Asset Protection Law Journal : Asset Protection Lawyer & Attorney : Kenneth J. Laino : Schneider Smeltz Ranney & LaFond Law Firm : Trusts, Estate Planning

It is generally estimated that more than half of all Americans have absolutely no estate planning documents.  This can potentially create a lot of hassles for your loved ones.

But even those Americans with very good estate planning documents often fail to focus on asset protection for their children and other beneficiaries.  If you simply leave assets to your beneficiaries without any kind of ongoing trust arrangement, those assets can generally be reached by their creditors with little effort.

We now recommend dynasty trusts for many of our clients.  These trusts are not as exotic as the name might imply.  They simply allow your children and other beneficiaries to hold assets in a continuing trust arrangement.  This can provide better protection in the event of a divorce; and it can also provide better protection from future creditors of the beneficiaries.

Providing some added protection for the assets that you leave to your loved ones can be an important gift to them.

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A June 8, 2011 New York Times article by Steven M. Davidoff (a law professor at the University of Connecticut School of Law) notes that personal liability for directors and officers of large publicly held companies is less common than most of us think.  Professor Davidoff argues that the upside of serving as a director or officer of a large public company is huge, and the down-side is very limited.

Even if the potential liability of public company officers and directors is not all that high, such individuals are still in need of asset protection planning.  These individuals will generally have a high net worth.  They can face potential liability from numerous other sources -- anything from divorce to an auto accident.  While many potential risks can be covered by insurance, personal asset protection is still advisable.

Small business owners may face a far greater risk of personal liability than public company officers and directors for a variety of reasons:

• Small business owners frequently have to personally guarantee company obligations -- which makes them directly responsible for those debts.
• "Piercing the corporate veil" arguments will more likely be raised against a smaller business than a larger one.
• Legal fees alone can be catastrophic for a small to medium sized business owner, even if he or she is eventually successful on the underlying claim.
• Smaller businesses and their owners frequently carry less insurance than larger companies.

Whether you are running an international conglomerate or you own a small or medium sized business, you should focus on protecting your personal assets to the greatest extent permitted by applicable law.

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A fascinating article by Daniel J. Wakin in the November 29, 2010 New York Times reveals that even Mozart should have done some asset protection planning.

An aristocratic friend of Mozart's sued him and won a judgment for an amount of more than two times Mozart's annual income.  The judgment called for garnishing half of Mozart's salary.  Mozart died shortly after the judgment was entered against him, and it appears that the creditor chose not to press Mozart's widow for payment of his debt.  But it is clear that the judgment caused Mozart a lot of stress and financial difficulty.

The article on Mozart shows that even in the 18th century, high profile and high net worth individuals faced significant financial difficulties from legal judgments against them.  If Mozart were alive today, I am confident that he would recommend very serious attention to an asset protection plan.  And he would urge you to develop such a plan before you run into financial difficulties -- not after there is a lawsuit or judgment against you.

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Trusts are not only for the rich.  Anyone with minor children (and even children in their 20's) should consider a trust for their family.

If any property passes to a child under your will, from a bank account "payable on death" or otherwise, the child will generally get all of that money at age 18.  The same holds true if you have named a child under a life insurance policy, IRA or other retirement account.  Even if money is held in a Uniform Gift to Minors Account, the child gets everything at age 18.

Some people are very responsible and financially sophisticated at that age.  But let's face it -- many are not.  A lot of teenagers and twenty-somethings would rather party than manage their investment portfolio.

Many parents do not think about how much their children could inherit at age 18.  While most Americans are strapped for cash and living paycheck to paycheck, the value of their estates (including house, life insurance, retirement accounts, etc.) could be substantial.

By creating a trust, funds can be held by a trustee and used to pay education, housing and other expenses.  Any remaining balance can be distributed at a later age.

While I deal with many more complex asset protection vehicles, a fairly simple family trust arrangement can prove to be a huge benefit.  It can greatly increase the odds that your hard-earned money will not be wasted away in the event of your death.

