The biggest risks in wealth protection and how to mitigate them
Accumulating wealth is difficult enough; once you have it, you’ll need to protect it. Too many people build up a nest egg for themselves, or inherit wealth, and don’t know what steps to take to make sure it remains intact and/or keeps growing.
The reality is that there are many threats that could jeopardize the long-term integrity of your wealth, and you’ll need to work proactively to protect it.
The Biggest Risks in Wealth Protection
What exactly are you guarding your wealth against? What are the most common threats to consider?
- Investment loss. What happens if you make a bad investment? Let’s say you put $1 million of your $5 million into a new business, and it goes under. Your entire net worth has dropped by 20 percent. Fortunately, there’s an easy way to protect against this threat: asset diversification. The basic principle is to distribute your wealth across a large number of different types of assets; that way, if any single investment fails, your wealth won’t take a massive hit.
- You’ll also need to think about inflation. Over time, the relative value of money decreases slightly; this is why $1,000 today has less total purchasing power than $1,000 in, say, 1960. If you aren’t careful, inflation could gradually chip away at the raw buying power of your material wealth. The best way to guard against this is to keep your money in investments capable of generating interest in excess of inflation. Common choices include stocks, bonds, real estate, and high-yield accounts.
- Civil judgments. If someone sues you for damages in a civil case, the court could attempt to seize your assets. If you’re found responsible for paying an exorbitant sum of money for damages, as well as legal fees, it could put a major dent in your holdings. One simple way to protect against this threat is to invest in an offshore trust; offshore trusts have a number of benefits, including the fact that they fall outside the jurisdiction of U.S. courts attempting to enforce a domestic civil judgment.
- Divorce could also put a significant burden on your finances. Depending on the ruling, you and your spouse may be splitting your joint assets and accounts, and you may end up owing alimony and/or child support indefinitely. There are several strategies that can help you here, but establishing a prenuptial or postnuptial agreement (if possible in your state) can provide a framework for how you’ll manage the financial side of a divorce. You can also keep your assets someplace that isn’t subject to divorce-related rulings, like in a retirement account.
- Professional liability. If you or your business is accused of wrongdoing in some way, you could be held responsible—and you could be forced to give up your personal wealth to cover the damages. Fortunately, there are many strategies designed to protect you in this area. For starters, you can structure your business as a corporation or limited liability company (LLC); these exist as separate entities from a legal perspective, and can shield you as an individual. Additionally, you can purchase insurance policies that can kick in if you ever face legal trouble.
The Most Important Precautions
If you’re looking for the simplest collection of wealth protection strategies you can use to keep your assets safe, these are a good start:
- First, you’ll want to diversify your asset holdings. Having too much of your money in one place or one investment is a bad idea; instead, distribute your wealth across a number of reliable (and some risky) holdings.
- It’s also important to purchase insurance. Depending on your business and your personal life, you may want to obtain robust personal or professional liability policies, a product liability policy, and/or an additional umbrella liability insurance policy, meant to cover your expenses that exceed your “normal” policies.
- Business structures. Creating a legal structure for your business is a no-brainer for most professionals. Starting an LLC, or even a corporation from scratch is a process that isn’t super complex and doesn’t take much time—but it can protect you indefinitely from financial risks associated with the business.
- Legal planning. Finally, consider working with a lawyer to take advantage of legal options meant to protect your wealth. Depending on your state and your current situation, it may be a good idea to set up a trust, or make use of specific legal rules, like a homestead exemption.
If you’re inexperienced in the field of wealth management, or if you want professional advice on what to do next, it’s in your best interest to speak with a lawyer and/or a financial advisor. These experienced pros will be able to provide you with more specific advice, tailored to your situation.