Asset Protection and Estate Planning Starts Today
John walks into his attorney’s office and asks, “What happens now?” His attorney takes a deep breath and says, “ I need to review what assets you own, and I will tell you what property you can lose now that the lawsuit is over.”
“I thought I had insurance for this. What happened?” asks John. The attorney responds, “Well, insurance covers part of it, but your coverage is limited to $250,000 per incident. You’re in for $300,000 out of your pocket. That is what the insurance company is not covering.” With a mild sigh the attorney adds, “If I would have had you as a client before this suit started I would have structured your affairs so that you would only have $50,000 or less out of your pocket. Come back tomorrow with your financial statements, and we can start reviewing what you have and what you may not have in the near future.”
The preceding conversation is not an uncommon scene for professionals who may be liable for malpractice in today’s world. Also, the high costs of insurance premiums have led some professionals to lower the limits of their insurance policies with the thought they may be a less attractive lawsuit with lower insurance coverage (See Hartwig and Wilkinson 2003). In
In today’s business and legal environment, asset protection and estate planning is not a luxury afforded for the wealthy, but a necessity for those who are self-employed, own multiple properties, work in a profession subject to malpractice claims, or intend to acquire assets. What many individuals do not understand until it is too late is asset-protection planning is a preventative measure, not a cure to a problem. There is no way to hide assets after a mistake has been made. There are no transferring bank accounts to children, parents, or a spouse after a mistake. Transferring assets after a judgment has occurred may be fraud. The law has become more sophisticated — so should your estate and asset protection strategy.
Asset-protection planning today utilizes trusts, family limited liability companies, family limited partnerships, offshore trusts and accounts, and good estate plans. Also, with so many vessels to utilize, the need for a professional specializing in the area of law is greater than ever (see generally Chen 2008).
Trusts take many forms and are catered to specific purposes. Insurance trusts are used to pay estate taxes and shelter life insurance from estate taxation. Land trusts are a tool to keep ownership of real estate confidential and judgments may not be enforceable against Land Trusts. County recorders document a trust number and ownership is vested with a trust company. Owners are beneficiaries of Land Trust and have the power to sell, refinance, or assign their interests to other parties similar to owning their property in their individual name. Revocable trusts are used to avoid probate court after death and promote family harmony upon one’s death. A well-drafted Revocable Living Trust also may limit certain beneficiaries access to their inheritance to protect their loved ones from drug addictions, financial mismanagement, and divorce proceedings. A spendthrift provision in the Revocable Living Trust restricts a beneficiary’s inheritance from being subject to creditors and divorce proceedings unlike wills. Assets pass according to the trust agreement and cannot be challenged as a will. A will also requires a probate proceeding upon death that takes a minimum of about a year and estate funds are frozen during this time period. A Revocable Living Trust provides a smooth transition upon death or incapacity and beneficiaries can enjoy their inheritance in less than 30 days unlike a will.
Limited liability companies are a newer hybrid vehicle utilized by professionals. The company is owned by members and managed by the members or an appointed manager, which is chosen by the members. LLCs allow for different membership classes and different rights to be assigned to different classes. Many times, the LLC is used to insolate possible liabilities to specific assets or activities. LLCs are like virus protection on a computer in that the goal is to limit the damage of a lawsuit and insulate the lawsuit to the particular asset in question versus the whole family wealth.
LLCs are often preferred to limited partnerships (hereinafter referred to as “LP”) because of their simplicity. For an LP to afford the same protections as a LLC, the LP would require a corporation or LLC to be a general partner. A general partner is the person or corporate entity that manages the day to day operations of a LP. As a rule, general partners have no limited liability protection unless a corporate entity is chosen as the general partner. In contrasts, limited partners are shareholders or family members that contribute cash in exchange of non-voting and non-management interests. In an LLC, all members are protected from liability regardless of status or activity with the company.
Offshore trusts are used when more protection is desired. The benefits are tied to the laws of the country where the trust is formed. Some countries do not recognize judgments from
The estate plan is one of the steps in a good asset protection plan. This should normally be the first consideration when utilizing an asset protection professional. The underlying purpose of a good asset protection plan is to provide for one’s retirement, family, and children. Asset protection planning increases one’s leverage in negotiations to settle lawsuits and prevents lawsuits by lowering one’s risk profile. Many times, estates of deceased persons and individuals can be tied up for more than a year to several years and costs thousands of dollars in legal fees and costs. Lawsuits drain the assets of the estate and also may end up being settled against the wishes of the deceased. More importantly, intra-family disputes arise as a result of court procedures that destroy families. Most individuals could not put a price tag on the value of keeping their family close knit and without conflict. A proper estate plan promotes family harmony and enables the decedent (the deceased person) who drafted the estate plan to leave a legacy the way they choose, to whom they choose, and when they choose.
With the help of a good professional, a family plan can be created and in full effect within two months. An annual review of assets and assistance with real property purchases can assure a great plan will be properly maintained and have the desired effect if it is ever needed.
Chen, Susan. (2006, November 22). Asset Protection - Why Do You Need It. EzineArticles. Retrieved April 10, 2008, from http://ezinearticles.com/?Asset-Protection---Why-Do-You-Need-It&id=366522