Risk Management & Asset Protection

A: Having asset protection is critical to protecting your assets from creditors. There are many circumstances in which your assets can be attached or garnished by creditors, including if you file for bankruptcy, get a divorce, or are in a civil lawsuit. It's important to consider these circumstances before they occur, If; if you don't protect your assets properly, you could lose them.

A: Contributions and earnings in your Traditional or Roth individual retirement accounts (IRAs) have an inflation-adjusted protection cap of $1 million against bankruptcy proceedings.

In addition, amounts rolled over from qualified plans, such as 403(b) and 457 plans have unlimited protection. However, this protection only applies to bankruptcy, not to judgments awarded in other courts, like if someone was injured due to your actions. Protection also does not include judgments for most domestic relations lawsuits, such as child support. In such cases, state law must be consulted to determine whether any protection exists and to what degree.

A: Assets in employer-sponsored plans have unlimited protection from bankruptcy, regardless of whether the plan is subject to the Employee Retirement Income Security Act (ERISA). This includes SEP (Simplified Employee Pension) IRAs, SIMPLE IRAs, defined-benefit, and defined-contribution plans, 403(b) and 457 plans, and governmental or church plans under the Internal Revenue Service (IRS) code section 414. Amounts in your SEP IRA from regular IRA contributions are subject to a $1 million limitation.

ERISA plans are also protected in all other cases, except under qualified domestic relations orders (QDRO)—where assets can be awarded to your former spouse or other alternate payees—and tax levies from the IRS. For this purpose, a qualified plan is not considered an ERISA plan if it covers only the business owner. The protection for owner-only plans is determined by state law.

A: Asset protection for annuities and life insurance is determined by state law. Some protect the cash surrender values of life insurance policies and the proceeds of annuity contracts from attachment, garnishment, or legal process in favor of creditors. Other states protect only the beneficiary's interest to the extent reasonably necessary for support. There are also states that do not provide any protection. 

A: Homestead exemption is a legal exemption in many states that protects a home from creditors following the death of a spouse or during bankruptcy. The amount of protection you have for your home varies widely from state to state. Some states offer unlimited protection, others offer limited protection, and a few states provide no protection at all.

A: An irrevocable trust like an asset protection trust can help keep your assets protected from creditors. An irrevocable trust is a trust that the grantor cannot change. It can also help your heirs avoid probate.

A: An irrevocable trust is designed to restrict the grantor from changing it. Once you transfer money into the trust, you cannot remove it. If you are the trustee, you can make necessary withdrawals to cover expenses.

A: You can plan for asset protection in several ways. The key is to create as many obstacles as possible for creditors before they can legally claim rights to your property. Here are several ways to protect your assets:

Asset protection trusts

Several states, including Alaska, Delaware, Rhode Island, Nevada, and South Dakota, allow asset protection trusts (APT), which are a type of irrevocable trust.

Asset protection trusts offer a way to transfer a portion of your assets into a trust run by an independent trustee. The trust's assets will be out of the reach of most creditors, and you can receive occasional distributions. These trusts may even allow you to shield the assets for your children.

The requirements for an asset protection trust are:

• • It must be irrevocable.
  • The trustee must be an individual located in the state, or a bank or trust company licensed in that state.
  • It must only allow distributions at the trustee's discretion.
  • It must have a spendthrift clause.
  • Some or all the trust's assets must be in the trust's state.
  • The trust's documents and administration must be in the state.

If you are considering an asset protection trust, consider working with an attorney who is experienced in this field. This way, you can ensure your trust meets regulatory requirements.

Accounts-receivable financing

If you own a business, you could borrow against its receivables and put the money into a non-business account. This would make the debt-encumbered asset less attractive to your creditors and make otherwise accessible assets untouchable.

Stripped-out equity

One option for protecting your assets is to pull the equity out of them and put that cash into the assets that your state protects. Suppose, for example, that you own an apartment building and are concerned about potential lawsuits. If you took out a loan against the building's equity, you could place the funds in a protected asset, such as an annuity (if annuities are sheltered from judgments in your state).

Family limited partnerships

Assets transferred into a family limited partnership (FLP) are exchanged for shares in the partnership.

Because FLP owns the assets, the assets are protected from creditors under the Uniform Partnership Act (UPA). However, you control the FLP and thus the assets. There is no market for the shares you receive, so their value is significantly less than the value of the asset exchanged.

A: Here are some other inexpensive, simple ways to protect your assets:

• Transfer assets to your spouse's name. However, transferring assets to your spouse could have consequences if you divorce.
• Put more money into your employer-sponsored retirement plan because it might have unlimited protection.
• Buy an umbrella insurance policy that protects you from personal injury claims above the standard coverage offered by your home and auto policies.
• Make the most of your state's laws regarding homesteads, annuities, and life insurance. Paying down your mortgage, for example, could protect cash.
• Don't mix business assets with personal assets. That way, if your company runs into a problem, your personal assets may not be at risk

We believe in the virtues of a well-balanced portfolio where assets are distributed across several different asset classes. Well-balanced portfolios are a proven method helps to reduce your risk. Owning a mix of uncorrelated assets means they do not move in the same direction. For example, when stocks go up, bonds typically go down, and vice versa.

Our client portfolios are well-balanced with a mix of large and small company U.S. stocks, international stocks in both developed and emerging markets, real estate, commodities, and, for short and intermediate-term fixed income, bonds. SWM offers you an expansive selection of investment vehicles. A partial list of available alternatives follows:

• Stocks: Represent equity in a company. The main types of stock are common and preferred. Stocks are also categorized by company size, industry, geographic location, etc.
• Bonds: A bond is a loan to a company or government that pays investors a fixed rate of return over a specific timeframe. Types of bonds include U.S. government, municipal, international, and emerging market, corporate bonds, ETF (a basket of bonds) and socially conscience green bonds.
• Non-Traded REITs or Real Estate Investment Trusts:
• A real estate investment trust is a company that owns, operates, or finances income-generating real estate. The capital of numerous investors makes it possible for individual investors to earn dividends from real estate investments—without having to buy, manage, or finance any properties themselves.
• Oil & Gas: Oil and gas stocks are issued by public companies involved in the exploration, drilling, and refinement of oil and natural gas.
• BDCs or Business Development Companies: A business development company invests money in privately owned, small- and medium-sized businesses that are facing challenges and need help to grow or get back on track, and they may not be able to obtain financing through traditional means, like bank loans or bond issues. BDCs aim to generate income and capital gains when the companies they invest in are sold, much like venture capital or private equity funds. 
• Equipment Leasing: As capital is raised, it is invested in a portfolio of leases or loans, and as those transactions pay out, distributions are made. When the last lease or loan is fully paid off, the program is closed.
• Managed Futures: Managed futures refers to an investment where a portfolio of futures contracts is actively managed by professionals. Managed futures are considered an alternative investment and are often used by funds and institutional investors to provide both portfolio and market diversification.
• Hedge Funds: A hedge fund is a limited partnership of private investors whose money is managed by professional fund managers who use a wide range of strategies, including leveraging or trading of non-traditional assets, to earn above-average investment returns.
• Private Equity: Private equity is a type of alternative investment class that describes investment partnerships that buy and manage companies before selling them. Private equity firms operate these investment funds on behalf of institutional and accredited investors.