Financial Protection Strategies For HNWIs

If you're a wealthy person, you need to think daily about various financial protection strategies. When you take the perspective that you need to manage risk, it changes your financial behaviour completely. You want to initiate activities that prevent governments, people, and market shops from taking away your wealth, but what exactly should you be doing?

Use asset protection trusts

If you're not doing it already, you should be using asset protection trusts to shield your assets against creditors and litigation. The idea is to place real estate, liquid capital, or equities into an irrevocable trust and then transfer legal ownership to the trust itself. When your assets are no longer yours, creditors and lawsuits can't get at them.

There are all sorts of options for establishing domestic asset protection trusts in various countries around the world, including the United States. You can also do it offshore, especially in the Caribbean.

Isolate against legal risks

High-net-worth individuals should also be isolating their legal risks through entity separation. Don't own a private business or commercial real estate under your personal name. Instead, put it under a business name. Ensure that litigation against you can't wipe you out financially. Most companies do this under the umbrella of a limited liability company. You can also use a family limited partnership for various types of assets. Once you have a structure like this in place, your personal portfolio, properties, savings, and assets are protected in any liquidation.

Insure where it makes sense

You also want to get insurance in areas where it makes sense. A lot of high-net-worth individuals carrying over $5 million to $10 million go for umbrella liability cover. This protects them as a secondary shield, providing additional support even when primary insurance doesn't cover the risk. 

Specialised home insurance is also a good idea, depending on the properties you own. You need a type of cover that provides insurance for wine, jewellery, and high-value art.

Deploy life insurance

Where possible, you also want to look at a way to deploy life insurance as a type of liquidity wrapper. You don't want your legacy to be an unexpected estate tax bill.

High-net-worth individuals often use irrevocable life insurance trusts (ILITs). Here, the trust owns the life insurance policy, which means that it keeps the death benefit out of the taxable estate entirely. Ultimately, this means that the beneficiaries receive more money in the event of a tragedy. The estate tax still applies to qualifying elements of the estate, but it doesn't apply to the life insurance policy itself.

Use geographic diversification

Perhaps the most important financial protection strategy these days is geographic diversification. Changing geopolitics means that high-net-worth individuals are looking for opportunities to protect their wealth in multiple jurisdictions, not just the US or Europe. For example, many wealthy people want to go to countries with independent banking systems, like Switzerland and Singapore. They also like holding a variety of currencies and foreign-registered assets, which build a natural hedge against severe economic or political downturns.