Almost everyone knows someone who had a problem and lost everything.
Claims can, for example, allege professional liability, responsibility
for a car accident, or unpaid creditors. Whether meritorious or not,
defense can be enormously costly. With our litigious society, with
limited risk for those making liability claims, asset protection
planning has become required for many and highly desirable for many
more.
In this issue of
The Wealth Advisor, we will provide an introduction to
asset protection planning (what it is, types of risk, when to plan, what
to expect in the planning process, and levels of planning) and how you
can get started.
What is Asset Protection Planning?
Asset protection planning is not about hiding or concealing assets. It
is about using the existing laws appropriately to obtain the best
possible level of protection for your assets – in other words, to make
you a less desirable target for claimants.
Types of Risk
Professional Liability
Physicians, dentists, other health care professionals, lawyers,
accountants, and sometimes people whose business enterprises pertain to
health care, such as skilled nursing facilities and assisted living
facilities, are frequent targets for claims. Those in construction
(architects, builders, developers) also have professional liability
concerns.
As a general rule, nobody can limit their own professional liability
through a legal device. That’s why professionals carry malpractice
insurance. But there are other areas of risk against which professionals
can and should protect themselves.
Professional and Personal Liabilities of a Partner
In a general partnership, each partner is liable for all claims arising
out of partnership activities. Verbal partnerships are always general
partnerships. Only in a limited partnership can the partners be
protected from liability for the malpractice of the other partners. In a
multi-owner entity in which an owner is married, protection may also be
needed against a partner’s next spouse becoming an owner.
Non-Professional Personal Liabilities
These include liabilities for business deals (for example real estate)
that have gone bad and tort claims (such as for car wrecks). In any
business there could be non-professional liability claims based on
employment practices, alleged employment discrimination, and alleged
sexual harassment, to name just a few.
Other General Liabilities
Professionals and nonprofessionals alike are exposed to general
liabilities that can cause their assets to be at risk. These include
liability for unpaid income and estate taxes; the behavior of children
and their spouses, which can lead to loss of family assets; co-signing a
loan or mortgage with a relative or another who defaults or has a
judgment filed against them; or a car wreck or other accident.
When to Plan
The best time to plan is before a claim arises. There are different
rules that apply for known claimants and unknown future claimants. But
even with an existing claim, and sometimes even after a judgment has
been entered, some options may still be available. It is, however, vital
to avoid making a “fraudulent” transfer; i.e., a transfer of assets
with intent to defraud or hinder creditors that is made without full and
adequate consideration.
The Planning Process and What to Expect
Because asset protection planning can include a variety of strategies,
it is usually best accomplished by a team of advisors, which may include
a CPA, estate planning attorney, financial advisor, insurance advisor
and possibly retirement plan administrator. Any member of this advisor
team may recognize that you need asset protection planning and recommend
an evaluation, or you may have some concerns that you would like to
address. Generally, the process takes at least three meetings to plan
and implement. They are:
1. An Initial Meeting: During the first meeting, the advisors
will gather basic financial information, determine your objectives and
begin to establish a relationship with you. They will also set some
reasonable expectations for how asset protection planning works,
including how the laws work and what you can expect.
It is important that you are honest and forthright in providing the
information requested. At the same time, because the very nature of
asset protection planning can involve current worry about potential risk
and/or litigation, it is important to determine early how much
information you are willing to share and should share with various
members of your advisory team. For example, it may be vital to preserve
attorney/client privilege and not share litigious information with
non-attorney advisors who could be subpoenaed later.
2. An Advisors Meeting: After the initial meeting, the advisor
team will usually meet without you to review your objectives, discuss
various legal and financial solutions and determine a consensus
solution.
3. A Solution Meeting: Here the advisor team will present a unified
solution plan, including all legal and financial components, to you.
Because many of us are living into our 90s, your plan should be flexible
enough to accommodate changes over 20 or more years.
Have Reasonable Expectations
* Many people would like to have a
high degree of certainty of
the outcome of asset protection planning, but there may be circumstances
that neither your advisors nor you can effectively control. Even so,
the end result should be considerably better than if you had done no
planning at all.
* Many people want to
maintain control rather than shift assets
to some unknown third party in a foreign land. The preferred approach
is to maintain control or at least oversight of your assets.
* You want to have a plan that will
discourage lawsuits from the outset.
Your advisors cannot make your assets appear not to exist, but they can
create a structure that will make it much less attractive for a
potential plaintiff to go after you than after someone who has done no
planning.
* You want to
avoid liability traps of owning assets in general partnerships or in joint ownership where the assets are at risk to problems another owner may have.
Funding the Plan
Once the plan has been approved, your advisors will make a list of the
assets and determine where they need to go. It can easily take six
months to a year to fully fund the plan, and it’s usually done in steps
and pieces. During this time, it’s important that everyone stays
informed about the process.
Levels of Asset Protection Strategies
There are numerous asset protection strategies you can employ, from very
basic to advanced, depending upon the particular risks you face, your
current situation, and the extent to which you are willing and able to
go to protect your assets. Briefly, asset protection begins with
utilizing state and federal law exemptions for things like life
insurance, retirement plans, and limited types of jointly owned
property. These exemptions have limited effectiveness, however, because
they only protect these specific types of assets. For those who need
broader protections, more advanced strategies like business entities and
even trusts specifically designed to protect you against future
creditors may be in order.
Planning Tip:
Asset protection planning is a complex area, and as you start to become
familiar with these tools, you will begin to understand why a team of
advisors is usually needed to accomplish your goals.
Conclusion
If you are concerned about protecting your assets, talk to us. We can
help you evaluate your situation, put together a team of advisors and
start putting a plan into place. Most asset protection plans will build
right on top of your existing estate planning.
Remember, the best time to plan is
before a claim arises.
TEST YOUR KNOWLEDGE ABOUT ASSET PROTECTION PLANNING
1. Most asset protection plans hide your assets so creditors cannot find them. T F
2. Health care professionals do not have to worry about asset protection. T F
3. The best time to plan is after a claim has been filed against you. T F
4. Most asset protection plans can be created in just one meeting. T F
5. Asset protection planning will absolutely protect all of your assets. T F
6. Attorney/client privilege extends to all members of your planning team. T F
7. Funding the plan can usually be completed in less than a month. T F
8. State and federal law exemptions have limited effectiveness because they only
protect specific types of assets, such as life insurance and retirement plans. T F
9. Creating business entities can be a viable means to protect your assets. T F
10. Asset protection planning can’t hide your assets, but it can make your assets
less attractive for a potential plaintiff to go after
you. T F
Answers: All of the above are false except 8, 9 and 10.
To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax adviser based on the taxpayer's particular circumstances.