Your Estate Could be Bankrupt Unless You Protect Against This
Whether you’re a successful business owner, a family of wealth or just average, middle-class folks, if you haven’t prepared for the possibility of lawsuits — baseless or not — your legacy could be on the line.
![Judge holding gavel in courtroom](https://cdn.mos.cms.futurecdn.net/4e89qVukWdz8ovkL5NFDLK-415-80.jpg)
To be truly comprehensive, estate planning needs to be about more than passing your wealth down to your heirs. It needs to be about how to protect it while you’re still alive.
To illustrate the point, let’s examine the case of Sara and Jonah Williams, a hypothetical couple who worked for over 30 years to build their fledgling fast-food business into a thriving franchise with stores throughout the nation. Then they got slapped with an unexpected and overly litigious lawsuit in which they were sued for millions of dollars.
Fortunately for the Williamses, they planned for the unexpected by fusing comprehensive estate planning with asset protection. Over the years this protection made certain they paid the least amount of taxes legally allowed while also maintaining the maximum level of asset protection possible against financially ruinous lawsuits.
![https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-200-80.png](https://cdn.mos.cms.futurecdn.net/hwgJ7osrMtUWhk5koeVme7-320-80.png)
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
In today’s litigious environment, it’s all about protecting your legacy.
Don’t Leave Yourself Vulnerable
Comprehensive estate planning involves both conventional estate planning structures to maximize the amount one may pass along at death, as well as effective asset protection structures to insulate one’s wealth from devastating lawsuits prior to death.
Traditional estate planning works on only half of the problem, namely passing wealth on to heirs. But what is often overlooked, to the detriment of the client, is a catastrophic lawsuit arising during the client’s lifetime costing them all or a substantial part of their assets.
Affluent families and successful business owners are routinely targets for lawsuits — often devoid of legal merit — because the plaintiffs and their lawyers know the defendant, at the end of the day, will settle rather than remain embroiled in lengthy litigation. Without proper asset protection planning in place well before any legal claim, all could be lost.
For example, I know of a partner in a real estate development who was hit with a $60 million joint and several judgments when his partner was adjudicated having breached his fiduciary duty to his principal, even though the partner had never even met or had anything to do with the plaintiff.
A Problem Not Just for the Rich
You might think that this type of protection is only for the wealthy, but even those with more moderate estates can benefit from this form of planning That’s because a person with a $10 million net worth who gets hit with a $5 million lawsuit judgment still has $5 million left to live on. However, a person with a modest $3 million estate who gets hit with a $5 million judgment is rendered insolvent.
Removing the prospect of collectability from a legal judgment forces most plaintiffs to settle early and inexpensively, enabling clients who want to hold on to what they have worked so hard for over the years to protect their families. Ways to accomplish this could include strategies that allow you to control your wealth but not own it, such as:
- Limited partnerships
- Limited liability companies
- Foreign asset protection trusts
- A Private Retirement Plan (for California residents)
If an individual’s assets are protected in one of the vehicles described above, their assets become exempt from judgments.
Some wonder if going offshore is illegal. The IRS wouldn’t print all of the forms one is required to file when undertaking this method of planning if going offshore were a crime. The goal of asset protection is to remove the economic incentive for new creditors to go after assets that are securely in a trust.
Getting back to the case of the Williams family, because their comprehensive estate plan included proven strategies that also protected their assets from future liability claims, they were able to negotiate a very favorable settlement with the plaintiff, since the prospects of recovery beyond the settled amount were quite speculative.
Working with a professional who specializes in both reducing death taxes and establishing “firewall” protection to dissuade catastrophic lawsuits and encourage early settlements can create more robust estate planning structures, which discourage frivolous lawsuits and other opportunistic litigants.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Jeffrey M. Verdon, Esq. is the lead asset protection and tax partner at the national full-service law firm of Falcon Rappaport & Berkman. With more than 30 years of experience in designing and implementing integrated estate planning and asset protection structures, Mr. Verdon serves affluent families and successful business owners in solving their most complex and vexing estate tax, income tax, and asset protection goals and objectives. Over the past four years, he has contributed 25 articles to the Kiplinger Building Wealth online platform.
-
Visa Is the Worst Dow Stock Wednesday. Here's Why
Visa stock is down sharply Wednesday after the credit card company came up short of revenue expectations for its fiscal Q3.
By Joey Solitro Published
-
Another Analyst Moves to the Sidelines on Tesla Stock After Earnings
Tesla stock is spiraling Wednesday after the EV maker's big earnings miss and Wall Street has been quick to weigh in. Here's what you need to know.
By Joey Solitro Published
-
Confused by Annuities? Making Sense of the Different Types
Many investors aren't sure if annuities are a good option for meeting financial goals. Let's look at the different categories, along with their pros and cons.
By Kris Maksimovich, AIF®, CRPC®, CPFA®, CRC® Published
-
Talkin' 'Bout My Generational Wealth: Baby Boomers
With retirement, each generation has different priorities and challenges. For Baby Boomers, it's a matter of ready or not, here it comes.
By Alvina Lo Published
-
How to Avoid a Big Hassle if Your Financed Car Gets Wrecked
How an insurance check is made out for repairs can cause a world of problems if the lienholder is left out.
By H. Dennis Beaver, Esq. Published
-
Estate Planning Strategies to Consider as Election Nears
Are big changes in tax laws coming soon? Not likely, but you might want to take advantage of higher estate and gift tax exemptions well before the end of 2025.
By David Handler, J.D. Published
-
How to Get Your Money's Worth From Your Financial Adviser
A good financial adviser will focus on how your financial planning and investment strategy align with your lifestyle and aspirations.
By Pam Krueger Published
-
Think of Prenups and Postnups as Financial Planning Tools
These contracts provide a clear framework for asset management and protection and are especially useful if you get married later in life.
By Andrew Hatherley, CDFA®, CRPC® Published
-
Congratulations on Your Raise: Three Things to Do With It
We're not saying you shouldn't spend it on a new car, but there are some considerations to guard against lifestyle creep and to help ensure a comfy retirement.
By Andrew Rosen, CFP®, CEP Published
-
Check Off These Four Financial Tasks to Finish 2024 Strong
The new year is a popular time to set financial goals, but now is the ideal time to check how you're doing. Four tweaks could make a big difference.
By Daniel Razvi, Esquire Published