Using Margin to Equity Strip the PP for Asset Protection

[TripleB]

I'm reading a book on Asset Protection Planning that describes one method known as "equity stripping" to deny assets to a potential creditor, or dissuade a predatory lawsuit. It involves using margin to reduce equity in your investments. Suppose you have $100k in stocks in a brokerage. If your brokerage will give you a $50k margin line of credit using the $100k stocks as collateral, then you take the $50k in cash, and can more easily hide the cash than your stocks. Additionally, you will not realize a taxable event as you might if you were to sell stocks to take the cash.

One method to "hide" cash would be to dump it into prepaying your mortgage if you live in a state with high levels of homestead exemption protection. Thus, you take the $50k cash from the above example, send it to the bank who has your mortgage, and this will not be considered a fraudulent conveyance because you are just paying off an existing loan. Then this $50k is protected from potential creditors because it went into your house.

Your current creditor (brokerage) is owed at least $50k of your $100k in stocks. Even if a judge forces you to liquidate your stocks, the new creditor can only take half.

The book suggests that brokerages will allow you to take margin lines out to 50% of stock holdings, but to a larger percent of bond holdings. Since the PP is 25% Treasury Bonds, I wonder if this is a feasible strategy to use. It would require that you hold the LTT in taxable accounts (because your 401k/IRA are already protected from creditors), and holding LTTs there is tax inefficient.

I doubt a brokerage would allow one to take too high of a percentage of LTT on margin due to how volatile they are.

The ideal situation here would be to have the margin line of credit available, and only exercise it if a potential lawsuit emerges. Thus the only true cost is storing the LTTs in taxable.

Imagine someone who has 50% of their money in taxable assets, and 50% in 401k/IRA, you could theoretically protect almost all of it from creditors using this strategy. Keep the 25% gold in coins, which is virtually invisible. Keep margin credit available on the 25% LTTs. And by virtue of being within a 401k/IRA, your 25% stock and 25% cash positions are also protected.

Anyone have experience setting up margin lines of credit? What do you think of the strategy as it would mix with the PP?

[Indices]

You lost me when you said the word "margin".

[craigr]

Buying umbrella insurance is cheaper and much safer.

[TripleB]

Buying umbrella insurance is cheaper and much safer.

It's cheaper, safer, and does provide a solid initial layer of protection. It's not full-proof. I hate when people say "I have $2M in assets so I'll get $2M in umbrella insurance and be safe."

What they fail to realize is that they may have a judgment for $4M that requires them to liquidate their $2M of assets plus get the full insurance payout.

One might believe that they do nothing wrong and have no need for asset protection. I would imagine people of the Harry Browne philosophy would be more sympathetic to the need that crazy shit happens.

I have nothing against umbrella insurance, and believe it's necessary as the first layer of asset protection. I don't believe it's the end-all.