When it comes to protecting your wealth, there are three primary risks that you should plan for:
1. Risk of a lawsuit
Protecting your assets from lawsuits is not about defrauding legitimate creditors - it's about segregating your assets using common and legal strategies at a time when you have no existing or foreseeable claims. In addition to any professional, business, car or house liability insurance you can purchase, the following are some typical strategies to protect your assets:
Gifts. Although giving assets to a family member reduces the amount of assets you have that are subject to creditors, it also increases the assets subject to the family member's creditors. Furthermore, other than gifts to a spouse, the gift is considered a sale at market value for Canadian tax purposes, potentially triggering a taxable capital gain.
Trusts. Transferring assets to a trustee of a formal trust results in a loss of legal ownership and some control of the funds, thus reducing your assets subject to creditors. However you may also be subject to capital gains/loss taxation. So you need to be confident that the trustee is someone who will protect and manage your assets in your best interests. Consider a corporate trustee for this purpose due to their reputation and expertise in managing trust assets. Offshore trusts may provide greater creditor protection than domestic trusts due to a specific country's creditor protection laws and the potential unwillingness of a domestic creditor to chase after assets in a foreign jurisdiction.
Life insurance. Based on provincial laws and court precedents, if an insurance policy is structured properly, the investment component of an insurance policy is not subject to creditors.
Business owners. If you are a business owner and you have accumulated surplus assets in your business that are not needed for operating expenses, consider transferring these assets to a holding company. This can help protect the assets from the operating company's creditors.
2. Risk of market downturns
Diversification is one of the golden rules of investing to reduce your risk of losing capital due to market downturns. Traditionally, diversification has meant allocating your assets between the three main asset classes (cash, fixed income and equities) as well as between different geographic areas and sectors of the economy. More and more people with $1 million-plus investment portfolios are considering alternative investments for further diversification to protect assets and boost returns. Speak to your advisor about different alternative investment options such as hedge funds, segregated funds and principal-protected structured notes.
3. Risk of income loss
If you become disabled or die, are you confident that your family will have adequate financial resources to maintain their lifestyle? Adequate disability and life insurance coverage should be a top priority when it comes to planning your finances. Without the proper coverage, you risk rapidly depleting assets you have worked so hard to accumulate and having a much lower standard of living. You should also have a discussion with your insurance advisor on the costs and benefits of critical illness and long-term care insurance, which are becoming increasingly necessary as more people survive illnesses and diseases than ever before, and require additional care and financial support as a result.
This article appears in the RBC Dominion Securities guidebook, Family Wealth Management - Ten Strategies to Build and Protect Your Family's Wealth. Contact 604-257-7455 for a complimentary copy.
This article was supplied by Colin MacAskill, a vice-president and an investment advisor with RBC Dominion Securities Inc. This article is for information purposes only. Please consult with a professional advisor before taking any action based on information in this article. MacAskill can be reached at 604-257-7455.