The great investor, Stanley Druckenmiller, liked to say, “The way to build long-term returns is through preservation of capital and home runs. You can be far more aggressive when you’re making good profits.” Preservation of capital is the most important rule of wealth management. The second rule is, “Don’t forget the first rule”. 

It is impossible to pass on wealth if that wealth is destroyed. Bad economic decisions, sharp turns in the economic environment, or lawsuits can devastate your wealth. 

It is important to understand the concepts of wealth management and to use the relevant financial vehicles to shield your wealth from your own mistakes, economic downturns and lawsuits. 

Shifting Ownership of Your Assets

Changing the title to your assets is a great way of protecting your assets in the event that you are subject to a lawsuit in which ownership of your assets is threatened. It is not always possible to change the ownership of all your assets, it is possible to remove your name from public records in order to protect your home or any properties that you are renting out. 

If you are married, you can retitle your assets using the principle of tenancy by the entirety. Tenancy by the entirety is only available for married couples. In this way, the surviving spouse automatically inherits the portion of the asset that belonged to their deceased spouse. Assets owned under tenancy by the entirety are protected from judgments against one of the spouses. So, for example, if you were to incur a debt and be compelled to pay off that debt by a legal judgment, your assets owned in tenancy by the entirety would be protected from that judgement. At times, it may be possible to also protect retirement plans and individual retirement accounts (IRA). Tenancy by the entirety is an important tool of family planning. 

Insurance

Life insurance can be used to reduce your estate tax, gift tax, and income tax, while also setting aside significant funds for your beneficiaries. 

Casualty, liability and property insurance can protect you against an array of legal challenges. So, for example, if your profession exposes you to an above-average risk of liability and lawsuits, getting casualty, liability or property insurance is something you should seriously consider. 

Limited Liability Structures

Limited liability implies that your liability is reduced. In other words, you can segregate your personal assets from your commercial income, such that any liability incurred within the limited liability entity, does not spill over to your other economic interests. This is especially true if you own risky businesses such as botox certification.

Failure to limit liability can result in you losing everything. Liability in one area of your economic life can devastate the rest of your economic life. 

Irrevocable Trusts

Similar to changing asset ownership, with irrevocable trusts, you change ownership of your assets to an irrevocable trust. Any liability you incur cannot touch your irrevocable trust, even if you are a beneficiary of the trust. Nevertheless, any assets distributed by the trust to its beneficiaries can be claimed. In that sense, there is a limit to the degree of protection an irrevocable trust can provide.