Taking this step should lead to
new business for your practice.
Note: This is the third in a three-part series on the growing area of affluent wealth protection services.
There is a strong correlation between a person's
overall level of wealth and his or her concern for the preservation and
safety of their fiscal and physical assets. It is this growing demand
for wealth protection that creates an opportunity for wealth managers
to provide even greater value to their clients. In last month's article
we discussed the six-step process a wealth manager can use to assess a
client's risk and create a plan of action.
In this month's article, we will review a blind case
study focusing principally on the two elements of wealth
protection-asset protection and family security. In this case study we
have relied on the Whole Client Model, the holistic client profiling
methodology used by many of the most successful financial and legal
professionals, to help us develop a broad awareness of the client, his
lifestyle, his assets and his objectives. Ideally, the information
collected as part of the profiling process is presented on a single
page so it is easier to identify the relationships between the various
people, assets, products and circumstances in a client's life. Due to
space limitations, relevant highlights of the client's profile will be
presented in summary paragraphs.
Wealth Protection Case Study Client
JD is a 51-year old male with a successful real
estate development business. He has an annual income of $400,000 and a
net worth of roughly $24 million.
Financials
JD's net worth is comprised of the following things:
$12 million in equity in the real estate development business which
represents 50% of the company's value; the company owns seven apartment
buildings; $7.5 million in investable assets; $4 million in personally
owned undeveloped real estate; a term life policy with a face value of
$3 million nearing expiration; $500,000 in equity in his primary
residence; and $300,000 in qualified retirement assets.
Relationships
JD is married for the second time to a woman 13
years his junior. He has a 16-year-old daughter with behavioral issues
from his first marriage, and a business partner who owns 49 % of the
real estate development company.
Interests
JD likes to spend his free time and his
discretionary income traveling with his family, golfing with his
business associates, clients and friends, and fly fishing.
Advisors
JD has a number of existing relationships with
professional advisors. He has an advisor managing $1.5 million (for the
purposes of this case study, this advisor is the one conducting the
wealth protection assessment for JD), a broker with $4 million in
assets and a long-term banking relationship that provides him with
credit lines, the overall administration and investment management for
his company's retirement plan including his $300,000 account, and
management of another $2 million in assets. Additionally, he has two
accountants who separately handle his personal and business affairs and
a real estate attorney who focuses on his business.
Process
JD is the primary financial decision-maker for his
family and his company. Although he responds best to numbers, rather
than concepts, and wants information presented in a clear and
quantitative fashion, he does not want too much detail up front. Only
after he has had a chance to evaluate a broad idea will he request
details, and then he wants as much information as possible so he can
create an informed opinion.
Goals and Concerns
Disgruntled tenants have threatened JD and his
family, and both he and his company have been named and involved in
numerous lawsuits. Additionally, he is concerned that his 16-year-old's
new driver's license and social activities will create unwanted
exposure. As a result, he has repeatedly expressed a desire to take
care of his family, both financially and physically, and wants to find
a better way to protect his family and his assets moving forward.
Furthermore, he has indicated an interest in selling his real estate
development company in a few years, by which time he expects it to
double in value.
Based on the information provided in this article, a
number of wealth protection issues can be readily identified, namely
shielding JD's business and his real estate assets from creditors and
litigants and taking the necessary steps to defend his family against
past and future threats to their safety. The following is a short list
of the immediate asset protection and family protection solutions that
can be presented to JD by an astute wealth manager.
Asset Protection Planning
Freeze the value of the real estate development
company at its current level, enabling JD to sell it at some point in
the future and keep his estate tax burden consistent with today's
assessment of the company regardless of any increase in the company's
value. Freezing the company can be accomplished in a number of ways,
including the use of legal structures such as defective grantor trusts
or sophisticated financial strategies such as cascading derivative
transactions. When properly structured and executed, these freezing
strategies can also provide the additional benefit of creditor
protection.
Place the seven apartment buildings owned by his
company, and any other properties they may purchase in the future, in a
series limited liability company versus the more common approach of
separate LLCs.
Secure JD's personally owned undeveloped property
from creditors by placing it in a trust structure or converting it to a
security and hedging it.
Family Security
Immediately conduct background checks on anyone
with access to JD and his family, including company employees and
service providers to the family, such as housekeepers and gardeners.
Hire a security specialist to initiate an investigation into the threats.
Work with personal security experts to construct a
crisis intervention plan in the event that one of the threats is acted
upon, and determine if more serious, ongoing measures are required.
Helping JD identify and address his wealth
protection concerns will produce two important opportunities for a
capable wealth manager. First, both goodwill and trust will be
generated through the effort which can, in turn, strengthen the
relationship between JD and his advisor and create a favorable
environment for business expansion. Secondly, by conducting the Whole
Client Model exercise a number of additional opportunities can be
identified that are beyond the scope of wealth protection-and once a
savvy wealth manager is aware of opportunities an action plan can be
developed and implemented. The following is a short list of new
business opportunities that were revealed through the profiling effort.
Additional Business Opportunities
As the advisor with only $1.5 million of JD's
assets, there is an opportunity to capture up to $4 million from his
broker and up to $2 million from the bank.
Evaluate JD's satisfaction with the bank's
management of his company's retirement plan and, based on this
assessment, develop a strategy to take over and manage the plan.
Get a referral to JD's business partner, who appears to have a similar financial profile and legal risks.
Review any buy/sell agreements for the business
that are in place to be sure they accurately reflect the wishes of the
two partners, and update them appropriately.
Key person insurance should be reviewed and
updated to reflect the current status of the two principal partners,
and update them appropriately.
Develop an estate plan as an extension of the
asset protection planning process, which may result in providing trust
services as well as additional life insurance, including a better
solution than JD's current term policy.
JD has a sizeable estate rife with complexities that
will benefit from professional insights, and the practitioner that
provides the needed expertise will be the one to capture additional
business from him, assume a more central role in his affairs and secure
a place on his list of trusted advisors.