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Apr 18, 2017

Protecting Wealth: Asset Protection Options

When considerable assets have accumulated, considering options for protecting one's wealth is important. Individuals and businesses have a number of options to safeguard certain assets from creditors and other monetary judgements. These methods may protect assets in the event that the debtor later becomes insolvent.

Wealth can be shielded through a few different mechanisms, which include:
  • Discretionary trusts
  • Holding companies
  • Transferring assets to a spouse

The Discretionary Trust

A trust is an arrangement whereby a third party holds assets on behalf of a beneficiary. If done right, trusts provide the benefit of protecting assets from creditors.

Such trusts should be irrevocable. This means that the terms of the trust cannot be changed without the permission of the individual who benefits from the trust. In contrast, revocable trusts could allow creditors to gain access to the assets.

Holding Companies

A holding company is a corporation that exists primarily to control another company. The holding company is given shares in the operating company. Those shares are then separated from the operating businesses by paying dividends to the holding company. Those dividends are not only protected from creditors, but are also usually tax-free.

Creating a holding company can create further benefits. For example, the company can defer taxes by making other investments.

Transferring Assets To A Spouse Or Another Family Member

Real property assets - usually the family home - can also be safeguarded by placing them in the name of a spouse or other family member. Such an arrangement can be useful if the individual in whose name it is placed is not in a precarious debt situation.

While property can also be transferred to another family member, this can be problematic since transfers to anyone other than a spouse may bring tax consequences. The government sees the transfer as the disposal of property at fair market value.

High net-worth individuals facing asset seizure are wise to consult with a lawyer experienced in devising strategies for asset and creditor protection.