Legal Safeguards for Your Wealth

It's not an exaggeration to say that the million bucks it took you years to amass can vanish in the blink of an eye. Just ask a refugee from WorldCom or Enron or a senior pilot flying for a bankrupt airline.

Once you have a fortune, it's vital to protect it. Like the Nebraska factory workers who recently shared the record $365-million Powerball jackpot, you'll find that your world has changed. You can't do much about a fraudulent employer, but in most cases you can take sensible precautions. You'll need more insurance and, if possible, a legal fence to separate your business interests from your personal assets.

Most of all, you'll want to avoid messy divorces and lawsuits. Once you're flush, your fortune rarely remains a secret and your lifestyle may present high risks. For example, the combination of a lakefront cottage, a boat and teenagers or college-age children can be an accident waiting to happen. Umbrella liability coverage is critical -- "at least two times and maybe three times your net worth," says Stewart Welch III, of the Welch Group, a wealth-management and financial-planning firm in Birmingham, Ala. Fortunately, such coverage costs just a few hundred dollars per year. Other ways to safeguard your assets:

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Stocks and bonds. Avoid the temptation to morph from a patient, diversified investor into a master of the universe. "When you're on top, you might attribute too much of your success to skill and become overconfident," says John Nofsinger, a finance professor at Washington State University and author of Investment Blunders of the Rich and Famous. Just because you have the means to invest in a hedge fund or an exotic tax shelter doesn't mean you should do it, says Nofsinger. Traditional stocks, bonds and mutual funds or a separately managed account run by an investment adviser all work just fine.

Business equity. If you own part of a business that has grown significantly, cover your legal flanks, advises John Readey, a partner in the law firm Bryan Cave, in Kansas City, Mo. Once your little company becomes a serious enterprise, you need to structure it more formally, especially if you're concerned about a business partner who is flaunting your success by traveling or partying too much, for example. Draft a written operating agreement that spells out each partner's responsibilities, such as supervising employees or bird-dogging finances, so the company isn't left to drift on its own. Be clear about what happens if you want to sell or if another owner wants out. Partners should carry life and disability insurance on one another to protect the business.

Real estate. Welch and Readey are amazed at how many real estate investors jeopardize most, if not all, of their net worth by keeping tenant-occupied properties in their own name. Welch advises turning each rental into a separate limited-liability company. That may cost $500 to $1,500 a shot in legal fees and other up-front costs, but it's cheap protection if a tenant or a creditor confronts you because of something that happened on one of your properties. You don't want a single incident to jeopardize all your assets.

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