Estate Planning for most people is a way to organize their assets, a way to distribute those assets when they die by using a will or a trust, and a way to control those assets while they are alive by using Powers of Attorney. But some people need more than that. People who have high wealth, people who own their own business, and people who work in professions which are common for litigation need more — they benefit greatly from asset protection as well as estate planning.
People with High Wealth
If you have high wealth, incorporating asset protection strategies is an important part of your estate planning to protect your assets from a second tax when transferring them to family members and other heirs. The problem is what is “high wealth”? There is no real solid definition to the term. And, most people do not consider themselves to be wealthy or to have high wealth, although many are and do. It reminds me of the story of the man who wanted to find out how to tell if someone was native of New England.
A foreign man, who was very interested in the people of the United States and the differences of people between geographic regions, asked an American friend he knew “How can I tell if someone is a native of New England, just by looking at him?” His friend replied “If he is eating apple pie for breakfast, he is a native of New England.” So the foreigner found a man eating apple pie for breakfast and asked if all people native of New England ate apple pie for breakfast? The man replied “No, lots of people eat apple pie for breakfast. People native to New England eat warm apple pie for breakfast.” So the foreigner found a man eating warm apple pie for breakfast and asked if all people native of New England at warm apple pie for breakfast? The man replied, “No, people native to New England have cheddar cheese on their warm breakfast apple pie.” So the foreigner found a man eating warm apple pie with cheddar cheese for breakfast and asked if all people native to New England eat warm apple pie with cheddar cheese for breakfast? “Ah-yep, they sure do”, said the man, “but REAL folks who are native to New England, are eating it with a spoon.” Just like everyone the man asked about who is a native of New England had a different idea of what constituted a native from New England, everyone will have a different idea of what constitutes a person with high wealth.
For the purposes of estate planning, it is best to look at high wealth as a fluid definition with specific benchmarks. Wealth defined as high is fluid because the benchmarks are subject to change depending on numerous factors, including where you live and current federal and state tax policy. The benchmarks best used are the amount of wealth necessary to where the beneficiaries will be forced to pay estate tax or “death tax” on their inheritance. Currently (2017), in Illinois the bench mark for owing estate tax is $4 million, and the Federal benchmark is $5.49 million. So if you live in Illinois and your total taxable estate exceeds $4 million you have what would be considered high wealth and you would benefit from incorporating asset protection strategies so that your heirs will not be forced to pay a second tax on assets where taxes have already been properly paid. If you live in a state with no state estate tax, but you have a total taxable estate of more than $5.49 million you have what would be considered high wealth, and again you would benefit from incorporating asset protection strategies.
Business Owners
According to the Small Business Administration (SBA) there are over 28 million small businesses in the United States. The SBA defines a small business as a business with fewer than 500 employees. Of those 28 million small businesses, over 22 million are non-employers, or self-employed businesses with no additional employee payroll. Many of these small business owners would not fall into the category of having high wealth. Renting space, leasing equipment, leaves little in the way of assets in the name of the business, and with the average annual revenue of non-employers being roughly $44,000; many are not socking away large bankrolls.
Recent numbers show that Illinois has more than 272,000 businesses, with more than 221,000 of them employing 20 people or less. While these business owners are working towards lofty goals, the vast majority of them is not yet falling into the high wealth category, and still will value incorporating asset protection into their estate planning.
It is important for all business owners, regardless of industry, capital, or income to draw bright lines around what are business assets and what are personal assets. Should the business ever be named as a defendant in a lawsuit, and if the plaintiff is able to ‘pierce the corporate veil’ as it is known, or name the owner of the business as a person, into the suit, the personal assets of the owner could be at risk. For this reason, it is important to protect not only the business assets from litigation, but also the personal assets. This is why all business owners, even those who may not be high wealth earners, benefit greatly from incorporating asset protection strategies in their estate planning.
Professionals
Some professions carry with them high risks of lawsuits. Included in these professions are those in the Medical Field, Lawyers, Accountants, Real Estate Agents, and Chefs, according to a compiled list from CBS News, Yahoo, and Reddit. The main causes of complaint are professional negligence, breach of contract, and personal injury.
The best asset any professional carries is their insurance policy.
It also helps to use asset protection strategies in order to protect personal assets from professional judgements. For example, if a doctor gets sued, and the judgment is above their insurance limit, the plaintiff can go after the doctors personal assets, such as their house or bank accounts. But, if the doctor uses asset protection strategies and creates an LLC to hold the house and other personal property items, and the LLC names both the doctor and the spouse as officers, each with a 50% share. And, according to the rules of the business it requires a majority of shares to agree in order to dispose of any asset, it would make that asset much less desirable to anyone wanting to attach any judgment on that asset.
Conclusion
Asset protection is an important part of estate planning for many people. It’s important for many different reasons depending on your taxable assets, your career, and your profession. Asset protection can be used to protect your assets from duplicate taxation, debt collection, and judgement attachments.
One of the real challenges of asset protection is how comfortable someone is giving up control of an asset. Depending on the level of control they are comfortable retaining or relinquishing, can dictate the proper strategy for the asset protection. Short of being embroiled in a current lawsuit, there is never a bad time to begin incorporating asset protection strategies. The best time would be when creating or reviewing your Estate Plan, the sooner the better.
