It is far more exciting to focus on the wealth building process. But it’s equally important to help protect your wealth.
Think of your risk management strategy as the base of your financial pyramid. If it’s not built on solid ground, it can easily fall apart.
In this article, we discuss strategies that mitigate risks and can shield your wealth from legal and financial threats.
Safeguarding Wealth:
- Life Insurance: Life insurance provides a safety net for your loved ones in the event of passing away before you have accumulated enough wealth to be financially sufficient. It helps ensure that your family will be taken care of financially in your absence, covering expenses such as debts, mortgages, and education costs as well as providing a feasible income.
- Disability Insurance: If you are still accumulating wealth, your largest asset can be your income. If you’re making $250,000/yr that is $5million over the next 20 years. Disability insurance helps protect your income if you’re unable to work due to illness or injury for an extended period of time.
- Health Insurance: Most people who are employed have access to a medical plan. If you are self-employed or 1099 you can talk to a licensed health insurance agent to find the best plan. You can shop the federal or state marketplace, look into membership organizations to see if they offer a group plan, or there are faith-based organizations labeled health care sharing ministries that are not typical insurance but help provide benefits.
- Property and Casualty Insurance: P&C covers things such as your home, motor vehicles, and personal possessions. A low-price way to add coverage on top of all of these is an umbrella policy. It always amazes me that Home & Auto agents do not recommend these policies and you typically have to ask them to add it on.
Asset Protection Strategies:
We live in a world of many legal complexities and unforeseen circumstances, so it’s important to implement asset protection strategies.
- Limited Liability Companies (LLCs) and Corporations: Structuring business and investment assets within legal entities such as LLCs and corporations can shield personal wealth from potential liabilities stemming from business activities. Consider you own a rental property, and your tenant sues you. If your property is not in an LLC, they can come after all of your assets including your personal assets. However, if the property is owned by a LLC, then the tenant can only sue the LLC – preventing your personal assets from being exposed.
- Trusts: Irrevocable trusts are one way of shielding your assets from creditors while also allowing your beneficiaries to enjoy the benefits of those assets according to your wishes.
- Homestead Exemptions: Taking advantage of homestead exemptions can protect your primary residence from certain creditors. Not only that, it also can provide significant tax relief on your property taxes. There is a bill being looked at in Texas currently, if passed, would raise the homestead exemption to $100,000. Meaning if you are being taxed at 1.5%, if you have filed your homestead exemption, you’ll save $1,500 in property taxes.
- Creditor-Protected Retirement Accounts: Funneling your money in retirement accounts such as IRAs and 401(k)s offer creditor protection, shielding these assets from potential legal claims.
Being wealthy comes with many financial benefits, it also comes with a potential target on your back. Many of the strategies we’ve discussed today are simple and relatively inexpensive to implement given the amount of protection they would provide.
Remember, it’s one thing to build wealth; it’s also important to implement strategies that help protect it.
The views depicted in this material are for information purposes only.They should not be considered specific advice or recommendations for any individual.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor.
The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable by having the policy approved. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.
