Last month We looked at the emotional and financial challenges of advising a client during a divorce settlement. When analyzing the client situation, advisors have learned that the division of assets is not a simple case of dividing everything by two. Divorce specialists run scenarios of different possible settlements. If a spouse accepts a particular settlement offer, how will it look five or 10 years later? What will be the cash flow? How will expenses grow?
On the other hand, wealthy families can take steps to protect assets before a marriage occurs. If a divorce subsequently results, the settlement is much simpler since many fewer holdings are attachable. Protecting assets properly to fulfill a family’s wishes and having the right documents implemented, however, is what separates advanced planning from theory.
Once Burned, . . .
The experience of an ultra-high net worth family and its surprising lack of planning show how asset protection and estate planning intertwine. Arthur Bavelas of Resource Network, LTD. in Radnor, Pennsylvania, (and a consulting private wealth specialist to my firm, Advanced Planning Group) came to advise this three-generation legacy family that had substantial assets consisting of operating companies and investments held in and out of trusts. The family made significant money primarily in two sectors, real estate and financial markets. The second-generation children participated actively in the family businesses. Some of the grandchildren also worked in the business while others pursued interests outside of the business.
The primary beneficiaries of the family assets were the grandchildren. All of them had been married at least once, and two had been divorced. Unfortunately for the family, the assets the divorcing spouses received far exceeded the settlements the family had anticipated.
When Bavelas first met the family, he identified a number of critical problems: massive amounts of assets subject to claims of creditors; potential lawsuits by interlopers; inadequate protection against risks; insufficient estate planning; and high estate taxes in the future. Lack of prenuptial planning was also a problem.
Bavelas and other advanced planning advisors have noted that even very sophisticated, highly successful clients have trouble understanding that an ex-spouse is a creditor. Although they can accept the idea that the spouse of an offspring shouldn’t have access to certain assets, the idea of the “ex” being a legitimate creditor–just like a bank–doesn’t resonate until advisors explain all of the hazards.
With this family primed for a new solution after the high payout for the two divorce settlements, Bavelas offered solutions that prepared for future marriages by orchestrating protection not only with prenuptial agreements, but by organizing the assets to make them independent of the agreement or its expiration. The majority of the assets passed via a variety of trusts and other techniques to the great-grandchildren and the generation after that. The solutions structured assets in such a way that a divorcing spouse would get access to only a modest amount of assets. The team also created strategies to protect ongoing investments and businesses. Revised estate plans made sure that family assets would go where intended using trusts for asset protection, generation skipping, and estate planning, among others.
The family invested venture capital in a variety of well-thought-out investments, some with the typical high risks for this kind of investing. Among their investments was a social network that was worth little when they originally invested and ultimately sold for several hundred million dollars.
Start at the Beginning
Fortunately for the family, Bavelas and his team worked with them at the inception of the investment when it was worth a crumb of its selling price.
They structured the investment in such a way that it was not subject to personal income tax and not subject to estate tax. The key was that this solution was applied at the launch of the investment when it was worth very little–otherwise it wouldn’t have worked.