Thus far in this series on protecting your assets from a lawsuit, we’ve covered lifestyle issues, insurance planning, federal and state exemptions, titling of assets and the use of trusts. Legal documents are another way to protect your assets and today I’ll cover three categories: legacy planning, life insurance planning and prenuptial agreements.
Legacy Planning. When I review the wills of new clients, the documents often leave assets outright to the surviving spouse or, if there is no surviving spouse, to the children at a young age, say 21 or 25. A transfer directly to the surviving spouse continues to subject those assets to a potential lawsuit. As for the children, outright distributions at a young age expose assets to two risks. First, in my experience, many people in their twenties are ill-equipped to handle large sums of money and will either spend the money or invest it poorly. Second, the divorce rate in America continues to hover above 50%. Leaving your assets directly to children can expose those assets to a future divorce. Combine the odds of a divorce with the odds of a lawsuit during an adult child’s lifetime and you can easily see the importance of developing an asset protection strategy. In our practice we developed a concept we call, “Legacy Trust with Asset Protection Attributes”, whereby assets, at death, are transferred to a trust for the benefit of the surviving spouse or children for their lifetime. They receive monthly cash flow from the trust as well as principal distributions for predetermined events or situations…education, health, down payment for the purchase of a home…for instance. Should the trust beneficiary be threatened by a divorce or lawsuit, the trust language shields trust assets.
To Do: Take a moment to determine the total value of your estate including life insurance; review your will to determine how your assets will be left to your heirs; and decide if a Legacy Trust is a strategy worth considering.
Prenuptial Agreements. I’m sure you’re all familiar with the concept of a prenuptial agreement whereby couples, prior to being married, sign an agreement limiting the transfer of assets should the couple later divorce. This is most typical where one or the other or both of the couple have children by a previous marriage. We have also used a prenuptial agreement in cases where a child is expected to inherit substantial assets either outright or in the form of a family business interest.
Life Insurance. From an asset protection perspective, one of the mistakes I see people make is to, inadvertently or otherwise, name their ‘estate’ as the beneficiary of their life insurance. In one case, a husband did this and also did not have a will. As a result, the insurance proceeds were distributed according to state law and resulted in $500,000 going outright to the widow (no asset protection!) and $500,000 being held under a state conservatorship for the nine-year-old son until he turned 19 at which time he’d receive his money including all the growth, outright. I’m guessing you can see the problem here.
To Do: Make certain that your life insurance has a named beneficiary and, for asset protection, consider the advisability of using an Irrevocable Life Insurance Trust as both the owner and beneficiary of the policy.