by Chris McGraw, JD, LL.M., Senior Wealth Strategist
Introduction
An old wealth management saying, “it is not what you earn, it is what you keep,” often becomes a significant value proposition for sophisticated wealth management advisors. This may involve tax planning such as structuring ownership of assets for estate tax protection or holding and managing assets during life to reduce income tax exposure. Some advisors refer to this as providing “tax alpha” or wealth preservation for their clients. But what about money or assets lost because of a divorce or litigation? This can be a more significant “financial loss” event than a tax liability. Asset protection is not an area for the unwary to wade into, but being able to ask pertinent questions and recognize issues is a strong first step. Then, based on the preliminary findings, a determination can be made as to the need to visit a specialist in the area. Below are considerations, at a high level, for early steps of an asset protection review and plan.
Determine Possible Sources of Liability
Look for potential sources of liability. Some of the more common risks for successful individuals include divorce, professional malpractice, business interests (including real estate), officer and director liability and long-term care expenses. But what may be overlooked or not considered are the more personal or family risks commonly referred to as general torts. The more common personal general tort liabilities arise from things such as home ownership, cars, planes, teenage drivers, lake house/vacation property ownership and the “toys” that often go with second home ownership, such as boats, snowmobiles, jet skis and motorcycles.
Insurance Adequacy Analysis
After identifying areas of potential liability exposure, consideration should first be given to whether liability risks can be eliminated or lessened by insurance. Types of insurance often include homeowners’ insurance, motor vehicle insurance, umbrella insurance, commercial insurances, directors’ and officers’ liability insurance, disability insurance, life insurance and long-term care insurance. Insurance is typically a simple but effective solution.
Creditor Exemptions Under State and Federal Laws
Asset protection planning typically involves protective layers, starting with insurance. The next consideration is asset location or ownership. Laws vary among states, but some level of creditor protection often exists for assets owned in retirement plans and IRAs, investments under life insurance or annuity contracts, equity in a primary home, assets owned by business entities, certain jointly owned assets and community property. Thus, state and federal laws may be used to shield certain assets from liability risks. Each state has different rules and amount levels subject to protection. For instance, some states do not have a homestead exemption protecting a residence from judgment creditors and some states provide unlimited value homestead protection. Thus, consultation with an asset protection specialist in a particular state is appropriate before relying on such.
Once federal and state laws are considered and utilized, assets can then be divided into two separate classes, the protected or exempt assets and the unprotected or non-exempt assets, which may call for an additional layer of asset protection planning.
Married Couples
Often, because of a profession or business activities, one member of a couple will have an elevated risk of exposure to creditors’ claims. Retitling and rebalancing property so that the high-risk spouse’s assets are “exempt” and placing “non-exempt” assets in the name of the low-risk spouse may be a simple but effective solution. Of course, shifting ownership of assets between spouses has risk in the form of a subsequent divorce.
Trust Planning
If there is a desire to avoid the risk of a later divorce, both spouses have an elevated risk of exposure to creditors’ claims or there is no spouse to shift ownership of non-exempt assets, ownership of unprotected assets in trust may be appropriate. Some states, by statute, specifically provide for a specific type of trust to be used for asset protection purposes. These trusts are commonly called Domestic Asset Protection Trusts (DAPTs). If structured appropriately and all legal requirements are satisfied, a DAPT, except for any statutory exceptions, will protect the assets therein from unwanted outside risks. Non-self-settled trusts commonly used in estate planning, such as Gift Trusts for Descendants, Charitable Trusts (CRTs) and Irrevocable Spousal Lifetime Access Trusts (SLATs), have strong asset protection attributes for the beneficiaries. While most trust planning is done domestically, certain situations may call for the use of offshore asset protection trusts.
Conclusion
Comprehensive wealth advisory management encompasses more than just investment returns. It also includes advising across one’s personal balance sheet to mitigate risks to wealth, primarily taxes and judgment creditors. Your Oxford team is experienced at counseling clients to help maximize their wealth when holding during life and later when it is transferred upon death.
The opinions are as of date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. The information in this presentation is for educational and illustrative purposes only and does not constitute investment, tax or legal advice. Tax and legal counsel should be engaged before taking any action. OFG-2502-19
