Asset protection strategies are essential for safeguarding your wealth from unexpected events or liabilities. While some methods can be complex and expensive, there are five relatively simple and cost-effective techniques that can provide significant protection: umbrella insurance, life insurance, annuities, retirement accounts, and 529 accounts. Understanding these strategies and how they can benefit you will help secure a business owner’s hard earned assets and ensure the financial future for your loved ones.

Umbrella Insurance

Umbrella insurance is a type of liability insurance that provides added coverage beyond the limits of your standard policies, such as auto or homeowners insurance. It will protect you from major claims and lawsuits by covering costs that exceed your other policy limits.

A key advantage of umbrella insurance is its affordability compared to the amount of coverage it provides. For a relatively low premium, you can secure a high level of protection, typically starting at $1 million. This can protect the hard earned investments you plan to rely on during retirement, which would be taken in a lawsuit were damages to exceed your primary insurance limits. 

Umbrella insurance may also play a role in estate planning by protecting your assets from potential claims arising before your death.  By ensuring your insurance coverage is sufficient to cover potential claims, you can help preserve your estate for your beneficiaries. 

For personal coverage, premiums for umbrella insurance are generally not tax-deductible.  However, any payouts you receive from your umbrella policy are typically tax-free, as they are considered reimbursement for personal losses rather than income. 

While an individual umbrella policy offers extensive coverage, it may not cover certain types of claims, such as those related to business activities or intentional acts.  A personal umbrella policy covers general activities in the home, a lake house, ranch, or recreational venue, but exclusions are common for high risk activities such as hunting, watercraft, or aircraft.  When purchasing coverage, ask for optional add-on coverage for any high risk activity otherwise excluded under the policy. You may also find individual umbrella policies that extend coverage to an individual’s residential rental real estate activities.  If rentals are not covered, a separate landlord umbrella policy may be available at a reasonable rate.

For business activities, a separate umbrella policy must be used and should be deductible as a business expense.  You will need a policy that covers your specific operational activities.  This will provide added coverage beyond the limits of your business casualty and liability policies for actions by personnel and risks to customers. While you can expect to pay more for business umbrella insurance compared to personal coverage, the protection you receive is an effective way to mitigate out of control jury awards and attorney’s fees.  

If you operate your business in a protected LLC or corporation, where claims generally cannot reach your personal assets, the added umbrella coverage is still important to protect valuable business assets such as accounts receivable, contract rights, and real property.  If you operate your business as a sole proprietorship, then the added umbrella protection is essential to protect your personal savings and investments from the risks of ongoing business operations and possible claims. 

When adding umbrella insurance, be prepared to beef up your underlying insurance coverage to keep a certain minimum level of coverage. Your underlying coverage costs significantly more in premium when compared to the cost of umbrella coverage. The insurance companies want you to have a minimum level of underlying coverage so only excessive (and less frequent) claims are covered by the umbrella policy.

Life Insurance

Life insurance provides a financial safety net for your loved ones in the event of your death. It can help cover expenses such as funeral costs, outstanding debts, and ongoing living expenses, ensuring that your family is not burdened financially during a difficult time.

There are two main types of life insurance: term life and permanent life. Term life insurance provides coverage for a specified period, such as 10, 20, or 30 years, and is typically less expensive than permanent life insurance. Permanent life insurance, which includes whole life and universal life policies, provides coverage for your entire life and also includes a cash value component that can grow over time.

You, like many other business owners, may choose life insurance for its ability to provide financial security for your loved ones. The death benefit is typically income tax-free and can help your beneficiaries maintain their standard of living after you are gone. With beneficiary designations the death proceeds may escape the risks and costs of probate and pass directly to your loved ones. 

Life insurance can also be used as an estate-planning tool for providing liquidity to pay estate taxes or other expenses without forcing your beneficiaries to sell assets in order to pay them. And, it can be used to equalize inheritances among beneficiaries or provide for charitable giving.  Additionally, after the death benefit is received by a beneficiary some states will protect those proceeds from all future claims against the beneficiary, e.g., divorce, lawsuits, or bankruptcy.

Even though life insurance offers many benefits, it is important to consider the cost and whether it fits within your budget. Premiums can vary based on factors such as your age, health, and the amount of coverage you choose. Additionally, permanent life insurance can be more expensive than term life insurance and may have complex features that require careful consideration. Term insurance is relatively inexpensive for younger couples raising children and is a great way to replace lost wages when a parent dies unexpectedly.

You may want to reach out to your personal financial planner or advisor to learn more about life insurance planning. Your CPA, business attorney, and estate planning attorney are also great resources to check with. And you may request guidance from a trusted casualty and liability insurance agent.

Annuities

Annuities are financial products that provide a regular income stream in exchange for a lump sum payment or series of payments. There are two main types of annuities: immediate annuities, which begin payouts immediately after a lump sum payment, and deferred annuities, which delay payouts until a later date.

Similar to life insurance, annuities and their distributions may be completely protected from lawsuits. Because annuities allow for beneficiary designations, the remaining benefits may pass at death without probate.  A financial planner or advisor can help you transfer exposed financial investments to annuity products that are shielded from personal and business claims.    

Annuities can provide a reliable income stream in retirement, helping to ensure you do not outlive your savings. Annuities can also help with estate planning by providing a lump sum death benefit or a guaranteed income stream for a surviving spouse or other beneficiaries.  They can also offer tax advantages, as earnings grow tax-deferred until they are withdrawn, which means you do not pay taxes on them until you withdraw the money. And, annuities can provide protection against market volatility, assuming they offer guaranteed minimum returns.

