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Estate Protection B y K i m b e r l y Wa t s o n S e w e l l a n d F r a n k l i n H . Wa t s o n
S tatistically and anecdotally, we all know that the number of divorces, lawsuits, and bankruptcies is staggering. While no one believes lightning will strike them, wealth created through a lifetime of work, saving, and investing can be lost overnight if these forms of man-made lightning do strike. To protect your assets from such disaster, proper risk management strategies should be given careful consideration. These strategies include exempting your assets from the claims of creditors, limiting your liability through type of ownership or legal entities, and transferring your risk through insurance. Exempting Assets State and federal laws may exempt some of your assets from the claims of creditors. Depending on your state of domicile (i.e., your legal residence), the equity in your primary personal residence may be protected from creditors. Protection also may extend to your salary or wages, retirement funds, and even the cash value of your life insurance. Once you have identified the protected asset classes available to you under applicable law, it may be prudent to maximize your protection by converting nonexempt assets into exempt assets. For example, if the equity in your home is exempt from the claims of creditors under the laws of your domicile, then using non-exempt resources to payoff your mortgage may be a smart move. Limiting Liability Many married couples purchase and own their assets as joint tenants with rights of survivorship. Bank accounts and financial instruments owned by married persons are also often designated as being owned jointly with rights of survivorship. Courts will presume that the debtor spouse owns a 50% interest in joint tenant with rights of survivorship property unless the facts demonstrate a different allocation of ownership, and a creditor may seize the interest the debtor spouse holds in joint tenant property. However, unlike joint ownership with rights of survivorship, tenants by entireties ownership, a special form of joint tenancy ownership available only to married persons, affords certain asset protection benefits. Many entrepreneurs operate their businesses as sole proprietors rather than through a legal entity, such as through a Corporation or a Limited Liability Company. Whether their business is home-based or in the Fortune 500, these business owners are attracted by the informality of sole proprietorship. They also do not want to incur legal fees to create and maintain a legal entity. However, in addition to other advantages, conducting business through a legal entity may offer substantial risk
management benefits. While lawsuits brought against a sole proprietorship are really lawsuits against the owner’s personal assets, lawsuits against a properly created and maintained legal entity are really lawsuits against the entity’s assets. Additionally, certain entities, such as limited liability partnerships and the limited liability companies, have substantial benefits for estate planning as well as asset protection. While the investment interests in an LP or LLC are not “exempt” from levy by creditors of the limited partner, asset protection is available by virtue of the limited procedural remedy given to creditors to levy upon a debtor’s limited partner interest and an LLC membership interest. A creditor has no right to seize property within a partnership or an LLC to satisfy the debt of a partner or member. Moreover, in a properly drafted LP agreement or LLC agreement, a creditor has no right to vote or inspect the books and records of the LP or LLC. Nevertheless, the selection of an appropriate legal entity is critical for managing your risk. Transferring Risk When was the last time you reviewed the details of your liability insurance program with your insurance professionals? Are your policies current? Are the coverage limits adequate and are the deductibles reasonable? Have you scrutinized the policies for loopholes? Remember: the fundamental philosophy of any insurance coverage is to pay a premium you can afford to transfer a risk you cannot afford. Take time to understand both the risks you have retained and the risks you have transferred. Closing Thoughts Managing your risk, like avoiding lightning, requires that you make proper plans in advance of the storm. Take time today to protect your wealth tomorrow. POCKET PROTECTORS—TIPS TO HELP PROTECT YOUR POCKET: Valuation Experts There are times when some or all of your assets must be valued with great accuracy. At such times, your best guess is just not good enough. For example, a rock-solid valuation is necessary to help withstand an IRS challenge to any discounts claimed on gifts of Limited Partnership interests. Additionally, if you are valuing a business for a buy-sell agreement between shareholders, a sale to a third party, or for estate tax purposes, then an accurate valuation is essential.
Kimberly Watson Sewell and Frank Watson
Here are some resources to help you locate a valuation expert: the American Institute of Certified Public Accountants (www.aicpa.org or (888) 777-7077), the National Association of Certified Valuation Analysts (www.nacva.com or (800) 677-2009), the American Society of Appraisers (www.appraisers.org or (800) 272- 8258), and the Institute of Business Appraisers (www.go- iba.org or (954) 584-1144). Federal Deposit Insurance Corporation— Are You Protected? The FDIC (Federal Deposit Insurance Corporation) is an independent agency of the United States government that protects you against the loss of your deposits if an FDIC-insured bank or savings association fails. But how safe is your money? In the era of bank bailouts, more Americans since the great depression are watching the ever-growing list of bank failures. Fortunately, you can check the status of your bank online, early and often, at www.fdic.gov. While you are there be sure to review the requirements to maximize you account protection under FDIC rules, especially if you have accounts held in a Revocable Living Trust. In addition to online help the FDIC provides a toll-free number to answer questions about coverage for Revocable Living Trusts. For assistance, call (877) 275-3342.
For more information, please contact: Watson Sewell, PL (850) 231-3465 - www.watsonsewell.com
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