Coming into money can be both a blessing and a curse. Whether the client is a rookie professional athlete who just signed a multiyear, multimillion-dollar contract; a young entertainer with a hit show and endorsements; the beneficiary of a trust that has terminated; a lottery winner; or the winner of a large verdict or settlement in a personal injury or divorce case, special attention from a team of professional advisors can avoid negative consequences from the windfall.
What’s more, implementing a Sudden (or Substantial) Wealth Accumulation and Transmission Trust (SWATT) can mean the difference between the client enjoying lifelong comfort or ending up worse off financially than before the sudden wealth.
Taxes: The influx of wealth may be taxable itself, and when the proceeds are invested there will likely be taxable income and gains. Mostly newly wealthy clients will be unfamiliar with their new tax requirements and may be faced with substantial federal and (perhaps multiple) state income taxes. The client may also now confront human resources issues under labor laws, and state and local payroll tax and insurance filings.
Requests from friends and family: Newly wealthy individuals often discover that they can’t say no to requests for financial assistance from family and friends, which can create cash flow problems and even generate gift tax obligations. A client who decides to make generous loans instead of gifts face issues regarding documentation and taxation of interest.
Philanthropy: Charities will solicit the newly wealthy and the client will need guidance about evaluating institutions, rationalizing a coherent charitable program, impact on cash flow and tax-efficient mechanisms for contributions or pledges.
Investments and Insurance: Newfound wealth can be poorly invested due to lack of experience and oversight. Building an effective wealth management team is of the utmost importance. There will be critical issues of appropriate wealth allocation — for example, how much money to allocate toward nonfinancial assets such as residences, vehicles, jewelry and art. The purchase of such assets in turn creates a need for liability, and real and personal property, insurance. Life, health and disability insurance will be critical as well, the latter especially for the athlete or entertainer.
Without appropriate counsel on all of these issues, many newly wealthy individuals end up losing everything, despite their influx of money. We often hear of actors or other entertainers, sports figures and lottery winners who wind up with nothing because they don’t know how to deal with these concerns and don’t seek proper guidance.
A variety of professionals will be eager to provide advice: business managers (at least for athletes and entertainers), investment managers, tax accountants and insurance brokers. Lawyers can take the lead on coordinating the different professionals, designing and implementing the optimal legal structure and promulgating clear lines of responsibility.
• Consider whether large, ongoing infusions of cash are likely — and for how long. Entertainers and athletes may have a relatively short period of years when very substantial remuneration may be expected. Lottery winners, beneficiaries of trusts, and winners of lawsuit settlements or verdicts may receive only a onetime windfall that should be shepherded very carefully.
• In many cases, the client will have significant intellectual property needs, such as handling endorsements, contracts and the right of publicity. Intellectual property rules vary greatly from state to state. For example, the right of publicity passes through the estate to beneficiaries in California but not in New York.
• Asset protection is key for the newly wealthy. A client may be inexperienced with normal business practices, and special attention should be paid to bookkeeping formalities and use of separate LLCs for different types of property, residences and vehicles.
Lawyers can effectively guide a client to these goals. Lawyers can negotiate service and employment agreements, commercial agreements, endorsement contracts, acquisition of real estate and other tangibles, charitable pledge agreements, wills, trust agreements, and other estate planning documents. Additionally, a lawyer can design, explain and implement an overall structure strategy geared toward protecting the client’s assets while also enabling the client to retain ultimate control.
Basic Structure: The simplest way to structure a client’s assets might be a “management trust.” Such a trust will be tax neutral. There should be a bank as an administrative trustee, a trusted individual trustee, and a trust protector (to protect the client from being taken advantage of by a once-trusted individual).