Sudden windfall beneficiaries typically want to protect and preserve their newfound wealth. Unfortunately, many don’t know where to start–especially as friends, family members, and opportunists attempt to capitalize on their good fortune. If you’ve recently come into a large sum of money, it’s important you keep your assets safe. In this article, we’re sharing asset protection strategies you may want to consider if you’re suddenly wealthy.
Wealth Protection Strategy #1: Strategic Asset Location
Strategic asset location can be an effective asset protection strategy for sudden wealth beneficiaries. You can avoid unnecessary taxes and protect your assets by utilizing certain account types and legal entities.
Tax-Deferred Investment Accounts
Depending on your annual income, the long-term capital gains rate on investments can be as high as 20% in 2021. However, tax-advantaged accounts like IRAs, 529 plans, and health savings accounts can help minimize your overall tax liability.
These types of accounts typically allow you to grow your assets tax-free. In some cases, you can defer your tax liability until you need the money.
As an estate planning tool, trusts allow you to control how and when your assets are distributed after your death. They can also be helpful if you wish to provide for younger generations without gifting them money outright.
Trusts also offer specific advantages over a traditional will, such as privacy, tax benefits, and increased protection against legal action. While they don’t replace the need for a will altogether, they can be an effective asset protection strategy. This may be especially true if you wish to preserve your wealth for generations to come.
Family Limited Partnerships (FLPs) and Limited Liability Companies (LLCs)
Some wealthy families choose to use FLPs and family LLCs to exclude certain assets from a taxable estate. As separate legal entities, FLPs and LLCs can help safeguard family wealth against creditors (and in some cases, divorce).
Families who form an FLP or LLC no longer own the assets they contribute to the new entity. Rather, each participating member holds units or membership interests in the entity.
These entities are beneficial since they generally limit member liability. In addition, you can typically discount the value of the contributed property for estate planning purposes under IRS rules. Be sure to consult an expert if you’re considering this option as laws can vary by state.
Asset Protection Strategy #2: Asset Titling
As an estate planning tool, asset titling (legal ownership) can help protect your wealth as it transfers to future generations. Indeed, even the best estate plans can fall apart if assets aren’t titled correctly, according to J.P. Morgan.
Moreover, strategic asset titling can safeguard your assets against outside predators and creditors–especially in a legal dispute. Be sure to consult your financial advisor and/or estate planning attorney as you navigate the complexities of proper asset titling.
Asset Protection Strategy #3: Insurance
You likely have certain insurance policies already to prevent unnecessary financial losses. Still, as you accumulate more wealth, you may want to consider additional types of insurance to protect your assets.
Umbrella insurance is particularly important if your sudden wealth increases your chances of being sued. It protects your assets over and above basic liability and property insurance coverage. In addition, umbrella insurance can help protect your assets against libel, vandalism, slander, and invasion of privacy–events that can deplete your assets otherwise.
When it comes to umbrella insurance, most experts recommend a coverage amount that matches your net worth, plus your potential future income stream. However, this can vary depending on your personal circumstances and objectives.
Cybercrime & Identity Theft Insurance
As cyberattacks and identity fraud cases become more mainstream, your risk of being a victim of cybercrime only increases. Depending on the circumstances, recovering from identity theft and fraud can be time-consuming and expensive. As such, some insurance providers offer cybercrime and identity theft insurance as an additional safeguard.
It’s important to note that this type of insurance doesn’t necessarily reimburse victims for all stolen funds and financial loss. However, it will pay up to a specified dollar amount for financial losses directly related to your identity theft. In some cases, this insurance may also reimburse you for any expenses you incur while restoring your identity. It can also help protect your assets from future attacks.
Cybercrime and identity theft insurance is just one of the asset protection strategies to safeguard your wealth against cyberattacks and fraud. Check out this article for additional cybersecurity best practices.
Incorporating these Strategies Into Your Wealth Plan
It’s natural to have questions and concerns about effectively managing a sudden windfall. Working with an experienced wealth manager can help you protect your newfound wealth and preserve it well into the future. In addition, your advisor can help you determine which asset protection strategies make sense for you and your family–and implement them accordingly.
Sherwood Wealth Management specializes in the financial planning needs of sudden wealth beneficiaries. If you’d like to speak with a fiduciary financial advisor about protecting and growing your newfound wealth, please schedule a call with our founder, Brian Littlejohn.