Protecting Family Assets

Bavelas also created a solution for the expected royalty income streams that would start if the small company were successful. He determined their present value at the inception and the family sold the rights to them to a third party. Since there was no constructive receipt of the revenue prior to their monetarization, those revenue streams could be deferred as long as the family liked. If they took distributions, they would be taxed. The additional benefit to these two solutions provided was to protect these assets, as well.

“The real simple method of giving away value in a company is when it’s worth nothing,” observes Bavelas.

Getting the Docs Right

A family falsely believing that it has the right documents to secure assets is worse off than the family that knows it needs a plan but just hasn’t acted. Unintentional defects in documents or execution all too frequently occur, resulting in some combination of expensive legal solutions, excess taxes paid, or unprotected access to assets.

Errors in documents result less from technical misjudgments or editing errors than from lack of coordination, misinterpretation of family wishes, and/or inflexibility to adjust for changing circumstances. A will with boilerplate language could be legal, but its limited scope could financially harm a family in the future. Financial advisors and estate attorneys, for example, have observed that many problems evolve from lawyers who practice estate planning as a sideline rather than as a specialty.

Flexibility for the Future

The planning process should result in a plan that works today but is flexible enough that it can’t accommodate some possible new family scenarios in five or ten years without requiring major modifications. An attorney may want or need to draft a family trust when the assets are relatively small. Unlike the sophisticated solution mentioned above for that family’s asset that had significant growth potential, some trust may not adequately account for changes in principle. For example, a trust–with the grandchildren as the primary beneficiaries and once-rural undeveloped land as the asset–can dramatically increase in value as small towns become suburbs. With the grandchildren as beneficiaries, the trust could become subject to generation-skipping tax.

When assets dive in value, other problems arise. A trust with a highly concentrated portfolio, which may be the result of stock options, could seriously underperform. For a trust originally worth $10 million, the $500,000 left for a cousin may have made sense since the four children were dividing the rest. If the trust dips in value to $2 million at the time of distribution, the cousin receives an embarrassingly large share compared to the children–inheritances that don’t reflect the original wishes of the parents. Requests should be tied to inflation or if specific amounts are required, they should be reviewed annually.

Getting the Desired Outcome

A family’s complex emotional dynamics can’t be ignored in the planning process, notes Bavelas, as it drives the mechanics and the end result. Most advisors with a technical focus have difficulty asking the hard questions about the desired outcome of the planning process and focus more on crafting legal documents. The other members of the team must step up to ask the family to identify the desired outcome of the proposed work and to explain the interpersonal relationships among siblings and the parents and grandparents.

Most of the asset protection work that an advance planning team can perform for a client can only be done during the estate planning process for the matriarch or patriarch. It establishes a variety of benchmarks that helps support the notion that the planning was done not just for asset protection purposes but in the spirit of good and thoughtful estate planning. “Doing asset protection work and estate planning work together is a very defensible asset protection position, from a legal standpoint,” notes Bavelas. “If it were ever contested, you could say, yes, it does protect my assets, but it also allowed me to do the estate planning that I needed to do.”