Why asset protection?
Many people think that asset protection is needed only by the very rich, who often proactively manage their assets. That couldn’t be more wrong. In real life, it’s actually the opposite – the fewer assets you have, the more important they are for you and your family.
Life insurance of $100K that doesn’t reach the beneficiaries might not matter much to a very wealthy family or high-net-worth individuals, but this same amount of life insurance can make the difference between stability and dramatically deteriorated circumstances for a family with limited resources.
The same goes for every type of asset – bank account, stocks, real estate, etc. This principle is valid not only for physical assets but also for digital – email accounts, social media profiles, to list a few. If asset protection is so important, why do so few people think about it?
The primary reason is that, for most people, this topic is not well understood. And more importantly, they don’t know where to start.
With this blog, we’ll try to draw back the curtain and shed some light on the topic, ultimately showing you how easy and hassle-free it can be to protect your assets and secure your family’s quality of life if anything should happen to you.
Definition
In the financial world, asset protection means using strategies to guard your wealth from seizure or other forms of loss, for example establishing an irrevocable trust to protect your personal or business assets against the claims of creditors. I know, this sounds very obscure, so let’s say it in very simple words: asset protection helps to keep your assets in your hands, or in the hands of your family if anything happens to you.
In a very practical sense, asset protection includes these basic steps:
- cataloging your assets in a secure repository
- tracking your assets, for example, updating them whenever you add a new asset or there is a change in existing assets
- ensuring the beneficiaries you assign will be aware of your assets so that they can identify and locate them and, as a result, claim ownership
- applying technical, financial, legal or other tools to protect your assets in the case of an unforeseen event.
It’s important to note that asset protection applies not only to personal assets, but also to business assets. This can be very valuable for business owners. For example, they can set up a trust to protect the business assets of their limited liability company (LLC) or other business entity.
Financial service companies can extend these steps with additional features such as asset management to increase your net worth, but the above steps represent the basic minimum that asset owners need to take to ensure the protection of their assets.
Different types of asset protection
Let’s have a look at the most common asset protection tools in the United States and globally:
- asset protection trusts (e.g., an irrevocable trust to protect against potential creditors).
- insurance policies and
- family limited partnerships (FLPs)
Using these tools requires a lot of time and effort. But apart from that, you will notice that the most common asset protection tools target primarily external risks. For example, the insurance policy for a real estate can protect it against natural disasters, and irrevocable trusts can protect your assets against the claims of creditors in the case of bankruptcy.
But all these asset protection tools fall short when it comes to personal risks – for example, your heirs being unaware of and unable to locate your insurance policy, company stocks, bank account or other assets.
Let’s take a simple example. You take out life insurance and you name your spouse or children as beneficiaries. You think you’ve secured peace of mind; you believe your family would be secure if anything happened to you. You couldn’t be more wrong.
You might be surprised to learn that insurance companies don’t have a legal obligation to proactively notify your beneficiaries! Yes, you read that correctly – they will know that something has happened to you, they will know who your beneficiaries are, appointed in the policy by you, but they are not required to notify them! So your spouse or children might never become aware of that policy and benefit from it.
As you will see below, we are talking about billions of dollars in the US alone that don’t reach the beneficiaries but remain unclaimed in institutions.
So how do people protect their assets from these personal risks, for example, forgetting about an asset, heirs not being able to locate an asset, or an asset protection tool, such as an insurance company, failing to notify your heir about the asset? Here are the most common protection techniques which people employ against these risks:
- storing the information on the hard drive of their personal computer
- printing it out on paper and storing it in a secure place at home or at the office
- using a digital vault
- storing the information on Excel or Google Sheets.
You can’t fail to notice that while the protection tools relating to external risks are quite sophisticated, the tools used to protect your assets from personal risks are all over the place. And most importantly, they fail to cover against some very important personal risks:
- These options would fall short if anything happened simultaneously to you AND your partner, with whom you’ve shared the asset information.
- The people with whom you share the information about your assets might forget how to access it.
