• Phone: 800.654.3170 x101 | Fax: 800.474.7989
Wednesday, 02 January 2013

Can A Life Insurance Policy Or Annuity Protect Your Wealth From A Lawsuit?

The number of lawsuits is rising, too. When economic times get tough, some people see a civil suit as an easy way to get rich. Lawsuits always target those who have money and not just big corporations, either. Small businesses, successful entrepreneurs, physicians and wealthy individuals all fall into the crosshairs of litigation lawyers. As every law student learns at some point: “commercial success spawns litigation.” Everyone wants their money.

Fortunately, we’ve got some great solutions for you (and one solution offers a way to turbo-charge your investment profits). So whether you are just beginning your journey to personal financial freedom or you’ve already secured the fortune of your dreams this article can be beneficial for you. A legitimate question to ask is: how do you safeguard your hard earned wealth?

Many times I’m asked if a trust or trust fund can protect my wealth. This is a good question... and the answer is more complicated than a simple “yes” or “no.” Here’s why:

It comes down to how the trust is set up, basically whether the trust is revocable or irrevocable. Whoa. Those are big lawyer-speak words, so let’s simplify it.

Revocable = you can change the terms of the trust (or dissolve it) whenever you like. It is completely flexible.

Irrevocable = you cannot change the terms or dissolve it (at least not until the terms or purposes of the trust have been completed).

Most trust funds that people set up are called “Revocable Living Trusts.” As already mentioned, the “Revocable” part means that the terms of the trust can be changed. The “Living” part means that the trust is in effect while the trust creator is still alive. A Revocable Living Trust has many nice features. It’s relatively easy to set up, and it is becoming a popular replacement for a will in the United States. There is one little problem: the revocable living trust offers no asset protection.

The courts are very clear about what money is protected in a lawsuit and what is not. Revocable trusts have no protection whatsoever. If you are sued, any money you have in a revocable trust is vulnerable.

So if you’re looking for asset protection (or any potential tax sheltering), a revocable trust won’t cut it. For protection against lawsuits, you need an irrevocable trust. But the protection you get with an irrevocable trust comes with significant trade-offs and you must follow some stringent rules. Below are two iron-clad rules of an irrevocable trust.

The first is if you are sued, lawyers will try to attack the legality of your trust. Your only line of defense is to make sure the trust is set up as clearly irrevocable.

The second iron-clad rule is that you must set up the irrevocable trust before anyone sues you (or even before someone threatens to sue you). If you try to set one up after a lawsuit is initiated, no (competent) lawyer will touch it. That’s because lawyers can then be sued too under state "fraudulent conveyance laws. " If you attempt to hide or move assets to avoid creditors it’s a fraudulent conveyance. The courts will rule against the trust in a lawsuit.

Setting up an irrevocable trust for asset protection isn’t cheap. Domestic asset-protection trusts cost around $3,000 to $10,000 in attorney's fees, plus yearly asset management fees of roughly 1 percent.

A much lower cost alternative to a trust, depending upon your needs, is an Indexed Universal Life (IUL) that might serve as a viable replacement for an asset-protection trust. The “IUL” is what I like to call a Self-Directed Banking System. It’s a foundational strategy in a wealth protection and income plan.

An “IUL” and an irrevocable trust are not identical, but an “IUL” is much easier to set up. No lawyers are needed; it has a lower startup cost; and includes a host of additional benefits. For example, an IUL can provide:

  • A guaranteed annual return (you’ll receive a set amount of interest each year)
  • No risk of principal (which means the amount will never drop)
  • Indexed growth at a competitive annual rate of return (6-10% or more)
  • The ability to take out your money whenever you want, without penalty
  • Protection against creditors due to a lawsuit or bankruptcy (in most cases)
  • Liquidity so you can have your money in your hands within a few days
  • Access to your money in the event of a disability.
  • The ability to buy your home, cars, and other large purchases from yourself, so you earn the interest instead of a bank.
  • TAX FREE withdrawal of your money when you decide to retire.

Basically, you protect your money from a lawsuit without giving up control of the money.

There is also another asset protection product, provided by insurance companies, called the Fixed Indexed Annuity (FIA). Just like the IUL, the FIA (in most cases) provides creditor and lawsuit protection and is the perfect haven for your qualified/retirement savings. The FIA offers indexed market growth and also guarantees no loss of principal or gains along with it protection.

If you fall into the categories described in the beginning of the article, the IUL and FIA could be perfect for you.

Published: 2013.01.02, Fox Business