Estate planning is essential for professionals looking to secure their financial legacy and protect their assets. This comprehensive legal overview details the intricacies of estate planning tailored specifically for professionals, covering aspects ranging from asset protection to strategic wealth preservation and seamless asset transfer. Armed with information tailored to your specific circumstances, you gain the empowerment and assurance needed to secure your financial future.
Asset Protection
Asset protection is the foundation of financial stability. The purpose of asset protection is to preserve what your business has accumulated. In today's litigation-happy climate, even LLC membership may not protect you from being named as an individual defendant in a lawsuit.
To begin the process, your trusted advisor will ask you a number of questions that include:
- Existing debts & possible claims
- Personal & business assets
- “Exact ownership” of assets
- Unique facts & circumstances
The ultimate goal is to protect your personal and business assets from individual creditors.
Personal Asset Protection
There are four tools for protecting personal assets from creditors: trusts, retirement accounts/IRAs, and adequate insurance.
Trusts
Trusts come in many forms and can be tailored to fit your needs. This includes gift trusts, revocable trusts for spouses (including prenups), asset protection trusts, inheritances in trust, trusts for the benefit of children, spousal limited access trusts, and trusts for probate avoidance (to prevent claims of creditors at death).
Trusts, like Grantor Retained Annuity Trusts and Intentionally Defective Grantor Trusts, can be utilized to transfer business assets during life while minimizing gift/estate taxes. These trusts allow appreciating assets to pass to beneficiaries with reduced tax consequences.
Retirement Accounts & IRAs
Retirement accounts and IRAs are powerful tools for asset protection.
ERISA spendthrift protections are included in retirement accounts, which also permit unlimited accumulation free from creditor claims. If possible, they should be limited to the required minimum distributions. On the other hand, retirement IRAs are not ERISA protected, so protection from creditors depends on state law. Self-directed IRAs allow for investments outside the scope of the traditional IRA. In the event of bankruptcy, assets in IRAs and Roth IRAs are protected from creditors, if they do not exceed a certain value.
Adequate Insurance
Adequate insurance, like D&O and umbrella policies, completes the asset protection strategy.
Business Asset Protection
There are various entity structures to protect from creditors, including LLCs and corporations, which vary depending on your business's needs. Regardless of entity structure, it is vital to maintain entity formalities, separate assets into different entities (business vs. real estate), and keep personal and business assets separate. Like personal insurance, it's important to maintain adequate commercial and umbrella insurance coverage – and keep your policy updated after major changes.
Succession Planning
Succession planning is also crucial to the future of your business. First, determine who will take over. Will it be a family member, employee, or an external strategic buyer, customer, or competitor? Then, determine whether the assets or stock of your company will transfer via gift, compensation, or sale. In the event of a sale, it's important to prepare for the transfer by hiring an advisory team, performing an internal audit, and proactively identifying and addressing potential issues.
Death, Divorce, & Dissolution
All good things eventually come to an end, and when that time comes, it's crucial to protect your business assets, minimize taxes, and maintain relationships. Well-drafted operating agreements, buy-sell agreements, and trusts are essential to achieving these goals. Without them, default state laws will govern, potentially exposing your business to unnecessary creditor risks, disputes, and public disclosure of records. It's also important to review your life insurance and installment notes to ensure proper titling and favorable tax treatment.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
