Beware Asset Protection Plan Scams

The following excerpt is reprinted from an excellent article written by Forbes contributor, Todd Ganos, and posted online here.  I am a firm believer in asset protection strategies as part of a comprehensive estate, financial, and/or business succession plan.  That being said, the number of dubious mass marketed and mass produced  "asset protection plans" is troubling. 

 I advise my clients that anything called an asset protection plan or asset protection trust should be considered critically and carefully.  Many of these mass marketed plans cannot survive scrutiny.  Remember, if it sounds too good to be true, it probably is. Remember also, that keeping your asset protection strategies secondary to other legitimate estate, financial, or business succession objectives is key to their success.  In this regard, see my article, "Asset Protection Planning- "Keep it Secret; Keep it Safe." 

Mr. Ganos writes:

Recently, a friend attended a seminar on asset protection.  Based on information that my friend provided to me, the seminar seemed to be what has become a disturbing trend.

To be certain, asset protection is an important discipline within the field of wealth management.  Asset protection might also be called risk management.  As one might imagine, there are a number of ways to implement asset protection/risk management.  And, it is not uncommon for asset protection/risk management issues to intertwine with other disciplines, such as estate planning and tax planning.

So, how might a seminar on asset protection be a scam?  Perhaps you have heard the saying: if all you have is a hammer, everything looks like a nail.  What typically occurs in one of these seminars is that the presenter whips up fear about gold-diggers filing frivolous lawsuits attempting to get at your hard-earned money.  Typically, the presenter’s solution is not an interdisciplinary approach to an individual’s circumstances.  Instead, the presenter’s solution seems to always lead to a family limited partnership, a Nevada “secret” company, or an asset protection trust in a favorable jurisdiction . . . which is what the presenter specializes in.  And, whatever the solution is, it is cloaked in an aura of “only the elite know about this.”

In reality, the specific way that asset protection/risk management should be implemented for any person will be wholly dependent on that person’s specific objectives and circumstances.  The solution should attempt to integrate asset protection/risk management issues, estate planning issues, tax planning issues, etc.  You should question anyone who doesn’t do this.

One key question about asset protection/risk management planning is about the cost of implementation.  A particular approach might provide you with a “bullet-proof” solution.  (Keep in mind that there are always trade-offs and limits to any approach.)  But, what does it cost to implement and what does it cost to maintain?  One popular approach that is pushed at asset protection seminars is a foreign asset protection trust.  Such trusts – if done correctly – can easily run $20,000 or more simply to establish . . . never mind the annual expense to maintain.  (Key point: if done correctly.)

Now, let’s consider another approach to asset protection/risk management that has been around for hundreds of years: insurance.  As a point of disclosure, neither my firm nor I sell insurance nor are we licensed to sell insurance.

According to one source, the net worth threshold to enter into the top 1 percent of wealth in the U.S. is about $1.5 million.  Let’s round this up to $2 million.  The annual cost of a $2 million umbrella insurance policy will vary from provider to provider but will be in the range of about $300 to $400.  That is a pretty inexpensive asset protection plan compared to the annual cost to maintain a structure proposed by these presenters.

While I don’t have a source, for the sake of argument, let’s just say that the top one-half percent wealth threshold is $5M.   The annual cost of a $5 million umbrella insurance policy should run about $600 to $700.   If we extend the coverage to a $10 million umbrella insurance policy, the annual expense might reasonably be $1000 to $1200.

Think about it: for 99 percent of the general population, insurance is a fairly low-cost solution for asset protection/risk management.  In all fairness, insurance has its own limitations.  However, insurance can be combined with existing estate, tax, and business planning to yield a respectable asset protection plan.  Don’t be led to believe that one presenter’s solution is “the” way to meet your needs.

Here are some final thoughts.  Hiding assets is not a valid asset protection strategy.  If you have a judgment against you and you fail to disclose ownership of assets, you might be found in contempt.  Hiding assets is not a valid tax reduction strategy.  If you hide assets and fail to report income from those assets, you might be found guilty of tax evasion.  Do things right and do things smart.

Mr. Ganos does not, perhaps, strongly enough make the case for insurance.  Assuming there is a claim, who will pay for the attorney to defend you?  Most insurance policies include the cost of defense as a benefit of coverage.  The legal expenses necessary to defend a claim can be substantial.  If you are required to defend yourself, how do you select an attorney with experience defending the type of case in which you are involved?  There is a great chance that the insurance company has retained qualified counsel with experience defending others against whom similar cases have been filed.  And, not that you should be concerned, but if you are worried that your counsel will not give your case the attention it deserves (since you are one of many clients), the attorney on retainer for the insurance company has every interest in handling every case with the same competence and professionalism.  As an attorney friend of mine involved in insurance defense explains, the attorney is only loss or large settlement away from being replaced by other counsel.

Most importantly, regardless, you will need competent counsel to defend your asset protection plan in the event that there is a loss that is not covered by insurance, making insurance coverage more, and not less, important.  The cost of this defense is separate and distinct, and wholly uncovered by insurance.  Although some asset protection devices rely upon this additional "fight" and its attendant "costs" as a disincentive to lawyers (asset protection marketers will make statements like, "a lawyer would have to be crazy to try and attack your plan"), most trial lawyers will assure you that the possibility of insurance is enough to make and pursue the claim, and once a judgment is obtained, they are not easily dissuaded from collecting the judgment.