Asset Protection for Sudden Wealth Beneficiaries

Written by: Brian Littlejohn

If you’re the beneficiary of a windfall, you may want to protect your assets as friends, family members, and opportunists attempt to capitalize on your good fortune. Here are three asset protection strategies to consider as you navigate sudden wealth.

Strategy #1: Strategic Asset Location

You can avoid unnecessary taxes and protect your assets by utilizing certain account types and legal entities—for example, tax-deferred investment accounts, trusts, and family limited partnerships and LLCs.

  • Tax-Deferred Investment Accounts. Depending on your annual income, the long-term capital gains rate on investments can be as high as 20% in 2021. Tax-advantaged accounts like IRAs, 529 plans, and health savings accounts allow you to grow your assets tax-free and, in some cases, defer your tax liability until you need the money. 
  • Trusts. As an estate planning tool, trusts allow you to control how and when your assets are distributed after your death. Trusts also offer specific advantages over a traditional will, such as privacy, tax benefits, and increased protection against legal action.
  • Family Limited Partnerships (FLPs) and Limited Liability Companies (LLCs). Some wealthy families choose to use FLPs and family LLCs to exclude certain assets from a taxable estate. As separate legal entities, FLPs and LLCs can help safeguard family wealth against creditors (and in some cases, divorce). 

Strategy #2: Asset Titling

Even the best estate plans can fall apart if assets aren’t titled correctly. As an estate planning tool, asset titling (legal ownership) can help protect your wealth as it transfers to future generations. In addition, strategic asset titling can safeguard your assets against outside predators and creditors–especially in a legal dispute.

Strategy #3: Insurance

As you accumulate wealth, you may want to consider additional types of insurance to protect your assets—for example, umbrella insurance and cybercrime and identity theft insurance.

  • Umbrella Insurance. The suddenly wealthy often become targets of frivolous lawsuits and financial claims. Umbrella insurance protects your assets over and above basic liability and property insurance coverage. Most experts recommend a coverage amount that matches your net worth, plus your potential future income stream. However, this can vary depending on your personal circumstances and needs. 
  • Cybercrime & Identity Theft Insurance. As cyberattacks and identity fraud cases become more mainstream, your risk of being a victim of cybercrime only increases. To offset the financial risk associated with these crimes, some insurance providers offer cybercrime and identity theft insurance as an additional safeguard against theft and fraud. 

Protecting Your Newfound Wealth

The right asset protection strategies can help you preserve your wealth and provide for your family for generations to come. Since these strategies can be complex, you may want to consider working with a fiduciary wealth manager or estate planning attorney. A trusted advisor can help you determine which strategies make most sense for you and implement them properly.

Related: 7 Tips for Resolving Investor Disputes

Brian Littlejohn, MBA, CFP®, CFA is a financial advisor with Sherwood Wealth Management, providing investment management, retirement planning, and comprehensive financial planning and is a subscriber to MyPerfectFinancialAdvisor.