You’ve spent a lifetime working hard, building some savings, putting money into your home, saving for your kid’s education and planning for retirement. Your offensive game plan has been impressive. Your friends and family wish they could get a hold of your playbook. The execution, flawless. All that’s left to do is coast to the finish line, die with a smile on your face and leave a legacy for those you love that will stand the test of time. It’s up. . .its good. . . game over. But wait. . . a gust of wind comes out of nowhere. . . the ball is careening left. . . no. . . is this really happening? It’s no good!! Just as you thought you had it wrapped up, it slipped away suddenly, unexpectedly – 30 yard field goal wide left, by centimeters.
An opening laden with football metaphors. Yes, the Super Bowl is upon us. The game’s best offense head to head against the game’s best defense. Both teams are capable of scoring – Peyton Manning and his receiving corps is as good as it gets, and on the other side you have a young quarterback capable of beating you with his legs and a punishing ground game featuring Marshawn Lynch.
The offense is there, but this game will be decided by defense. Which team forces the most turnovers? Which team’s defense will tire first? The team that keeps the opponent’s quarterback off balance and takes away key weapons will put itself in the best position to win. A strong D gives its team the best chance to win by a comfortable margin. In the Meadowlands, with its swirling winds, you don’t want to leave this one up to the kicker.
Lets put this in the context of personal finance. If you haven’t done any asset protection planning, you may have played the financial offensive game of a lifetime, but your wealth is vulnerable to potential future creditors and, should the worst happen, you could still lose everything, at the worst possible moment. Lawsuits, taxes, accidents, Mother Nature’s whims and other financial risks are facts of everyday life. What can you do? The very first thing to do is to evaluate and identify your potential loss exposure, then implement strategies that are designed to help reduce that exposure, without compromising your other estate and financial planning objectives. Sounds simple – if only life were that easy.
Let’s talk X’s and O’s.
The “IPS Basic Plus Umbrella” Play – aka INSURANCE PROTECTION STRATEGIES: Insurance is basic blocking and tackling. Personal property and casualty insurance provides protection for personal and business property, as well as additional liability protection. The two most common forms of property and casualty insurance are auto insurance and homeowner’s insurance. Insurance is the simplest way to cope with risk, because it shifts the risk to an insurance company.
Most people are primarily concerned with the costs and don’t fully appreciate the dangers associated with too little coverage. A good rule of thumb is to purchase as much liability coverage as is available under your policy. This typically will be $1,000,000 to 2,000,000. Liability coverage protects you in the event you cause an accident in your vehicle or in your home. If you happen to be negligent and cause an unintentional injury, medical bills and other expenses can add up very quickly.
If the claim exceeds your available coverage, then the injured person may look to your personal assets to satisfy a judgment. Wayne Cohen, a trial lawyer in Washington, DC who represents injured plaintiffs and is a Law Professor at George Washington University, sees this all the time. ”Far too often I see high net worth individuals who are under insured,” he says. “Then when a claim arises, and we exhaust all of the available insurance, we look to the personal assets of the person who caused the accident — bank accounts, cars, boats, houses, everything.”
Homeowner’s policies have specific limitations, so it’s essential that you discuss your individual needs with your insurance agent. Be sure to obtain coverage to cover losses resulting from flooding, earthquakes, high winds, and similar events. If you own fine jewelry, furs, artwork, or other expensive collections (even oriental rugs), these items should be appraised and scheduled on the homeowner’s policy. Additionally, clients should purchase specific policies for adult recreational toys (such as boats), swimming pools, and other valuable assets. You should regularly confirm that your homeowner’s policy is in good standing because your home is typically your largest asset.
You might also consider an “umbrella” policy. These policies sit on top of your auto and home insurance, such that they provide an “umbrella’ for excess claims. Let’s say, for example, that Amy Asset gets into a car accident with Paul Plaintiff. Amy has a $1,000,000 auto insurance policy. Paul has serious injuries that require ongoing hospitalization. The value of his claim is $2,500,000. Because Amy only has a $1,000,000 policy, Paul will have an entitlement to another $1,500,000 and will look to Amy’s personal assets to satisfy the claim. However, if Amy has an umbrella policy — let’s say of $3,000,000 — then the total amount of insurance that’s available is $4,500,000. Consequently, Paul will have the case resolved without ever having to look to Amy’s personal assets (i.e., her home, bank accounts, autos).
The “SPS Max Protect” Play – aka STATUTORY PROTECTION STRATEGIES: Creditors can’t enforce a lien or judgment against property that is exempt under federal or state law. While exemption planning can’t offer total protection, it can offer some shelter for certain assets. Both federal and state laws govern whether property is exempt or nonexempt in non-bankruptcy proceedings. When looking at exemption laws, be sure to find out how much of an exemption is allowed for a particular type of property–it may be completely exempt, or exempt only up to a certain amount or restricted in some way. Types of property often receiving an exemption include:
- Homestead (principal residence)
- Personal property
- Motor vehicle
- IRAs, pension plans, and Keogh plans
- Prepaid college tuition plans
- Life insurance benefits and cash value
- Proceeds of life insurance
- Proceeds of annuities
Let’s say for example, Amy Asset owns a business on the Jersey shore. When Hurricane Sandy destroyed the Jersey shore, her business suffered dramatically and she was forced to close. Amy had some business debt and was forced to file for bankruptcy protection. In this example, Amy had a large amount of equity in her home, and was an aggressive saver into her IRA. The equity in her home is exempt under the Federal law, but not the State of New Jersey. Her IRA assets would be protected from her business creditors.
The “APS Shift Right” Play – aka ASSET PLACEMENT STRATEGIES: Asset placement refers to transferring legal ownership of assets to other persons or entities, such as corporations, limited partnerships, and various types of trusts. The basis for this technique is simple–creditors can’t reach property that you do not own or control.
In some cases, shifting assets to a spouse who is less exposed to claims, if you have high exposure to potential liability because of your occupation or business, may be advisable. Your spouse would retain the assets that are subject to the exposure as his or her separate property, and you would retain assets that enjoy statutory protection. If you are a professional (i.e. physician, accountant or a lawyer) with business partners, it is may be advisable to form a Limited Liability Partnership which could protect you from the malpractice of your partners. Wealthy families with business ownership interests often are the target of lawsuits and should consider forming a Family Limited Partnership, or irrevocable trusts, so that the assets of the family would be sheltered from creditors of those businesses.
When considering your defensive strategies, make sure your plans are made for legitimate business purposes or to accomplish legitimate estate planning objectives or there will certainly be a flag on the play. Carefully document the legitimate business and estate planning purposes of any arrangements you make and put your plans into effect before you have any problems with creditors. Do not implement a plan at a time when a lawsuit is imminent or pending or at a time when you have an outstanding debt that you believe you may be unable to pay.
As the ball flops pathetically to the ground, the officials emphatically signal ”no good”. You hang your head. So close to the victory.
The truth is, this game was over long ago, because your defense failed to stop your opponent. Had it been, you would not have been in the position to suffer at the hands of mother nature’s whims, or your kicker’s unexpected bout of nerves. Take a hard look at the game film. Take stock of your financial situation and splash some cold water on your face. Time to shore up that D. Who wants to leave it up to mother nature, or worse, the kicker, anyway?
There are other issues that should be considered when implementing these strategies, including tax considerations. Consult an attorney and tax professional to evaluate your personal situation. These strategies are in no way meant to shield anyone from criminal activities.