The 10 questions of captive insurance, Pt.1: Have you started an asset protection plan?

By F Hale Stewart, JD, LLM, CAM, CWM, CTEP

The Law Office of Hale Stewart


I’ve put together 10 questions to ask to help potential captive owners and professionals determine if forming a captive is the right decision for them, one of which is:

“Have I started an asset protection plan?”

Captives are often developed in conjunction with a client's asset protection plan, as a captive not only insures against stochastic (lower frequency, higher payout) risk, but also shields assets behind another limited liability shield. But that leads to the question, "What is asset protection?"

The phrase "asset protection" is bandied about a great deal. There are websites that claim to provide "asset protection" advice and services, various companies who continually tell us about the importance of asset protection, and numerous books that help to educate the public on this topic of law. After looking at all the hoopla, you'd think that if you didn't engage in some type of plan, you were foolish beyond your years. However, often missing from this discussion are answers to two questions: What exactly is asset protection? And do I need to engage an attorney to create and oversee an asset protection plan?

Before providing a definition, let's pull the lens back and take a bird's-eye view of an individual's financial and legal life. There are several events which can negatively impact their financial well-being. In general, these are bankruptcy, litigation, divorce, physical/mental incapacitation and death (this actually impacts the decedent's family, but it can still harm a family financially if not dealt with properly). Asset protection looks at each of these events, and then asks this fundamental question: How can we mitigate the financial damage these events have the potential to cause? Or, put another way, asset protection is the legal discipline of mitigating, or attempting to mitigate, the negative impact of various financially and legally catastrophic events.

As should be obvious from the previous list of events, asset protection law actually involves small and large pieces of a number of different legal disciplines, but is chiefly comprised of estate planning, debtor/creditor law, business entities, tax law and litigation. It also helps to have at least a basic knowledge of economics and financial dealings, if not a full-fledged, thorough understanding thereof. And, some grounding in international law (especially taxation) will probably help. In short, asset protection law is really a hodgepodge of various legal concepts and ideas. Pay particular attention to the phrase "attempting to mitigate." No asset protection plan is fool-proof; the success thereof depends a great deal on the facts and circumstances of the claim involved.
As an extreme example, assume a client is a doctor who performs surgery while intoxicated and seriously maims a patient. If this case gets to a jury, expect a large pay-out — and don't expect any sympathy from a creditor attempting to enforce the judgment. And then there is bankruptcy, where the court has tremendous power and where the definition of "bankruptcy estate" is extremely broad — in fact, there are very clearly written statutory exemptions to the definition of bankruptcy estate and, frankly, that's about it. In short, anyone promising you the moon regarding an asset protection plan is pulling the wool over your eyes regarding what is possible.

Now that we've defined asset protection, the next question is: Who should engage in asset protection? There are several ways to answer that question. The first is to ask: Are you in a line of work that attracts a high degree of litigation? While we all face the possibility of litigation, some professions are more likely to be targeted than others. So, if you're in the line of fire, an asset protection plan makes sense. Here is a list of businesses that are more likely to be in the legal line of fire:
  • Doctors and other health care professionals
  • Manufacturers
  • Construction-related professions
  • Oil and gas
  • Commercial property owners
  • Transportation companies
While the list isn't exhaustive, it does give you an idea of who is a more likely target.

Once an individual reaches a certain income and/or asset level, they naturally become a target. I use the "accredited investor" definition ($1 million in assets and/or $200,000 per year in income for the last two years) as a standard benchmark. At this level, some asset protection is mandatory.

All businesses with assets over $1 million should have an attorney look at their structure and operations to minimize liability. There are other situations that require some planning, but these are less comprehensive and fall under other disciplines in addition to legal asset protection. For example, all individuals should consider whether or not they want to formally sign an advance directive decree, but this is less about asset protection and more about estate planning. And purchasing life insurance or a disability policy — while clearly designed to protect assets — is as much a financial or insurance decision.

However, if you are in one of the above mentioned categories — or you have clients that are in these categories — an asset protection plan is probably needed and warranted. And, a captive insurance company should probably be part of that plan.

See also:

Questions to ask a captive insurance provider about asset protection and due diligence

Cross tested retirement plan: The future of tax and asset protection planning for small business owners

How do buy-sell agreements fit into your clients’ asset protection plans?