- The people with whom you share the information about your assets might be too young or too old to remember the access instructions.
- And most importantly, the above asset protection tools don’t give you the option to allow access ONLY if something happens to you, not before.
How big is the problem?
The famous Californian attorney James L. Cunningham, Jr. puts it well in his book Savvy Estate Planning: “According to CBS News, about $1 billion in life insurance claims goes unpaid every year. That’s because even though the insurance company knows you are dead, they have no affirmative obligation to reach out and pay the money to your beneficiaries. The beneficiary has to submit a claim, but if the beneficiary doesn’t know about the policy, that claim will never be submitted. The insurance company knows you have passed, they know who the beneficiary is, but if no one steps forward, the company holds on to the money. I find this shocking.”
$1 billion per year just in the United States and only for life insurance. How big is the problem of protecting all types of assets from these risks? It’s huge. So-called unclaimed assets approach $100B in the US alone. Latest reports for the UK show £77B. Globally, we are talking about trillions of dollars. And the upward trend is alarming – a $5B increase per year in the USA alone.
Who is it for?
Asset protection was rarely needed 100 years ago when few people had more than a bank account, life insurance, and real estate properties. And these were the privileged few. Even these assets, so common nowadays, were unthinkable for the majority of the population 100 and more years ago.
Today, things are quite different. Many people have diverse and complex assets, often in multiple countries. Tech companies give stock options or RSUs to their employees, expats have assets in multiple countries, and more and more people invest in stocks and buy cryptocurrencies.
Asset protection is usually needed when you fulfil most of the criteria below:
Multiple asset types
You have multiple types of assets – life insurance, bank accounts, stock options, company stocks, cryptocurrencies, real estate, to list a few. This increases the complexity of asset tracking for the owner, and especially for the beneficiaries.
Multiple countries
Your assets reside in more than one country. This situation is particularly familiar to expats. When they move from country to country, they usually leave a bank account here, life insurance or a pension fund there. This further complicates asset tracking and, as a result, increases the need for asset protection.
Family members in different countries
Your family members live in a country different from the country where your assets are stored. For example, you live in the US and your assets are there, but your family members are in South America, Europe or Asia. This makes asset identification and location especially challenging for family members.
When you meet some of these criteria, it’s a signal for you to start thinking about protecting your assets.
When do you need it most?
While asset protection is needed by every person who has assets, it is especially needed when one family member is the primary provider of finance for the whole family. In this case, if anything happens to this member, the rest of the family becomes extremely vulnerable. If they are not aware of the assets or can’t locate and claim them, there can be tremendous and traumatic changes in their standard of living and overall quality of life, in addition to the overall unfairness of the assets not going into the hands of the rightful heirs.
The risk is especially high in this situation because when one family member is the primary financial driver, the rest of the family are often not particularly proficient with the diverse and complex types of assets that the financial driver in the family holds. They might be totally ignorant of terms such as ETFs, RSUs, stock options, and cryptocurrencies, which makes it even more difficult for them to claim these assets.
How does asset protection work?
We have already reviewed how the most common asset protection tools, such as trusts and insurances, protect against external risks but fall short in protecting against personal risks, such as forgetting about an asset or heirs being unable to locate an asset.
There are other inherent risks in the traditional asset protection tools, too. Let’s review them.
The first is that their protection is focussed primarily on protecting the value of the asset but not the ownership of the asset.
Traditional asset protection tools such as trusts and insurance focus on protecting the value of the asset but not the ownership.
For example, insuring real estate protects against climate disasters. An irrevocable trust can protect an asset. But all these asset protection tools do not guarantee or target proactively the protection of asset ownership.
Did the insurance company that provided your life insurance tell you how they would identify and notify your heirs if the insurance was triggered?
Did your bank tell you how they would identify and notify your heirs if you abandoned your bank account?
You might be surprised that, for most asset protection tools, the answers to the above questions are somewhat negative. And the reason is that they aim primarily to protect the asset value but not the asset ownership. The more blunt answer is they don’t have any incentive to notify your heirs.
