Sunday, June 7, 2009

Wealth Preservation & Asset Protection



Wealth preservation is the process of protecting your wealth from lawsuits, creditors, and life’s challenges that will diminish or alleviate your assets. In this article, we will discuss strategies to increase your chances against your assets being dissipated. Asset protection planning is misunderstood and most people believe that one’s assets are only at risk through malpractice and civil lawsuits. This could not be further from the truth.

The first wealth preservation strategy is to preserve your assets by creating a Revocable Living Trust (hereinafter referred to as “Living Trust”). A Living Trust is a written legal agreement that details your specific wishes with respect to incapacity and death. A Living Trust protects your assets during your life in case of incapacity. Incapacity is a condition where one cannot manage their own property, finances, or healthcare as a result of a lack of physical or mental abilities. Unlike a will, a Living Trust’s purpose provides a smooth transition during a person’s lifetime in case of a stroke, car accident, or any other disability that could occur. A Living Trust is typically used in connection with a Power of Attorney for Property and Healthcare.

A Power of Attorney for Property and Healthcare are legal processes where a person designates an agent to speak on their behalf in case they cannot manage their own finances or make their own healthcare decisions. Guardianship is a court procedure where a person asks a court to be appointed an incapacitated person’s guardian. Guardianship is a legal process where a person requests a court to allow them to manage a person’s financial interests and make personal decisions for them such as healthcare decisions.

Guardianship court procedures should be avoided because a person’s wealth can quickly be diminished as a result of paying nursing home care and legal fees and costs. Long term care insurance is insurance for people that manage the risks and expenses associated with nursing home and private nursing care. Guardianship court is often adversarial because competing persons want the power to take care of their loved one. A guardianship procedure can quickly result in a high expenditure of legal fees because multiple attorneys are employed. The attorneys get paid out of the incapacitated person’s estate (assets).

The second purpose of a Revocable Living Trust is to provide a smooth transition upon death. Unlike a will, a Revocable Living Trust should not involve a court procedure if designed correctly. Upon death, there is a court process called “probate”, which is a court that determines who is the rightful person to inherit from the deceased person. There is a misconception that creating a will is a way to transfer one’s assets to their intended beneficiaries. After one’s death, a will must be admitted into court and notice must be given to the deceased person’s relatives.

This notice requirement invites disputes and may create an adversarial family conflict. For example, a client of mine is facing a will contests by her brother because the brother is not happy that the father left all of his assets to only one daughter. Will contests cause family conflict and costs a lot of money in terms of legal fees and costs.

The family conflict could have been avoided by transferring one’s assets upon death through a Living Trust. Unlike a will, a Living Trust does not involve a court procedure and the Living Trust does not create a situation where notice must be given to any family members except the one’s inheriting.

Furthermore, a Living Trust is a private document where a will is a matter of public record where anyone can see the contents of the will. A simple way to preserve one’s assets is privacy and avoiding court procedures. Attorneys often create bigger conflicts, which cause excessive attorney’s fees and costs. More importantly, families are destroyed and most people could not put a price on their family.

The true purpose of a Living Trust is to transfer one’s assets in a manner that minimizes family conflicts. Hiring an experienced Living Trust’s attorney with guardianship and probate experience is important because choosing the Trustee and drafting the Living Trust in a manner that minimizes or eliminates potential family conflicts are crucial. One of the mistakes of inexperienced attorneys are ignoring or not noticing potential conflicts that could create family friction. The area of wills, trusts, and estates have several unique situations such as special needs children, adult disabilities, and extensive wealth that could cause court procedures, estate and gift taxation, and situations where one does not place assets beyond the control of the federal and state government.

The second wealth preservation strategy is owning real estate and investments in the correct manner. Many people own investment real estate in their individual or joint name. A person should incorporate and create a business entity that is designed to own real estate investments in a business entity’s name. Thus, you are creating a fictional person or business entity that is separate from your personal finances.

