Traditional Estate Planning May Not Protect Your Assets

Traditional estate planning is death planning not life planning. Why is it for most business owners that an estate plan may not cover the everyday liabilities of life or sudden impactful events that no one sees coming. Ike says, “Not a week passes when he doesn’t talk to someone who says, “I’ve got this covered, I think. I have my home, cars, and investments all titled in my Trust.” But the real reality is with a little probing on Ike’s part the layperson he’s speaking to feels that the transfer of their assets to a vehicle like an estate planning trust, commonly referred to as Revocable Living Trust, is effective protection.  But Ike says, “It’s not!” The first word in the trust is “revocable” and in most cases a judge will simply order you to revoke the trust and tender the assets for a judgment. All good financial advisers and estate attorneys favor estate planning; and estate tax exposure is one of the issues on many a client’s checklist. But that’s death planning. What have you done about life planning and the exposures everyone faces on a daily basis while practicing your profession or driving a car or through the activities of your children?

All or too many eggs in one basket (trust) can crack open your assets to litigation. Some business owners do take initiative and implement a good tool like an LLC as a barrier between themselves and their investments, but fail to adequately segregate and subdivide assets so that they are protected from the owner and each other. A common example is the case of the residential rental property owner who has a single LLC that is legally and financially responsible for a wide variety of properties that have different levels of liability, equity and use. If you call and say you have five to ten thousand dollars down on four new short sale properties in a single LLC, it’s probably OK because your total exposure is theoretically limited to $20-40K, the value of the LLCs assets. On the other hand, if you call and say that you have seven pieces of real estate with a total equity position of six or seven figures, some paid for, some all debt, including a triplex, a lot, and a commercial strip mall, you’re in a dangerous position because you may be co-mingling good assets and bad assets. Primarily because any exposure at a new, zero equity property could wipe out your entire portfolio of paid for or partially paid for properties. Assets must be divided based on use and equity as well as into the right kind of legal vehicle, among many other factors. It’s time for a major wake up call before the fox raids the hen house. 

Much of the content in this press release was taken from Ike Devji’s article Common Flaws of Asset Protection Planning with permission.