4 Basic Steps of Estate Planning to Protect Your Investment Assets

Make sure you take the necessary steps to secure your investment assets.

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On investment sites, we often talk about how to grow your assets. But there’s a different side to this topic — protecting and preserving your assets — that doesn’t get as much coverage. There are different ways to do this, including proper asset diversification, but not all of the risks to your wealth are market-related. The biggest ones, in fact, often happen outside the financial markets entirely.

Nothing will protect your assets if you are engaging in illegal activities, of course, but as your wealth grows you may be more vulnerable to lawsuits and other legal assaults that can wipe out your hard-earned assets.

Estate planning is usually the best way to protect your wealth, and ensure you're able to pass it on to your heirs at the time of your death.

What Is Estate Planning?

Estate planning is essentially about preparing for the transfer of your assets (your estate) upon your death. It's an effort to protect and preserve your assets so they can be transferred to your heirs upon your death, as well as minimize tax obligations in the process. It can also involve providing for custody and care of your dependent children (if you have any).

Estate planning can also provide a framework in the event you become incapacitated. For example, an estate trustee can manage your assets in the event you’re unable to do so, and a living will can be crafted to provide guidance as to which measures will be taken to preserve and extend your life. These kinds of arrangements can make matters much easier for your family in the event of your demise and death.

1. Protect Your Assets

Lawsuits can come from nearly any direction, and the likelihood of one increases with the size of your portfolio. They can come from neighbors, employees, customers, and even family members. People can assert claims against you for both real and imagined situations, and even if you win the case, you can still expend a fortune fighting it off.

One of the best ways to protect yourself from lawsuits is by removing some, most, or all of your assets from the reach of a potential suit. This is what estate planning does, it takes assets out of your name, and puts them into legally-protected vehicles. And once the money is beyond reach, the motivation to bring a suit can largely disappear.

Now that you know why you need to protect your assets, let’s dig into how you can best do that.

2. Write a Will

The simplest and least expensive way to begin an estate plan is by creating a will. This is a legally enforceable document that spells out your intentions for the distribution of your assets — both financial and personal — at the time of your death. It enables you to allocate the distribution of your assets to specific parties, in amounts spelled-out in the document.

Just as important, it can also provide you with an opportunity to decide who you don’t want to share in your assets upon your death. It can also reduce stress on your family, since it provides a written road map of how you want your financial affairs handled when you pass.

You can have a will prepared by an attorney for just a few hundred dollars if your financial situation is fairly simple. Of course, the more complex your finances are, the more involved and expensive the will can be. But consider it to be money well spent — it’ll represent your final word on how you want your assets distributed.

3. Create a Trust

Trusts are the next step up from wills, and a virtual necessity if you have substantial assets. And unlike wills, certain trusts also provide you with living benefits in that they protect your assets while you’re still alive.

There are different variations of trusts, and even more variations within each state. But there are two basic types:

Living trusts, also known as Inter Vivos. This is a type of trust you set up while you are still living. You can transfer your assets into a living trust, providing legal protection for your money during your lifetime. A living trust can be either revocable or irrevocable.

If it is revocable, you can amend it or even cancel it. It is the type of trust you maintain control over while you are alive, but upon your death the assets will be transferred as spelled out in the trust documents. In most cases, this transfer upon death will allow your assets to be dispersed without being subject to probate.

If legal protection is your primary concern, the trust needs to be irrevocable, and not under your control. In most states, revocable trusts where you control the assets and declare the income on your personal tax return are legally considered to be personal assets, and subject to seizure.

Testamentary. This type of trust is created upon your death, and funded by your financial assets or insurance proceeds transferred into the trust. It can offer greater legal protection than a will, because the money is actually transferred upon your death based on your wishes as expressed in the trust documents.

Trusts are an outstanding way to protect your assets from legal challenges during your lifetime, and actually a superior way to transfer assets upon your death. They typically cost substantially more to create than wills, and usually require ongoing maintenance. You’ll need an attorney to create one, as the trust will need to conform with federal and state laws.

4. Find Insurance as a Safety Net

Insurance is an absolutely critical component to good estate planning. Not only could it provide the funds used to increase your estate and/or fund a trust, but various types of insurance can be used to protect both you and your assets from a variety of legal challenges.

At a minimum, you should have an adequate amount of insurance in each of the areas of your life where it’s normally required — home, auto, life, health, disability, and various types of business insurance if you’re self-employed. These policies can represent your first line of defense against a legal challenge of any sort.

Estate Planning is Not a DIY Project

Estate planning is not the type of activity that lends itself well to a do-it-yourself project in an effort to save money. There is highly detailed information relating to state and federal law, income tax considerations, and planning and funding of trusts and other accounts, well beyond the knowledge base of the average person.

You should consider having at least four professionals involved in your estate planning effort:

  • An attorney who specializes in estate planning
  • A certified public accountant (CPA)
  • A financial planner
  • A reputable insurance agent

The reason for having specialized professionals — and spending the money necessary to bring them on board — is to be prepared for a potential disaster before it happens. Only people who work specifically in those disciplines will be able to anticipate specific outcomes, and more importantly, to prepare for them. Once a problem hits, it will be too late to maneuver assets to avoid trouble. And that’s the whole purpose of estate planning.

Kevin Mercadante

Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids.

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One Comment

  1. I have two home in Hayward. I have to create an estate planning for both the property. Need and expert estate planning attorney to create the proper planning. The point you have share about the insurance is a new information for me. I searching for online for tips and suggestion about living trust. I have got some unique information in your article. Nice sharing.

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