The steel magnate Andrew Carnegie, reputedly the world's richest man in his late 19th-century day, had some advice for anyone who wished to follow his example: “Put all your eggs in one basket,” he said, “and then watch that basket.”
Watching those eggs – aka asset protection – may no longer be that simple, if indeed it ever was. But it's no less of a concern for anyone who has managed to amass some wealth. Making money is one thing; keeping it may require an entirely different set of strategies.
On the most basic level, asset protection can include simple safeguards such as deposit insurance on bank accounts and the equivalent for brokerage accounts.
For example, the Federal Deposit Insurance Corporation (FDIC) covers money in member banks for up to $250,000 per depositor, per bank and per “ownership category.” So, for example, you might have $250,000 each in an individual account, a joint account, an IRA and a trust account, and be covered for the full $1 million, all at one bank. There are several other ownership categories besides those four, and, of course, no shortage of banks.
The Securities Investor Protection Corporation (SIPC) insures your cash and securities in member brokerage houses against the failure of that firm and, in some instances, theft from your account. The maximum coverage is $500,000, but, as with the FDIC and banks, you can structure your accounts in different ways (the SIPC calls this “separate capacity”) to multiply your total coverage.
Perhaps a greater risk to your personal wealth than the possibility of a bank or brokerage failure is a costly lawsuit. That's where other types of coverage come in.
After you've consulted with an insurance broker or two, your next stop might be a lawyer's office to discuss other ways to shield your assets from possible risks. Bear in mind that some of your assets may already be off limits to creditors in most circumstances. Those generally include your 401(k) plan and, in some states, your IRA. At least a portion of the equity in your principal residence is also protected under many states' laws.
To protect what's left, you might consider transferring assets to a spouse or children. However, both of those moves have significant risks of their own – divorce in the case of a spouse and loss of control of the money in the case of children, to name just two. With children you'll also face possible gift taxes, which currently kick in if you give a child more than $14,000 in any year. (Your spouse can give a like amount.)
A properly written trust can help achieve the same asset-protection goals without those issues. But note that you need to set up your trust before anything bad happens that could lead to a claim against you, even if you haven't actually been sued yet. If you attempt to establish a trust after that, it may be considered a fraudulent transfer to avoid paying creditors, creating a whole new set of legal problems for you.
A knowledgeable lawyer can walk you through the types of trusts and make recommendations based on your particular circumstances (see Build A Wall Around Your Assets). One option you're likely to hear about is a domestic asset protection trust or DAPT, a relatively new variety. Sometimes referred to as an Alaska trust, for the first state to legalize them, it essentially allows you to put assets into a trust, with yourself as a beneficiary, that's out of the reach of creditors.
Asset protection is not the only, or perhaps even the most important, aspect of wealth management. In fact, "The 2014 U.S. Trust Insights on Wealth and Worth," a 2014 survey of high net-worth investors, found that 61% considered growing their assets a higher priority than preserving them.
Still, conserving and shielding assets is a critical consideration in any financial plan, especially for someone with a significant portfolio. You can't take it with you – but you don't want to lose it, either.