By Scott Keffer
Growing up, I have memories of hiking in the mountains and parks in eastern New York: great trails, rushing rivers, scenic gorges and beautiful lakes. Despite the beauty during the day, the nights were sometimes filled with visits from unwanted visitors: predators looking to pilfer our precious supplies, not to mention to do us bodily harm. It took a bad experience for us to learn that we needed to take steps each night to protect our supplies and ourselves, to reduce our vulnerability to those thieving creatures of the night.
Protecting your wealth is a bit like my camping experience. You usually don’t deal with it until you’ve had a bad experience, am I right? By then, it may be too late and the results can be devastating. I know, I know, it’s not going to happen to you. Nevertheless, “wealth predators” exist. They threaten your peace of mind and your financial independence. Three of the biggest predators are life’s uncertainties, lawsuits/creditor judgments and taxes. They are three that you cannot afford not to protect yourself against. Your lifestyle and future security are at stake. Let’s take a look at them and some possible solutions.
Life’s uncertainties include disability, health emergencies, nursing care and incompetence. The costs of not protecting yourself in this area can mean a huge loss financially, but even worse, loss of personal control. Often, you cannot avoid experiencing some of life’s uncertainties. Nevertheless, there is no reason not to protect yourself from the emotional and financial hardship that can result and retain personal control of your decisions.
When Groucho Marx was in his 80s, despite his continued legal opposition, a Los Angeles court declared him incompetent. The woman who lived with him, Erin Fleming, claimed that Groucho wanted her to be the guardian. After an expensive and unpleasant legal battle, the court disagreed. A relative was declared guardian and given the power to make decisions on his behalf. Loss of personal control. Had Groucho established a Living Trust in advance, he could have specified whom he wanted to manage his affairs in case of incapacitation.
Do you know the name Sunny Von Bulow? Sadly, she went into an irreversible coma and has remained in that state almost twenty years, since December 1980. The cost of her care at Columbia-Presbyterian Hospital in New York City is estimated at around $500,000 per year. Is this what she would have wanted? She never took the time to outline her wishes. Loss of personal control.
Advance directives, like a Living Will and Durable Power of Attorney Health Care, would have allowed her to stay in control. She could have predetermined what kind of treatment she wanted in case of a terminal illness and whom she would authorize to make medical decisions for her if she was unable. Please note: since the rules vary greatly from state to state, be sure you have executed directives in any state that you may own a second home or have an additional business office.
Actor James Dean died at age 29 without a Will. The legal right to licensing fees of his likeness passed by interstate law to his father, who had abandoned him early in his life. They reportedly generate between $1 to $3 million annually. Is your Will up to date, in accordance with the law and your wishes?
The family of one of our deceased clients experienced the cost of an inappropriately drafted personal document, in this case, a Durable Power of Attorney. In the event of mental incapacitation, this document appoints the person of your choice to handle your personal affairs, including such things as signing tax returns, handling bills and even making investments and gifts on your behalf. This woman appointed her son and daughter to act on her behalf, but the document specifically excluded the power to transfer her lifetime $600,000 exemption. The error cost the family almost $200,000 in additional taxes at her death. Have your personal documents been reviewed lately?
At age 52, the chances that you will be disabled are twice your chances of dying. At 42, it’s 3.5 times more likely. A 1988 Brandeis University study showed that 40 percent of 65 years olds will need nursing home care at some point in their lives and almost two thirds will require it for more than 90 days. These risks can be transferred to a third party via insurance.
Lawsuits and creditor judgments make up the second category of wealth predators. You may say, “I’ve never been sued.” I’m sure you are well aware of the predatory impact of malpractice judgments in excess of malpractice limits, and the growing cost of litigation. You may have even further exposure if you are engaged in any other businesses, are involved with real estate, are parents of a teenage driver, have to co-sign or guarantee any loans, or sit on a corporate charity or board. In 1989, there was one civil action filed for every ten American adults. Today it’s worse.
Liability insurance and incorporation can help, but they don’t provide maximum protection of your personal wealth. You need to reposition your wealth for maximum protection, some into exempt assets and some into wealth buckets with protective “fences” around them. However, it’s very important to note that any moves in this area must be made even before there is a hint of trouble. Many assume that they can wait until there is a problem to act. This will not succeed.
Bowie Kuhn, the former commissioner of baseball, was a senior partner in a New York law firm that was forced into dissolution by its creditors. Shortly before his New Jersey house was to be attached by creditors, he sold it and bought a house in Florida, hoping to convert his nonexempt property (his New Jersey house) into property that is exempt from creditors (a house in Florida). A court ruled that it was a fraudulent transfer. After a real estate deal went bad, Dr. Tveten, a Minnesota doctor, tried to convert around $700,000 into exempt assets. The court again ruled that his awareness of the judgment implied intent to defraud.
Had these men converted nonexempt property into exempt property in advance, the outcome could have been very different. Keep in mind, although federal bankruptcy law exempts annuities, insurance and pension plans, protection under state law varies from state to state. It’s also very important to note that IRAs are not pension plans, therefore they are not afforded the same protection under federal law and some states do not protect IRAs.
In addition, had they explored the use of the increasingly popular Asset Protection Trust in conjunction with a Family Limited Partnership, they could have protected virtually all their other assets. Today, the Alaskan trust is the latest device for maximum asset protection.
Speaking of predators, how about transfer taxes? Leave your assets to an heir other than your spouse and face up to a 60 percent loss to estate taxes. Leave your retirement plan to an heir and you could lose over 75 percent to taxes! The late Bob Magness, patriarch of TCI, the world’s largest cable TV empire, was dubbed “so smart in life,” but “so foolish about death” in The Denver Post because he failed to deal the transfer of his large fortune. His family will watch as over one half of his almost $1 billion estate will be lost to transfer taxes.
Yet, it doesn’t have to be so. Historically, families like the Rockefellers, DuPonts, Fords and Kennedys have passed wealth from one generation to the next without death taxes. Using Family Dynasty trusts, they have shielded their assets from taxes for three or more generations. The late President Kennedy was a beneficiary of several of these trusts. With these and other devices, it’s actually possible to create a zero estate tax plan. Have you explored the many strategies available to help you transfer all of your wealth without paying any estate taxes?
However, reducing your vulnerability by predator-proofing your wealth requires a process. It requires a tested approach that includes: establishing a clear vision for where you want to go; testing your current plan for unknown traps; designing a comprehensive, integrated solution; appointing a lead advisor to oversee the process; and implementing the appropriate legal and financial tools. Sound difficult? Not as difficult as open-heart surgery—not for an experienced professional.
Benjamin Disraeli wrote, “Everything comes if a man will only wait.” In this case, waiting can bring the unexpected wealth predators. The result may be devastating: huge losses financially and loss of personal control. So don’t wait for a bad experience. Protect yourself today.
Scott Keffer is president and founder of Wealth Transfer Solutions, Inc., a legacy planning company in Pittsburgh.