Your investment accounts are understandably important to you. Chances are that you have worked an entire lifetime to amass this wealth, and you do not want anybody to come and take it away from you in a lawsuit or due to any other reasons. In order to keep this from happening, you will want to employ asset protection strategies so you can have some peace of mind for your investments. There are some steps that you can take or account structures that you can use in order to protect your investment accounts.
This is one of the foremost protections that you can use for your investments. Federal law has some form of protection for your retirement account that you can shield it from your creditors. Federal law will give protection to “qualified retirement plans.” State law will generally have further protections that they add unless the state opts completely out of the federal system. Accordingly, Your traditional and your Roth retirement plans are generally protected up to a certain amount. The average amount of this cap is $1 million, but the court has the ability to increase this cap in the interest of justice if you make a showing that it is necessary. Retirement savings are one of those areas that public policy tries to promote so this is always a sound place to keep your assets in order to shield them.
To give an example of state laws, Florida has a provision protecting both types of retirement accounts listed above and simple employee pension IRAs. Florida law says that any money or other assets that are payable to a participant or beneficiary in a qualified retirement or profit-sharing plan is exempt from creditor claims. In Florida, this protection even reaches IRA rollover accounts. Colorado has complete protection for retirement accounts as well and they can only be attached under certain very limited circumstances such as back child support.
There are some types of life insurance policies that act as an investment account in addition to providing a death benefit when someone passes away. These life insurance policies have a cash value component that you can access when you need it. This can take on the form of a cash surrender benefit if you decide to terminate the policy completely.
In general, the proceeds of a life insurance policy are exempt from lawsuits and creditors. When it comes to further protections, this will all be a function of the laws of the state in which you live. In Colorado, the amount of the protection of the surrender value of the life insurance policy is
$250,000. The amount of the exemption will vary by state. Some states will even have protections for the proceeds of annuities. To the extent that you do not need access to all of your investments, you should use these vehicles as ways to protect your assets. Note that you cannot just simply move money into life insurance immediately and expect to have the statutory protections. States will generally impose some kind of look back and mandate that you have the assets in life insurance for a certain period of time before protections apply. For example, in Colorado, your money must be in life insurance for years before it is exempt from creditors.
An asset protection trust is one of the most effective ways to protect your assets from creditors and lawsuits. Check the laws of the state in which you live to see whether the state allows domestic asset protection trusts. Not every state has laws that permit this. The states that do not allow for these domestic trusts will still recognize foreign asset protection trusts. When you move your assets offshore, there are a number of different vehicles that make it extremely difficult to impossible for creditors to get at your assets. The tradeoff is that you will lose some degree of control over your investment decisions because these will be made by an appointed trustee.
There are asset protection trusts for your investments that are called bridge trusts. These instruments will “activate” and move your assets offshore when there is a possible threat to your investments from a creditor. These trusts allow you to keep control of your assets for as long as possible, only surrendering control over them when there is a possible threat to them. These trusts are easier to maintain and do not involve any IRS filing requirements. Your investments should be able to remain in their current form and still be protected.
All of the steps mentioned above must be completed before there is any threat to your assets. They are part of an asset protection strategy that you must always have in place. When you do have a lawsuit or a creditor who is after your assets, courts will look back at the history of your assets. Protections are only effective when they are done well in advance. Otherwise, the court will assume that you moved your assets in order to specifically avoid that creditor and it will disallow the transfer. Then, the protection that you thought you had never really existed in the first place. Contact an asset protection attorney in order to devise an asset protection strategy because you never quite know when your possession of your hard-earned assets will come under threat and attack.