What is asset protection?

In an increasingly unstable world, prudent and informed asset protection is now a must. No matter how calm or perfect things might seem for you, your family, and your business, it is important to remember that conditions can change very quickly.

Risks that can affect your family wealth is endless

The list of risks that can affect your family wealth is endless. To name just a few:

  • government policies
  • inheritance taxes
  • income taxes
  • capital controls
  • divorces
  • lawsuits and litigation

On top of these micro-level issues, there are macro-level threats, such as economic downturns and financial crises.

Families without solid asset protection strategies in place may end up watching their wealth evaporate during these crises. Luckily, there are a variety of tools families and businesses can use to protect their wealth and assets. In fact, asset protection has emerged as important global industry with numerous institutions and countries offering ways for you to protect your wealth.

Examining Risks

We’re going to take a moment to go over some of the major wealth risks. Each risk, of course, is complex, and the methods to protect your wealth against these risks are equally complex. While this article will not cover every detail, it’ll help you get started. If you have any specific concerns or questions, you can always contact one of our experts to learn more.

With governments buried in debt, taxes may rise

By paying taxes you are making an important contribution to society. Few people want to pay taxes, but most people understand that it is important for society and thus do so, even if begrudgingly. Unfortunately, with public debts rising, often due to government mismanagement of public finances, many governments are now looking to extract increasing amounts of money out of people.

Many governments have either increased income taxes, or are considering doing so. In fact, France recently tried to institute tax rates up to 75%! These efforts didn’t raise much revenue, however, as the wealthy people simply fled the country. Meanwhile, a few years back the United States let tax breaks on the top brackets expire, resulting in an increase in tax rates. Across the world, numerous other countries either have or are considering tax increases.

Another type of taxation that is in place in some countries, and under consideration in many more, are inheritance taxes. These taxes are only implemented when someone dies, and the money is passed down. Often, such taxes are very high. In the United States, the so-called “death tax” can reach 40%, while in France it can reach 45%. Given how much money these taxes can raise, many other authorities around the world are considering their own versions.

Luckily, the right asset protection strategy allows you to find a fair level of taxation. Offshoring and setting up foundations, among other methods, can be used to protect a family’s wealth from inheritance taxes. Offshoring and other methods can also help lower income tax burdens. We’ll dig into these methods later, however.

Legal Risks, including Litigation, Divorce, and Bankruptcy

This is what most people think of when they talk about asset protection. Protecting your wealth from unwarranted seizure by legal authorities is always a must. To be blunt, governments often lack finesse when it comes to managing wealth related issues. Since the judge or jury’s money isn’t on the line, there’s usually not much concern. For families, however, the decisions made by judges can have a huge impact on wealth and well-being.

Most people get married for love, for example, but sometimes that love simply fades away. Once happily married couples may find themselves filing for divorce. Wealth management during these times can be very complex, and wealthy individuals with lower-income spouses stand to lose a lot of money.

While everyone should be protected during divorce proceedings, and treated fairly, courts often don’t distinguish between who earns the wealth, and who gets it during a divorce proceeding. You might spend your entire career building up a sizable retirement fund, only to see half of it, or more, taken away from you during a divorce proceeding.

You can also lose a lot of money during lawsuits, including civil suits. The civil law and litigation field is immensely complex, and people can find themselves being sued for issues they may have never even considered. Did a guest slip and fall down your stairs? You may be on the hook for their medical expenses, even if the fall was entirely their fault. Did you spill a cup of coffee on someone, by accident, at a restaurant? Again, you may end up in court. The number of potential lawsuits your business or family could face is literally endless.

Sometimes, these legal issues, as well as other issues, can force people into bankruptcy. While it’s fair for creditors to receive repayment during a bankruptcy proceeding, sometimes courts will leave people virtually homeless and penniless after a bankruptcy case. The judge deciding on the proceeding doesn’t have any skin in the game, so often they don’t show much compassion.