Annuities can be simple or complex financial products with fees and restrictions that can erode returns. Withdrawals are taxed as ordinary income, and if you withdraw from an annuity before age 59 ½ the amount may be subject to a 10% early withdrawal penalty. Another consideration is that an annuity may not keep pace with inflation, which reduces its purchasing power over time. 

Retirement Accounts

There are several types of retirement accounts, including employer-sponsored plans like 401(k)s and 403(b)s, as well as individual retirement accounts (IRAs) such as traditional IRAs and Roth IRAs. All of these accounts offer tax advantages that can help you save for retirement.

Contributions to traditional IRAs and 401(k)s are typically tax-deductible, while earnings grow tax-deferred. Roth IRAs offer tax-free withdrawals in retirement because contributions are made with after-tax dollars. 

Retirement accounts, like life insurance and annuities, are designed for beneficiary designations and the accounts normally pass directly to your heirs as part of your estate plan, which allows the accounts to bypass probate. 

Similar to life insurance and annuities, the investments inside a retirement account are protected from the personal claims against the employee during his or her lifetime. But unlike the protection provided by life insurance and annuities, distributions from retirement accounts may not remain protected after a relatively short period of time (e.g., a couple of months).  Additionally, in a significant number of states there is no protection for inherited retirement accounts, which may be taken in a lawsuit against the inheriting beneficiary. 

While they provide significant income tax benefits, there are limits to how much you can contribute to retirement accounts each year, and early withdrawals before age 59 ½ may be subject to a 10% penalty. Additionally, the value of your investments in a retirement account can fluctuate based on market performance. 

From a tax perspective, contributions to traditional IRAs and 401(k)s are tax-deductible (there is no deduction when contributing to a Roth IRA). Distributions from traditional retirement account plans are taxed as ordinary income (with no tax on distributions from Roth IRAs).  

529 Accounts

529 accounts are tax-advantaged savings plans designed to help families save for future education expenses. These accounts can be used to cover such costs as tuition, fees, books, and room and board at eligible educational institutions. By using 529s rather than personal savings accounts parents may build up significant financial investments for the family’s educational needs without exposing those funds to their own personal and business claims.  

One of the best advantages of a 529 account is its tax benefits. Earnings in a 529 account grow tax-free and withdrawals are also tax-free when used for qualified education expenses. Additionally, many states offer tax deductions or credits for contributions to 529 accounts.

Some think 529 accounts are too restrictive compared to other simple asset protection techniques. This is because if funds from a 529 account are not used for qualified education expenses, withdrawals may be subject to income tax and a 10% penalty. Additionally, the investment options within a 529 account may be limited, and fees can vary based on the plan.  However, many find a 529 account to be an especially valuable estate planning tool, because it allows them to contribute to the education expenses of their children or grandchildren while reducing their taxable estate. Contributions to a 529 account are considered gifts for tax purposes, and contributions can be made up to the gift tax exclusion amount each year without incurring gift taxes.

Summary and Conclusion

The five asset protection strategies discussed in this article offer simple and cost-effective ways for small business owners to safeguard their wealth and secure their financial future. Umbrella insurance provides added liability coverage at an affordable cost, while life insurance can provide financial security for your loved ones. Annuities offer a reliable income stream in retirement, and retirement accounts provide tax advantages to help you save for the future. 529 accounts can help you save for your child’s education with tax benefits. 

Each strategy has a varying degree of asset protection. Umbrella coverage protects your valuable savings and investment assets.  Life insurance and annuities can provide protection for life. Funds that stay in retirement accounts enjoy a high degree of protection, but less so after being distributed.  And 529s protect educational savings from risks and lawsuits, which ensures greater enrichment and long-term success for your family.

About the Authors

Rob Hugos is an Attorney, CPA and Partner, Director of Wealth Preservation and Protection Planning at Texas Trust Law in Austin, Texas. He helps clients, including businesses, with all aspects of general estate planning, including Wills and Living Trusts, and also works with clients to create and implement Advanced Planning strategies designed to achieve more complex estate planning, tax, asset protection and business objectives. 

Licensed by both the U.S. Supreme Court and the Supreme Court of Texas, Rob is a member of the Texas Bar Association, College of the State Bar of Texas, Austin Bar Association, Austin Tax Study Group, Estate Planning Council of Central Texas, Texas Board of Public Accountancy, and American Association of Attorney-Certified Public Accountants.

Brad Wiewel is the founder and owner of Texas Trust Law, powered by The Wiewel Law Firm which offers services in the areas of estate planning, probate, asset protection planning and elder law. Board-certified in estate planning and probate law by the Texas Board of Legal Specialization, Brad is an AV Rated attorney, which is the highest distinction for practicing attorneys in the legal world.

Brad received a B.A. from the University of Illinois and graduated from St. Mary’s School of Law in San Antonio with distinction (Top 10%). Subsequently, he served as a briefing attorney for a Texas appellate court. 

He has been quoted by the Wall Street Journal, Bloomberg Business and ABC News and has written for Next Avenue, Forbes.com, and the Austin Bar Journal. He has also authored numerous books, including The Texas Estate Planning Handbook, Surviving Texas Probate: A Practical Guide for Executors and Trustees, The Texas Asset Protection Handbook, Estate Planning for Women: Strategies and Solutions for Modern Women, and Welcome to Texas…Now What?.
Brad currently teaches in the University of Texas’ CFP training program and has conducted continuing education programs for CPAs.  He is an active member of numerous professional and community related organizations.