You would certainly not be happy knowing that your asset had preserved its value but was not in the hands of your family.
The second risk related to traditional asset protection tools is that they soon become outdated. Let’s take trusts, for example. One sunny day you decide to protect your assets by creating a living trust. You find a good attorney, list all your assets, sign the papers, and you are ready – your assets are protected. The reality is that they are not.
The reason is that assets are very dynamic. Take a second to think what assets you have now and what assets you had 15 years ago. The two lists are very different, right? Yes, assets change continuously. Establishing a trust is an expensive and bureaucratic process, and it is impossible to spend all that time and money with an attorney to continually keep your trust up to date for the next several decades. As a result, quite often when beneficiaries get access to a trust established by a family member 30 years ago, they are unpleasantly surprised that it’s of no value: the assets listed in the trust documents are no longer valid, while the new assets aren’t listed.
The third additional risk related to traditional asset protection tools is that they protect certain assets types, but not all. If you have insurance for your real estate, it protects only the real estate. Even if you have established a trust, certain assets such as life insurances can’t go into your trust.
Privacy and Confidentiality
Most of the traditional asset protection tools have inherent disadvantages related to privacy and confidentiality.
If you appoint beneficiaries in your document or policies, in almost all cases, they become aware of this right away. What if you want to appoint family members or other people as beneficiaries but you don’t want to inform them just yet? There are many situations in which this might apply. For example, you don’t want your 15-year-old son to know that he is a beneficiary of a $200K life insurance policy or bank account. He might start dreaming of buying expensive cars or partying non-stop. Apart from the obvious stupidity of blowing this money, your son would be distracted from studying, improving himself, and becoming a great and honorable human being.
This is just one of many situations in which you might want your beneficiaries to be notified about the assets to which they are assigned only if something happens to you – not earlier.
Most traditional tools unfortunately don’t allow for that. So how can you achieve it? Let’s see below.
So how, then, we should implement asset protection?
With the DGLegacy application, you can protect your assets against unforeseen events and ensure your family is secure. You can connect your preferred beneficiary with your preferred assets, and they will be notified at the time you choose – while ensuring they get the support they need in the process of claiming.
With DGLegacy, you can protect all types of assets. It is also easy to keep your list of assets and beneficiaries up to date.
This way, in the case of an unforeseen event, your loved ones:
- are aware of your assets
- can identify and locate your assets
- can minimize the chance of unclaimed assets.
This is achieved through the following easy steps:
- Catalog your assets
You catalog the assets that you want to protect via DGLegacy, providing the minimum basic information about the assets that will allow your beneficiaries to identify and locate them.
DGLegacy doesn’t ask for confidential information such as your bank account number, the value of your stock options, or financial account numbers!
- Assign beneficiaries and trustees
Beneficiaries are the people whom you appoint to be informed about the assets that you assign to them. These are usually your partner, your children or your extended family members, such as siblings and parents.
You might not want to share your asset information with your beneficiaries just yet. No problem. You can choose whether they are to be notified at the time you create the asset or only in the case of an unforeseen event.
If your beneficiaries are, for example, elderly people or children, they might not be proficient with the type of assets assigned to them. In that case, you can assign trustees for each of your assets in the DGLegacy application. If anything happens to you, they can help the beneficiaries to locate their assigned assets and claim ownership.
- Configure your Heartbeat protocol
The custom-engineered Heartbeat protocol of DGLegacy verifies that you are OK and detects whether anything unforeseen has happened to you.
It is a safe procedure which also aims to eliminate the possibility of false detections of unforeseen events. This is implemented through a multistep process described on the How It Works (link) page.
- Heartbeat protocol triggering (unforeseen event detection)
If there is no confirmation in response to any of the reminder emails or phone calls, the system detects that an unforeseen event has happened to you.
Then the notifications which you have configured into the system about the cataloged assets and the associated beneficiaries and trustees are triggered.
Unforeseen events happen. With the DGLegacy application, you can protect your loved ones and secure your assets when it matters the most.
