Over the past decade, wealthy Americans have grown accustomed to thinking of estate planning as a task with short-term consequences. Due to federal legislation, the rules have been changing year after year. The short-term chaos, however, may be distracting high-net-worth families from facing the realities of how long their wealth needs to last and how vulnerable their assets might be.
Given the risks faced by today's wealthy investors-whether it be from market volatility or malfeasance-it's not a subject to be treated lightly. This is especially true for investors in litigation-prone industries, such as hedge fund managers and doctors.
"In any investment vehicle where a manager has fiduciary duties, an investor or partner can step forward and sue for something that happened years ago," says Joshua Rubenstein, co-managing partner of trusts and estates at the law firm Katten Muchin Rosenman in New York City, who is seeing an increasing number of cases in which a fund manager's duty to partners is under examination. "Private equity and hedge fund managers in particular might find an investor coming forward and saying the money was mismanaged."
When it comes to assailable professions, physicians are long accustomed to sheltering their assets from creditors in case they are attacked in a malpractice suit. So are property builders and developers.
"This is partly a geographic matter, but in the Twin Cities there are a lot of medical device companies, and the heads of those companies are liable and need to protect their assets," says Ann Burns, chair of the trust, estate and charitable planning group at the law firm Plant Mooty in Minneapolis.
For estate lawyers and advisors, planning for clients in these risk categories means channeling assets into corporate or limited partnerships or limited liability corporations apart from their business, according to experts. While a creditor might try to gain control over such an entity, it can be structured to guard against creditors seizing voting interests.
Irrevocable trusts are also an increasingly popular asset protection vehicle, according to Rubenstein and his colleague Philip Tortorich, a trusts and estates partner with Katten Muchin Rosenman in Chicago. When the beneficiary of the trust is someone other than the grantor, the assets gifted or sold to the trust are generally beyond the reach of creditors of the grantor. In particular, assets sold for fair market value to the trust should not be subject to claims. Several states, including Delaware and Alaska, allow a grantor to settle a trust for his own benefit and prevent creditors from accessing the trust assets in the event of a claim. The grantor must be able to prove continued solvency after the assets are transferred to the trust, however. "You wouldn't do this for someone who already has a creditor crisis," Tortorich says.
IRS Scrutiny Of Asset Transfers
The traditional way to make sure a client's estate does not fall into the hands of disgruntled investors or other potential plaintiffs and creditors is to have the client transfer assets to his children while he's still alive, according to attorneys. But the strategies for such transfers are shifting as the federal government tweaks the tax code to raise revenues.
More than ever, estate planners have to consider the complications of gifting when it involves transferring interests from a hedge or private equity fund to family members, experts say.
To avoid hidden traps such as IRS over-valuation of the gifts, the owner must transfer a slice of every interest he owns so that the family members' interests do not vary in substance from his own-a vertical slice of the entire interest. An increasingly popular estate-planning tool to address this situation is the use of carry derivatives, based on the fund partner's carried interest or performance allocation.