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.
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.
-
Strategies to Optimize Your Social Security BenefitsTo maximize what you can collect, it’s crucial to know when you can file, how delaying filing affects your checks and the income limit if you’re still working.
-
Don’t Forget to Update Beneficiaries After a Gray DivorceSome states automatically revoke a former spouse as a beneficiary on some accounts. Waivers can be used, too. Best not to leave it up to your state, though.
-
What’s the Difference Between a CPA and a Tax Planner?CPAs do the important number crunching for tax preparation and filing, but tax planners look at the big picture and come up with tax-saving strategies.
-
Charitable Remainder Trust: The Stretch IRA AlternativeThe SECURE Act killed the stretch IRA, but a properly constructed charitable remainder trust can deliver similar benefits, with some caveats.
-
Three Ways to Take Control of Your Money During Financial Literacy MonthBudgeting, building an emergency fund and taking advantage of a multitude of workplace benefits can get you on track and keep you there.
-
How Did O.J. Simpson Avoid Paying the Brown and Goldman Families?And now that he’s died, will the families of Nicole Brown Simpson and Ron Goldman be able to collect on the 1997 civil judgment?
-
What Not to Do if an Employee or Loved One Is KidnappedBusinesses need to have a crisis plan in place so that everyone knows what to do and how to do it. Sometimes, calling the authorities isn’t recommended.
-
Why You Shouldn’t Let High Interest Rates Seduce YouWhile increased interest rates are improving the returns on high-yield savings accounts, that may not be an effective place to park your money for the long term.
