Asset protection is a crucial aspect of financial planning that aims to safeguard your wealth from potential risks and liabilities. Unfortunately, several myths surround this important topic, leading to confusion and misconceptions about its effectiveness and applicability. In this article, we will break down the 14 most common myths about asset protection and provide clear, fact-based answers to help you navigate this essential aspect of protecting your financial future.
Myth 1: Asset Protection is ONLY for Those with Very High Net Worth
FALSE: While it may seem intuitive that only the wealthy need asset protection strategies, the reality is that even individuals with a net worth of $250,000 or more should consider it essential. For instance, a client with a net worth of $1 million facing a $1 million lawsuit could be rendered bankrupt, drastically changing their family’s life. In contrast, a client with $5 million can absorb such a judgment without a significant lifestyle shift. Given the increasing litigious nature of society, asset protection is vital for anyone who has worked hard to accumulate wealth.
Myth 2: On-shore Planning is as Strong as Offshore Planning
FALSE: Many financial planners tout domestic asset protection strategies, such as Family Limited Partnerships (FLPs) or domestic asset protection trusts established in states like Delaware or Nevada. While these onshore asset protection solutions can be effective to a degree, they are not foolproof. Offshore asset protection often offers stronger protection, as it places your assets beyond the reach of U.S. courts. For comprehensive wealth protection, consider a multi-faceted approach that blends both onshore and offshore strategies.
Myth 3: I Will Lose Control of My Money with Asset Protection
FALSE: A common misconception is that implementing asset protection measures requires relinquishing control over your finances. However, with properly structured legal asset protection planning, you can retain enjoyment and use of your assets. The key is to work with a qualified asset protection attorney who can help design a strategy that allows you to leverage your wealth while safeguarding it from risks.
Myth 4: The IRS Will Audit Me if I Implement Asset Protection
FALSE: Setting up an asset protection plan through a qualified attorney does not increase your chances of an IRS audit. In fact, asset protection strategies often require specific forms and documentation that improve transparency with tax authorities. By following proper legal protocols, you demonstrate compliance with tax laws, thereby reducing potential scrutiny.
Myth 5: Asset Protection Can Save Me Taxes
FALSE: It’s important to clarify that asset protection should not be viewed as a tax-saving strategy. If an asset protection planner promises significant tax savings, proceed with caution. Most asset protection measures are designed to protect assets from creditors and legal actions, not to reduce tax liability. Attempting to intertwine the two can lead to complications and scrutiny from the IRS. Ensure that any asset protection strategy is tax-neutral to avoid potential legal issues down the line.
Myth 6: Asset Protection is a One-Time Event
FALSE: Many individuals believe that once they have set up an asset protection plan, they can simply forget about it. In reality, asset protection is an ongoing process. Changes in your financial situation, new laws, and shifts in your family dynamics can necessitate updates to your asset protection strategy. Regular reviews with a knowledgeable attorney can ensure your plan remains effective and aligned with your goals.
Myth 7: Asset Protection is Only for Business Owners
FALSE: While business owners have unique asset protection needs, individuals without a business can also greatly benefit from asset protection strategies. Anyone with personal assets—like homes, investments, and retirement accounts—can take steps to safeguard their wealth from lawsuits, creditors, and other risks. Asset protection is about creating a safeguard around your assets, regardless of your profession.
Myth 8: I Am Not a Lawsuit Target
FALSE: The reality is that lawsuits have become extremely common in the United States. Statistically, it can be easier to win a multi-million dollar lawsuit than it is to win the lottery. With more than one lawyer for every 292 U.S. residents, the number of lawsuits filed daily continues to rise. Anyone with a net worth over $250,000 is particularly vulnerable, as they are wealthier than 99% percent of the population and may become targets for frivolous lawsuits.
Myth 9: Asset Protection is Illegal
FALSE: When properly implemented by a qualified attorney, asset protection is a powerful legal tool that protects clients from future litigation judgments. Asset protection laws are recognized and have been adopted in 16 U.S. states. As long as you are not attempting to defraud known creditors, placing some assets beyond easy reach of potential claimants is both legal and ethical.
Myth 10: I Am Fully Protected with “Just” a Family Limited Partnership or Corporation
FALSE: Many asset protection services claim that a Family Limited Partnership (FLP) or a corporation is all you need for adequate protection. However, these onshore structures do not offer complete immunity, as they are still governed by U.S. laws. Rather than providing a comprehensive solution, companies that push FLPs or Nevada Corporations may lack the ability to offer more robust offshore strategies that can provide stronger protections.
Myth 11: I Must Keep Active Foreign Bank Accounts at All Times
FALSE: Maintaining a foreign bank account is not necessary unless you plan to move assets offshore. In most cases, having a proper asset protection plan in place is sufficient to deter frivolous lawsuits, diminishing the incentive for potential litigants to pursue legal action against you.
Myth 12: If Triggered, I Must Flee the Country
FALSE: In the rare scenario where asset protection is activated for offshore accounts, only the ownership of the funds is transferred outside the country. You do not need to leave the United States, and there are no illegal actions involved that would necessitate leaving home.
Myth 13: Asset Protection Can Be Implemented After I Am Being Sued
FALSE: The most effective asset protection strategies are those established before any legal threats arise. If you have already been served with lawsuit papers or anticipate that legal action is imminent, your planning may be compromised. However, there are circumstances where partial planning may still be possible, depending on individual situations.
Myth 14: I Can Protect Myself by Transferring All My Assets to Spouse and/or Children
FALSE: Transferring your assets to a spouse or children may seem like a straightforward way to avoid legal liabilities, but it can create multiple problems. Not only does this expose your assets to the potential liabilities of your spouse or children, but it also complicates estate planning and can lead to issues in the event of a divorce or other disputes. Additionally, courts can apply the doctrine of “Constructive Trust,” potentially viewing your family members as merely holding your assets in trust for you, negating the intended protection.
Conclusion
Understanding the facts behind these myths is crucial for anyone looking to protect their assets effectively. Asset protection is not just for the wealthy—it’s necessary for anyone aiming to safeguard their financial future. By dispelling these misconceptions, you can make informed decisions about your financial planning.
If you’re ready to discuss your asset protection strategy, reach out to our office today to schedule a legal consultation. Your wealth deserves the best protection possible. (888) 773-9399
By: Brian T. Bradley, Esq.