Luckily, offshoring offers a variety of methods to protect wealth from legal authorities. Often, these methods involve divorcing ownership of wealth from the original owner of the assets in question. While the owner will still have control of the wealth, actual ownership is often transferred to another entity, such as a foundation. We will dig into these issues later.

Who knows when the next major political or economic crisis will unfold. Market downturns and political instability are very hard to predict. Economists often don’t see the warning signs of a downturn until after markets have already collapsed, and voting populations can easily be swayed by pretty words and strong populism.

The political and economic risks to wealth are enormous and widespread. In recent months, for example, Donald Trump emerged as a front runner for the Presidency of the United States, promising to erect walls to restrict immigration, and trade barriers to reduce trade. Meanwhile, the people of the United Kingdom voted to leave the European Union, Greece and other countries were pushed to the brink of total collapse, and Russia’s economy has been sent into a free-fall following the country’s annexation of the Crimea and resulting sanctions.

At the same time, Deutsche Bank, a financial firm with complicated relationships with other financial institutions spread across the world, recently failed the United States Federal Reserve’s stress tests, and has been identified by the IMF as the world’s greatest threat to the global financial system’s systemic stability. Could a crisis at Deutsche Bank set off another global financial crisis? Possibly so.

We could write an encyclopedia length work on the currently potential market and political instabilities in the geopolitical landscape. And as complicated as the geopolitical environment is now, it will only grow more complicated in the years ahead. Who knows when the next period of political upheaval will strike. Could Donald Trump, for example, become President of the United States? Possibly so. And who knows when the next recession or even depression will occur.

These systemic threats make it even more essential to put a proper asset protection aside your business operations. Offshoring, setting up foundations and trusts, and building a prudent, diversified investment portfolio are just some of the many ways you can protect your wealth. That’s why in the next section, we’ll dig into wealth protection methods.

Protecting Your Assets from Personal, Political, Economic, and Legal instability

As you’ve already learned, the world is a dangerous place, at least when it comes to protecting your financial wealth. Luckily, there are a variety of tools, methods, and financial vehicles that you can use to protect your wealth from unexpected developments. Many of these tools and methods involve offshoring, which in this sense refers to the relocation of your wealth to a protected offshore jurisdiction.

First, the most common method to protect your family and your personal assets is probably through a limited liability company (LLC, LTD, IBC or CORP). Sometimes these companies are referred to by other names, such as an “incorporated” company. These special types of companies are most useful for active businesses.
With a limited liability company, the company itself is created as a separate legal entity. In many legal jurisdictions they are treated essentially as living entities. This means they can own their own land, sell their own debt, and make their own investments. This may seem like a nuance, but it’s essential because it means that these LLC’s can also assume risks. Importantly, if your limited liability company goes bankrupt, it will be the company itself that is punished and bankrupted, not you or your family.

International Business Companies (IBC) are similar to limited liability corporations, and in fact are usually a subset of LLCs. These companies are set up in offshore jurisdictions, are limited liability, and often offer a wide range of tax breaks. International business companies are a great option for people looking to offshore.

If you desire adding another layer of protection, which is a wise idea, you can also set up a holding company. This company can act as a place to accumulate your assets, while keeping your assets separate and protected. If you own say five businesses, you can set up a holding company to control all of them. The profits from your businesses are then sent to the holding company, the risks remain isolated in each of the businesses. So your five individual companies each assume their own risk. If one should fail, it generally will not threaten the other companies being held nor the holding.

Perhaps the highest level of protection is offered by a foundation. Foundations are more complex, and the laws governing them are often very intricate. The level of protection they offer, however, is extremely high. Most importantly, a foundation doesn’t have an “owner” but instead a board of directors to govern it. Since no one “owns” the wealth, it is very hard for authorities to attempt to access it.

Many foundations are set up for charitable purposes, but in fact most are actually set up to protect personal or family assets. Since ownership of wealth is divorced from the individual placing money in the foundation, a foundation offers very high levels of protection from legal proceedings, such as divorces and lawsuits.

We know asset protection is a complex and demanding topic. Therefore we offer free consultation. Contact us today.

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