Owning real estate investments in your personal name exposes all of your assets to lawsuits or creditors. Many people falsely assume that insurance is adequate to protect their assets from lawsuits. First, insurance companies often deny claims and people are faced with the prospect of paying for a lawsuit out of their own pocket or all of their assets being exposed to a potential judgment from their real estate investments. Second, people are not properly insured and have insurance policies that only provide for $250,000 in coverage. A person who is injured in a car accident or a fire may have extensive damages exceeding $1 million.

As a general rule, high net worth individuals should have a minimum of $1 million dollars of liability coverage. There are exceptions to this general rule and you should consult an insurance liability expert to discuss proper insurance coverage. Another method to reduce the likelihood of lawsuits is a privacy tool called “Private Land Trust”. A Private Land Trust is a privacy technique that keeps ownership of a property or properties anonymous. Typically, a private land trust shows the owner of the property as the Bank, which is the trustee of the private land trust. Banks charge trustee fees that fall in the range of a couple hundred dollars per year per property.

In considering a lawsuit, attorneys perform an asset search, which assists them determine whether a person or business entity has sufficient assets to warrant a lawsuit. As a general rule, attorneys do not want to sue people or business entities that do not own sufficient assets or have insurance. A private land trust is a tool to discourage lawsuits because an attorney may be discouraged from bringing suit because they cannot determine whether a person has assets to warrant a suit.

Another serious consideration in picking a private land trust is to minimize credit and bank fraud. Individuals and groups are scamming seniors and high net worth individuals and using their good credit and good name to secure mortgages, medical care, and credit. Keeping your identity secret is important in today’s society where identify theft is on the rise. Identify theft can cause families to deplete their assets and spend excessive legal fees.

The third strategy to preserve your wealth is to protect your assets against taxation. High net worth families should have experienced advisors such as accountants and attorneys to assist them to minimize taxation. Selling investment real estate and stocks and bonds should be carefully done to minimize capital gains taxes. Tax attorneys and accountants assist high net worth families to structure their assets and transactions in a way that minimizes taxation.

Additionally, high net worth families should protect their assets from estate and gift taxation. Estate taxation is a tax designed for people that own assets above the threshold the government allows without assessing a tax. In 2007, the federal government allows each person to own $2 million dollars in assets without assessing an estimated 50 percent estate tax. For estate tax purposes, the government considers assets such as life insurance proceeds, business and real estate interests, personal property, stocks, bonds, art, checking and savings account(s), and anything that could be sold for money.

Gift taxation is a tax assessed by the Internal Revenue Service that taxes gifts. For example, a quit claim deed to another party without adequate consideration is a gift. People should be careful in setting up and performing business and real estate transactions to ensure that one is not subject to a gift tax. A gift tax is about a 50 percent tax.

The third wealth preservation strategy is to set up a family business such as family limited partnership (hereinafter referred to as “FLP”) or limited liability corporation (hereinafter referred to as “FLLC”). A FLP or FLLC is an asset protection tool that places assets beyond the reach of malpractice lawsuits or creditors. This strategy is like adding virus protection to your computer. A FLP or FLLC sets up different sets of assets that minimize the risks of lawsuits such as malpractice or civil lawsuits. The asset protection goal is to place assets outside the control of an individual and outside the reach of creditors. This Article will not explain the benefits and weaknesses of FLPs or FLLCs further. Please see a specific legal article that examines FLPs or FLLCs in further detail.

Sean L. Robertson (“Sean”) is a Wealth Preservation Attorney & Principal of Robertson Law Group, LLC. Sean concentrates in Wills and Trusts, Asset Protection, Probate and Guardianship, and Business Transactions. Sean can be reached at 312-498-6080 or

1 comment:

  1. Asset Protection is a set of legal techniques and a body of statutory and common law dealing with protecting assets of individuals and business entities from civil money judgments