Wealth preservation aka “asset protection” is slowly rising to the top of the mainstream American lexicon, much like estate planning did a couple of decades ago. However, though related, the 2 activities are quite different. A solid estate plan’s end goal is to ensure that your intended beneficiaries obtain what you intend for them in the most efficient and least adverse manner possible. Retirement and tax planning are a substantial part of the estate planning process but the primary beneficiary at the end of the game is someone else, not you. Conversely, a solid wealth preservation plan will ensure that you don’t go broke before, during, or after retirement and fulfill your intentions toward your beneficiaries, tying it into estate planning. But the primary beneficiary of wealth preservation is not someone else; the primary beneficiary is you.
Estate planning and wealth preservation are technically linked because the core documents and the fiduciary roles are primarily the same. Both include trusts and, consequently, trustees. Both might even include a LLC. The fundamental distinction is jurisdictional, i.e., what law governs the trust.
Typically the laws in states that have asset protection statutes and are referred to as Domestic Asset Protection Trusts (DAPTs) govern wealth preservation instruments whose jurisdiction is in the U.S. Instruments whose jurisdiction is outside the U.S. are governed by the laws, or lack thereof, in those particular countries and are known as “offshore” trusts. Now before you start getting all antsy with thoughts of tax evasion, let me squash that thought like a bug. The only way to ensure that one doesn’t incur Uncle Sam’s penalties is by being completely compliant with the U.S. tax code.
Now before going too far into the different schools of thought surrounding DAPTs and offshore trusts, you may be thinking, “I don’t have a gazillion dollars, so this doesn’t apply to me.” But before I lose you to Facebook or an incoming text message – wait. If you live in America, you live in one of the most lawsuit crazed countries in the world. So while you may not have a gazillion dollars, consider the following stats:
- 99% of doctors in high risk specialties will be sued;
- 75% of doctors in low-risk practice areas will be sued;
- Every 6 minutes a child under the age of 5 is treated for an injury sustained on a residential stairwell;
- In 2012, a woman was awarded about $833,000 for an injury sustained on her landlord’s property ;
- Over a 10-year period, 15-21 lawsuits were filed per 100 architect firms;
- I won’t mention lawyers, it’s a given, people hate us, think we have deep pockets, so they sue us.
So if you know your liability insurance won’t cover a potential lawsuit or the cost of litigation in successfully defending an unscrupulous claimant, how comfortable are you holding a “fire sale”? If you’re not thrilled about selling your home and liquidating all of your assets, including your retirement portfolio, to settle a claim, then wealth preservation may be needed sooner rather than later. Then again, maybe you have a million dollars to burn…