Yet, the need for other types of insurance actually may become far greater. Personal liability coverage, for example, may need to be increased, along with the coverage limits and deductibles on related properties and automobiles. Similarly, property and liability insurance will need to be reviewed as cash is invested in new assets.
b. Trusts
Creditor-protection and similar trusts may be attractive for those experiencing infusions of substantial liquidity. Nevertheless, these trusts, which can offer additional protection from creditors, come with costs and should be considered carefully before utilizing them. Trusts can attract significant administrative fees and professional fees and may even create additional tax liabilities. These entities also often require the relinquishment of some control of the underlying assets, which many individuals ultimately cannot accept.
More conventional trusts should also be reevaluated after a liquidity event. Spendthrift provisions, trustee appointments and powers, and beneficiary provisions may require substantial attention in light of higher, more liquid asset levels.
c. Limited Liability Entities
LLCs, limited partnerships, corporations, and other limited-liability vehicles can also be deployed to offer insulation against future claims by creditors. Again, however, the use of these vehicles may have tax consequences and additional expenses, necessitating careful planning.
6. Professional Team Restructuring
In fact, all of the foregoing items require extremely careful planning. Therefore, perhaps the most important decisions that can be made following a liquidity event relate to the creation of the right team of experts to ensure the required level, depth, and breadth of planning.
This team may require a different composition than the team, if any, in place prior to the liquidity event. High-level expertise in the following areas will become critical: financial planning; investment management; legal structuring and advice; tax compliance; insurance planning; and intra-family governance. Experts in these areas can be retained independently, but some organizations are capable of providing all or most of the above services, potentially offering better coordination, efficiency, and integration of the services. In the absence of a single organization that can provide comprehensive services, another decision will need to be made: who will assume responsibility for coordinating the efforts of the various experts? Ideally, this leadership should be provided by a trusted advisor that has a fundamental understanding of all of the above considerations and experience in managing a multidisciplinary team of professionals.
In the end, all of the steps discussed above are important in ensuring that the most effective, optimal approach is chosen and executed following a liquidity event. Proper planning can create magic, especially when there is extensive coordination among professionals on the team and, of course, the client.
Michael Nathanson is the chief executive officer and president; Stephen Stelljes is the president of client services; and Nadine Lee is the president of the family office of The Colony Group, a national financial advisory company with offices in Massachusetts, New York, Virginia and Florida. The authors are grateful to Cary P. Geller, MBA, CPA, PFS, CFP, AEP, managing director of The Colony Group, for his contributions to this article.