is the Point of Property Protection Strategies?
 Asset Safeguard Structure
 Conclusion- Asset Safeguards 

Gold Mines and Land Mines

Once you start working, your major asset is human capital. Your ability to work.
Protect human capital like the gold mine it is!

Later in life, as you convert human capital to assets, there are additional
considerations that pile on top. What type of accounts or investments should you
fund? How can you keep those various assets Safe? What are the perils and how can
you mitigate them?

Still later, in retirement, tag on aging, estate and legacy considerations. Prior asset
safeguard strategies evolve over time as your goals change, but they never completely
resolve.

As a high income earner, you are a gold mine to overactive lawyers and juries of your
“peers.” Your goal– even if you are rich — don’t appear so to someone who might
want to take your assets and make them their own! You cannot always prevent all
lawsuits, but you can become a smaller target by avoiding some asset safeguarding
land minds.

Let’s look at Safeguarding your resources for folks early in their career, mid-career,
and in retirement to see what perils or land minds each group needs to consider.

Safeguarding Assets Through the Life Stages

 Figure 1 (Perils and Mitigation Strategies Through the Life Stages)

Above, you can see different perils or risk and ideas for mitigation depending on your
career stage. Let’s walk through the stages in a physicians career and see what
property protection steps you need to consider.

Asset Safeguarding Strategies for Early Career

Perils abound for the newly minted professionals. As human capital is the engine that
drives asset accumulation, career risk—that is, you might lose your job—is a huge
consideration. There are many ways to mitigate this risk, and maintaining income is
the primary concern early in your career.

Beyond that are many insurable risks, such as life, disability, health, and liability.
These are discussed below.

Finally, divorce is common and usually devastating to finances. I am not brave

enough to reflect on how to mitigate divorce risk. Understand, though, that divorces is
not infrequently the largest risk professionals face when safeguarding assets.

Human Capital
When you are a young, your greatest asset is human capital. This is literally the
ability to work and earn income in the future. You convert human capital into over
your career with the goal of using assets rather than your labor to support yourself.

How can you conserve your human capital?

If other people depend on you, then life insurance is a must. Most young folks do
not have an appropriate indication for permanent life insurance, so stick with term life
insurance.

Disability insurance is important. Much has been written on the topic of disability
insurance in other blogs so I won’t focus on it.

Health care insurance is a must. Nothing can drain your bank account faster than the
broken health care system we have.

As far as personal liability insurance, yes please! “Max out” your home and auto
policies and get $2-5M worth of umbrella insurance. As a high-income earner, this is
a necessary expense to safeguard your future.

Professional liability insurance is important, but outside the scope of this discussion.
Malpractice insurance is a must, obviously, as is other professional liability insurance
depending on your career. Despite high impact stories, it is very rare that a suit ever
gets above policy limits. If so, it usually is reduced to policy limits on appeal.
Personal assets are only very rarely garnered due to professional liability.

Asset Safeguards in Mid-Career

At least some attention should be paid to creditor protection by mid-career. That is,
there is not a zero probability that you will go bankrupt at some point in your life.
Many found themselves contemplating bankruptcy in 2008, and as we know the
economy is cyclical. At least acknowledge what your State provides for bankruptcy
protection.

In mid-career, consider predators in the context of liability. The longer you

accumulate assets, the higher the chances you will become a target. In addition,
families, houses, and young drivers are also sources of risk.

In order to safeguard assets, start with Exclusion Planning.

Exclusion Planning
First, let’s remember that predator protection (law suits) is different than creditor
protection (bankruptcy).
That said, some assets are safeguarded from bankruptcy (creditors). This is State
dependent, so know what your State-specific statutes say. This is the first stop in
property protection. Which assets do you own that are automatically protected by
State Law?

A good (though hard to read) resource is here.

Homestead-
Some states are more generous than others. For instance, Montana protects
homesteads up to $250,000 whereas other states are more or less generous. Texas and
Florida have unlimited homestead protections!

Retirement Accounts-
This is a big one. Remember ERISA plans (401k and defined benefit pensions) have
federal protection, where as other requirement accounts are State-specific. 403b and
governmental 457 plans are technically not protected by ERISA but have equivalent
significant protection. IRAs are usually covered up to $1M plus, however, inherited
IRAs are not considered retirement accounts and treatment is State-specific. Finally,
remember non-governmental 457s are not even your asset (they are an asset of your
employer and subject to their creditors).
Insurance-
This, again, is very State-specific. Look up and see if annuity payments are protected
from bankruptcy, and how much of the cash value of permanent life insurance policies
is covered. Disability payments and medical and group payments are also state
specific but less frequently considered.

Miscellaneous-
Varies depending on the state. For instance, Montana protects personal property up to
$4,500 and Tools up to $3,000. What about my horses and cows?

TBE
Tenants By the Entirety is important to understand. This is also State-specific so see
below.  Tenants By the Entirety is a way to title assets such that you don’t fully
control the asset, so the asset can’t be taken away from you if you are individually
named. This is a powerful asset safeguarding trick so find out if your state allows TBE
titling.
Additional Mid-Career Considerations
In reality, there are three paths to wealth.

The first, paper assets, focuses on retirement and brokerage accounts. If there are
absolutely no other alternatives, consider insurance products (the dreaded annuities
and life insurance) if you have a significant need for asset safeguarding.

Secondly, real assets (owning business and real estate) require professional guidance
with titling, incorporation, and other protection issues.