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The recent economic downturn has caused creditor problems for many wealthy Americans who never dreamed they would be in this kind of situation. A front page article in the July 9, 2010 New York Times reported that one in seven homeowners with loans in excess of $1 million is seriously delinquent. Foreclosures are occurring at shocking rates in affluent areas. One of several examples given by the New York Times is that the sheriff in Cook County, Illinois is increasingly in demand to evict foreclosed owners in the upscale suburbs to the north and west of the city -- like Wilmette, LaGrange and Glencoe.

In the past, most affluent Americans have paid little attention to asset protection. In better times -- when the real estate market and the stock market seemed to go nowhere but up -- it was difficult for many affluent Americans to imagine they would ever face serious creditor problems. Those days are gone. Focusing on the downside has now become a critical part of the planning process for the wealthy. Part of that focus should include a review of how all your accounts are structured and titled to be sure you have not missed opportunities to protect certain assets from creditors. As I have said many times before: the best time for that planning is before you have any financial problems -- and not once you are facing issues with creditors.

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The Dow Jones industrial average fell 324 points last Friday, its second worst slide of the year.  The drop pushed the stock market back into a "correction" -- meaning a decline of at least 10% from its recent high.

While I remain optimistic about the economic future of our country, we obviously face great challenges in the coming years.  Stock market volatility is here to stay.  General economic conditions remain uncertain; and competition from abroad will be a constant challenge.  So it remains critical to examine your assets from time to time (business and personal) and consider how well they are protected from creditors.

If you are a resident of Florida and own a home in Florida, and most of your assets are in IRA's and qualified plans, you have little to be worried about from an asset protection standpoint.  On the other hand, if you live in Northeast Ohio and a significant portion of your assets are invested in a family business, it is vitally important that you consider how well your assets are protected from creditors.

Many people focus on asset protection after some economic disaster strikes them.  By that time it is often too late.  The time to focus on protecting your assets is now -- before you have any creditor problems.

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In a post last month, I emphasized that a business can be lost or severely damaged by lack of a meaningful succession plan.  The title of an article in yesterday's New York Times says it all -- "Lack of Succession Plan Puts Family Venture at Risk".  The article has some useful suggestions for closely held business owners, and it outlines some of the items that should be addressed in a succession plan.

In a February post I noted that business succession planning should be a team effort.  Some matters require business expertise; but many issues require sophisticated legal planning.  For example, the New York Times article mentioned some fifth generation family owners in Columbus, Ohio who prepared a fifteen year plan to pass on the company to the next generation, using a mix of grantor retained annuity trusts and family limited partnerships.  These vehicles can lower tax liabilities as well as provide a legal framework for succession in the business.  This is a good reminder that careful business succession planning may help save taxes and provide other benefits in addition to simply determining who will run the company.

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Asset protection planning can bring a lot more certainty to our lives -- at least with respect to financial matters.  And there is a lot of evidence that certainty makes us happier.

Personal planning -- whether financial planning, estate planning, or asset protection planning -- clearly brings a degree of certainty to our lives.  A good estate plan cannot insure that your stock portfolio will do better next year.  But it can give you the comfort of knowing that whatever assets you do have will be distributed the way you want.  Estate planning thus brings a degree of certainty.  Likewise, asset protection planning can give you the comfort of knowing that you have done what you lawfully and reasonably can do to protect your assets.

A recent article by a Harvard psychology professor says that certainty actually makes us happy -- even happier than having more money. 

I see this all the time with respect to asset protection planning. Some business owners and individuals (including physicians and other professionals concerned about catastrophic lawsuits) are sometimes more worried than they should be about losing everything in a huge lawsuit.  If adequate insurance is in place, the risk of losing all your assets as a result of a malpractice suit or other litigation may be relatively small.  Nevertheless, worrying about a risk can literally be catastrophic in itself.  After consulting with an asset protection attorney a client knows what strategies are reasonably available and which are not.  Knowing that you have done whatever you reasonably can to protect your assets usually brings a significant amount of relief.  

Professor Gilbert says in the article I referred to above that certainty can bring greater happiness than money.  While asset protection planning will obviously not provide certainty in all aspects of your life, it can significantly reduce the uncertainty about what will happen if you face losses from some catastrophic lawsuit.  And it seems that should make you a lot happier.

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