Whether you are just getting started with investing or you have earned millions of dollars in returns, your brokerage accounts are worth protecting. Brokerage accounts are among the easier assets for your creditors to get their hands on; and, even if you own an account that is not worth much now, there are lots of reasons to make sure you are protected in the future.
To be clear, in this article we are just talking about non-retirement investment accounts. For more information on protecting the wealth you have accumulated in your 401(k) or Individual Retirement Account (IRA), you can read: Asset Protection for Retirement Plans. There are some unique issues involved with employer-sponsored retirement plans, so you will want to be sure to review the information we covered there as well.
But, back to brokerage accounts. You’ve got one (or several), and you need to make sure that it will be there when you, your spouse, your children, or your other chosen beneficiaries need it. To do so, you will likely need to employ a combination of estate planning and asset protection strategies.
How to Protect Your Brokerage Accounts from Creditors
When it comes to asset protection, brokerage accounts offer many of the same benefits as bank accounts. There are flexible ownership options, you have a number of options that will likely work well with your estate plan, and you may have the option to move your brokerage accounts offshore as well. All of these are critical to building an asset protection strategy that both (i) is effective, and (ii) gives you the ability to retain control over distributions from your portfolio.
Some of the most common strategies that investors use to protect their brokerage accounts include:
- Forming a limited liability company (LLC) – LLCs are not just for businesses, they are also great tools for estate planning and asset protection. The primary reason for this is the “limited liability” protection they offer. When you properly form, fund, and manage an LLC, the LLC is treated as its own separate “person,” and its assets can be shielded from your personal liabilities.
- Setting Up a Domestic Asset Protection Trust (DAPT) – A domestic asset protection trust is a type of trust that is set up to help individuals protect their assets from creditors. When you form a DAPT (or any other type of trust), the trust becomes the legal owner of any transferred assets (similar to an LLC).
- Setting Up a Foreign Asset Protection Trust (FAPT) – A foreign asset protection trust is similar to a DAPT, but with the (perhaps obvious) distinction that it is formed overseas. When you set up an FAPT in a country without full faith and credit for US judgments (such as Belize or the Cook Islands), this provides yet another layer of protection for your brokerage accounts.
- Using an Alternate Form of Trust – Other trusts, such as the revocable living trust, can be used for asset protection purposes as well. While the asset-protection benefits of these trusts can be limited to a certain extent, they will often offer countervailing benefits for estate planning purposes. When seeking to protect your brokerage accounts, it is imperative to give due consideration to both sides of this equation.
In addition to transferring your brokerage accounts into an LLC or trust, you may have other options as well – options that you can use regardless of whether you own your brokerage account in your name or through a legal structure. For example, insurance coverage is almost always a good idea. If you get sued for an auto accident, for professional malpractice, or for any other reason, your insurance policy (or policies) will serve as the first line of defense to personal liability. Contracts can play a key role as well, both in your personal life (e.g., a prenuptial or postnuptial agreement) and in your business (e.g., indemnification and other provisions for shifting liability).
Estate Planning for Individual Investors
When it comes to estate planning for brokerage accounts, the list of options swells significantly. However, depending upon your financial and family circumstances and your estate planning goals, it may be fairly easy to narrow down the list pretty quickly. Some of the options that will typically be on the table include:
- Brokerage Account Beneficiary Designations – The easiest way to provide for the transfer of your investment portfolio assets is to designate a beneficiary (or beneficiaries) on your account. In fact, if you set up your account with the help of a broker, you probably did this already. But, as with most things, the easiest way is not necessarily the best way, and there are a number of reasons why you might want to consider another alternative.
- Transfer on Death (TOD) Plan – With a TOD plan, your entire brokerage account gets transferred upon death (as opposed to distributing the assets in your portfolio). Most US states have uniform laws governing TOD transfers, though there are a few exceptions. If a TOD plan is the best option for your brokerage accounts, it will be important to make sure there are not any unique provisions in your state that require specific consideration.
- Joint Ownership of Brokerage Accounts – There are three primary forms of legally recognized joint ownership, each with its own unique characteristics and implications. With “joint tenants with right of survivorship” (JTWROS), each owner has equal and full rights to the account; and, when one owner dies, the other takes exclusive ownership automatically. “Tenancy by the entirety” is similar to JTWROS, but is available only to married couples in certain states. The third form of joint ownership is known as “tenants in common.” Tenants in common own separate interests in their account, similar to owning individual membership interests in an LLC. When one joint owner dies, his or her beneficiary will take ownership of his or her share.
- Revocable and Irrevocable Trusts – From revocable living trusts to dynasty trusts, there are various trust structures that can serve wealthy investors’ needs as well. In most cases, using a trust will be the most sensible option available.
- Your Will – We are listing your will last, because it is typically one of the least desirable options for transferring high-value assets at death. Any assets distributed through your will are going to be subject to probate, and using your will for property distribution eliminates many of the asset protection, tax reduction, and other benefits available with trusts and other estate planning tools.
Once you have your asset protection strategy and estate plan in place, it is important to make sure that your family members have the information they need to administer your estate after your passing. Working with your legal and financial advisors, you should compile resources and instructions to provide to your loved ones whom you have named as personal representatives, trustees, and beneficiaries. Personal representatives and trustees have certain legal obligations (and can face legal liability) as well, so you will want to make sure that they are comfortable taking on responsibility for administering your estate.
Questions? Contact Jiah Kim & Associates
If you own brokerage accounts and have not yet developed an asset protection strategy or estate plan, we can help make sure your financial assets are secure. To get started with a confidential wealth planning session, please call (646) 389-5065 or schedule an appointment online today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.