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4 ways to protect assets, without using a trust

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Many estate planning clients, when they contemplate ways to protect their assets, instinctively turn to sophisticated strategies, such as generation-skipping trusts. They may not think of insurance policies, even though insurance is, of course, all about protection.

But several different types of insurance can help with various forms of asset protection, often with less cost and fewer hassles than a trust requires, especially for clients with fewer assets to protect. Here are some alternatives you can provide for clients worried about losing their wealth:

Umbrella liability insurance: Wealthy people are always at risk for lawsuits, often of a frivolous nature. Liability insurance is a first line of defense against someone claiming a tortious injury against your client — for example, claiming they were injured on the client’s property. These policies generally cover not just any losses but the costs of legal defense as well.

The most common use of umbrella policies is actually as an extension of someone’s auto insurance. According to one estimate, 85 percent of all umbrella insurance claims are related to car accidents. Obviously, a tragic car accident can result in monstrous medical bills that can potentially run into the millions.

Liability insurance is surprisingly inexpensive. Estimates come back at just $200 to $300 per year for $1 million in coverage. So an entire $5 million estate could be protected for less than $1,500 a year. At the same time, it’s possible to be sued for more than the value of the client’s current estate. If a judge allows a plaintiff to garnish your client’s wages, his or her retirement fund and even future earnings could be at risk.

Business protection: Liability insurance becomes doubly important for business owners. And it’s not only because a business is more likely to see accidents or other mishaps take place on the property or in the course of conducting business.

First of all, the company itself could be at risk, not just the owner’s personal assets. Liability insurance can also protect against personal injury, including slander and libel, and claims resulting from false or misleading advertising. It does not, however, protect against employees’ claims for worker’s comp.

This insurance is especially important for business owners whose firms are structured as partnerships or sole proprietorships. Even a limited liability partnership could endanger an owner’s assets if that owner has been found to have acted in an illegal or egregiously irresponsible manner.

When buying personal liability insurance, most people try to insure the full value of their estate. But the strategy is different for many business owners. Trial attorneys know a lawsuit that ruins a client’s business will make that equity worthless, so there’s no point in suing for the full value of the business. Rather, attorneys tend to sue only for the full coverage amount of the client’s insurance.

Life insurance: Many states have moved to shield life insurance proceeds from creditors, even in the event of bankruptcy proceedings. (On the other hand, states like Wisconsin and South Carolina exempt only $4,000 of the proceeds of a life insurance policy from creditors). So in certain states, clients can have those assets in reserve for their heirs even in the event of a devastating lawsuit. For more on this, see this LifeHealth Pro article on using life insurance for asset protection.

Private placement life insurance: High-net-worth clients who consider themselves susceptible to lawsuits might want to consider the exotic variation known as private placement life insurance. Since it is offered without formal securities registration, the investment options can be uniquely customized for each investor, even into hedge funds and alternative investments. It can be very expensive, since the insurer draws up a personalized investment suite for each policy and an attorney will be required to help draw up the documents.

See also: Endangered estate planning tools? At least we still have life insurance

But most pertinent to the theme of asset protection, these policies can also be drawn up as offshore investments. PPLI is offered in such investment havens as Singapore, Liechtenstein and Bermuda. That can provide a form of asset protection that can’t be found in other types of life insurance policies — although, of course, it presents other risks of its own.

For more on estate planning, see:

8 ways to help widows navigate an inheritance

Court rules: No payment, no life insurance

How one family fought the IRS on estate taxes — and won