When working with high-net-worth (HNW) families in the estate planning process, the subject of asset protection often arises. While it’s not typically the focus of our discussions with clients, asset protection is often a secondary benefit of the planning we’re undertaking—if it’s discussed at all. But, in light of the fragile economic environment and the global health crisis, there’s has never been a more important time to help our HNW families proactively focus on asset protection.
Many families believe that asset protection is only for the wealthy. How often have clients and prospective clients told you it’s “too expensive” or “too complicated” or “I don’t have enough assets”? However, basic asset protection doesn’t have to be complicated. And, as your client’s wealth grows, adding additional protection as necessary makes good sense. After all, why go to all the trouble to build wealth at all if it can all be lost in the blink of an eye with no hope of protecting it or recovering it?
Many HNW families have created their wealth through ownership of closely held businesses or through the acquisition of real estate. As employees return to work and as customers start patronizing businesses again, there’s an entirely new set of unanticipated risks, even though the owner has done nothing new or different. Those risks are based on the possibility of a customer or employee contracting a disease. That disease may even prove fatal. Lawsuits are certain to become rampant, and liability insurance carriers likely haven’t even anticipated how to factor these risks.
Real World Example
John, a 75-year-old client of mine in the Midwest, has built a substantial net worth of $35 million. Most of his success comes from growing his engineering firm into the largest in the area, with over 100 employees. Early on, John and his wife, Sandy, bought the buildings where the company is still located. They own the building personally, and the building has grown in value like the business. But that building now presents a great risk to John and Sandy because its ownership exposes all of the couple’s personal assets to the risks associated with the property. Certainly, they have proper insurance, including liability insurance. However, no one knows for sure whether their coverage will be sufficient if there’s a COVID-19 outbreak on their property. Why shoulder the risk?
While it’s possible that Congress will pass legislation to insulate business owners from some liability from COVID 19 related illnesses, that issue remains unsettled. Further, if legislation does pass, it will be limited at best, and it will be untested in court until someone files suit.
New Risk Landscape
Advisors should take the lead and discuss the various opportunities and options with all of their clients. Understanding which jurisdictions have better asset protection rules than others is critical to the success of good planning. It’s also very important to understand which entity structures are best suited for which assets and how to separate risky assets from each other to isolate inherent risks. As mentioned earlier, it’s never been more vital to have these kinds of discussions with your clients.
Non-attorney advisors should be cautious about offering legal advice. However, they should be familiar with the fundamental limits of their state’s protection for life insurance, homestead and other assets. They should also be informed about the asset protection characteristics of various business entities: S corporations, limited liability companies, limited partnerships, trusts, etc. Additionally, some states have far stronger laws that will protect assets held in certain vehicles than other states.
Besides being conversant in each of the ways to owns assets, it’s also helpful to look at the assets themselves. In the case of John and Sandy, they owned several pieces of real estate in their own names. It would be advisable for them to separate each of their properties from each other in individual entities so they can isolate the liabilities from each of the properties. Therefore, if something unfortunate were to happen at one location, it would only possibly impact that property and not the others.
While this can add some complexity, it also adds safety.
Randy A. Fox, CFP, AEP is the founder of Two Hawks Consulting, LLC.