Finally, the entrepreneur who builds businesses should also seek professional
assistance.
Safeguarding your assets depend heavily on your chosen path.

For all three paths, the high-income earner should consider tax-deferred retirement
accounts as a primary savings vehicle. Don’t forget beneficiary designations!

This really is the heart of “classic” asset safeguards. What to do with your growing
assets in mid-career? There is no magic bullet, unfortunately. Focus on titling of
assets, risk mitigation, and get professional assistance.

Let’s transition now to estate and legacy issues.

Safeguarding Assets in Retirement

You must address the known risks in retirement. There are many known risks, but
health care and Long-Term Care are front and center for most folks, and will be
specifically mentioned below.

Estate and Legacy planning are also times to think about safeguarding assets. You
have amassed much. How it is spent when you are gone is an important consideration.

Sure, you should have an estate plan in place. This includes a will, but a will is not
enough! Make sure you have your designated beneficiaries in place for those accounts
that transfer outside of trusts and/or probate. This is an important, yet neglected
consideration.
Legacy Concerns
If you have planned well, you can concern yourself with your legacy. I have a nice
piece on How To Leave Money to your Heirs.
In addition, there is How to Optimize your Legacy which you can review.

The assets you pass on are yours, and you should concern yourself with how the assets
are used. Asset safeguarding may involve protecting your heirs, in a way, from the
assets.

Predators, Creditors, and Long-Term Care

There are actually three monsters to concern yourself with at this life stage. Predators,
creditors, and Long-Term Care.

I have discussed Long-Term Care Insurance, and it truly is a difficult decision. The

current pitch to physicians is hybrid life insurance / Long-Term Care Insurance
products. If you are considering one of these hybrid policies, make sure you
understand the Tax Implications of Long-Term Care Insurance because the person
selling you one surely won’t mention this massive downside.
Traditional Long-Term Care Insurance, while it provides more comprehensive
coverage, is expensive and likely to continue to have increasing premiums. Self-
funding is a third option. Again, Long-Term Care insurance is a difficult subject and
there are truly no good options currently.

What about healthcare costs? Medicare is important. Expect (and plan for) healthcare
costs to increase faster than inflation during retirement. This may include a buffer
account for future expenses, or build your floor income with especially high health
care inflation in mind. Keep IRMAA in mind!

Let’s focus on trusts for a second, as they are also misunderstood.

Trusts for Safeguarding Assets 

If you are a lumper, there are two types of trusts: Revocable and Irrevocable.

Revocable (or living) trusts are NOT for safeguarding assets. They may make your
assets more difficult to discover, but as you control and benefit from a revocable trust,
there is no property protection. Remember, these trusts are for passing assets outside
of probate and to protect you if you become incapacitated.
Irrevocable trusts remove the asset from your control, thus providing property
protection.

Initial irrevocable trusts are intended for estate TAX planning. Currently, the estate
tax exclusion is over $11M ($22M with spousal portability), so we are usually not
concerned with estate TAX planning.

There are three parties to an irrevocable trust: the grantor (who provides the assets),
the trustee (who manages the assets), and the beneficiary (who benefits from the
assets).

Generally, the grantor cannot be the beneficiary (as irrevocable implies you give away
the assets and cannot benefit from them).

So, in summary, we have revocable trusts which are used for estate planning, and
irrevocable trusts which are used for estate TAX planning. In the middle is property
protection.

What is the Point of Property Protection Strategies?

A brief word about the goal or the point of property protection.
Safeguarding assets seeks to separate control and ownership of assets. That is, you
still control the asset, but if someone has a judgement against you, you don’t own the
asset so there is nothing to take!

Specifically, safeguards do not protect you from law suits, it just makes you a less
appealing target. If you don’t own many assets, or it is not easy for lawyers to see
through your assets and decide you are a fat target, you are less attractive to sue.

So, when safeguarding assets, you place a legal barrier between you and your assets.
This does not make you judgement proof, but does provide you with leverage to settle
claims rather than pay them out.

Given fraudulent transfer concerns, safeguard your assets preemptively, before you
are sued.

Asset Safeguard Structure

Above, you can see a schemata of a complicated asset Safeguard strategy. There are
many different versions of this, but let’s focus on some basic elements.

LLCs own the separate assets. Keeping assets in separate LLCs prevents a judgement
against one asset from affecting others.
Above that, there is a holding company which may be in a state that provides
anonymity for your assets. In addition, this holding company has discretion so it does
not have to distribute assets to creditors even if there is a judgement.

As an aside, it is often better to have your brokerage account assets in an FLP or TBE.

On top, all assets are owned by your living trust. This does not provide protection for
you, but does avoid probate upon your death and is a source of protection for your
heirs.

A full discussion of this type of protection scheme is beyond the scope of this little
ditty. It shows you what you might be in for if you truly want a comprehensive
strategy…

Conclusion- Asset Safeguards 

Safeguarding your assets is not a one-and-done game. It is a process that depends on
where you are in your life cycle. Continued learning and assessment of your current
strategy is an important component of your overall financial health.

There are no magic bullets. Understand what perils are common and do your best to
mitigate known risks.

When you are young, protect your human capital. As human capital becomes assets,
optimally utilize State-specific exclusion planning.

Designated beneficiary forms and asset-specific planning are important. Wills and
sometimes trusts are early components of a comprehensive estate plan. Moving on to
retirement, complexity grows as you access your assets for income and mitigate
known risks.

With the growth of assets, safeguarding them becomes more complicated. It is worthy
consideration, however, to protect you, your family, and your legacy.