THE FIVE PERSONAL PROTECTIONS
By Nathaniel E. Clement, J.D.
At our law office we are often asked by clients to help them carry out their family planning goals, which are, usually, staying in control, having enough wealth to live comfortably during lifetime, and being able to give property away when and how they want to, during lifetime or after death.
We explain to our clients that making this happen means protecting family wealth. Without protecting the wealth, their goals won’t be obtained. Protecting one’s wealth can be done at either of two times: After you take ownership of the wealth or at a time before you receive the wealth.
It is far easier to protect family wealth before a recipient receives it than after a recipient receives it.
The purpose of this article is to show you how you can add the Five Personal Protections to every transfer of wealth that you are a part of. The key to making these work is to attach these protections before the recipient receives the wealth, whether the transfer to the recipient is during your lifetime or after your death.
When property is transferred, there is a one-time opportunity to add these protections. The recipient cannot add these protections after he or she receives the property.
The 5 personal protections are: (i) catastrophic health care protection, (ii) creditor protection, (iii) remarriage protection, (iv) divorce protection, and (v) values protection.
To put these in proper context, let’s take a typical planning situation. Husband Peter and Wife Mary are planning for themselves and their three adult children, one of whom has a problem with spending money on the wrong things, as Peter and Mary see it. The other children are mature and responsible. Peter and Mary have been married for 35 years. Peter’s financial assets are not sufficient to take care of Mary (at least in his opinion), so he has purchased a $1 million term life insurance policy, with Mary as the beneficiary.
Peter and Mary find their lawyer through the yellow pages; after a brief discussion about the fee to be charged, Peter and Mary meet with the lawyer for 30 minutes to discuss their needs. Peter tells the lawyer that all that he owns must be used to take care of Mary; Mary says the same applies to her wishes for Peter. They state that if a spouse is not alive, their wealth is to pass to the children in equal shares.
The lawyer prepares the will or living trust and follows their wishes to the letter. They return two weeks later to sign the documents and leave.
Ten years later, Peter dies of a sudden heart attack after a racquetball game. As expected, Mary outlives him. Mary, now age 65, collects on Peter’s $1million life insurance policy and puts it in a professionally-managed account. She also inherits, through the “joint with survivorship” feature of ownership, their jointly-owned bank account ($50,000) and their jointly-owned residence. There are no taxes, since Peter and Mary were married. All agree that Mary has sufficient resources to live comfortably. She even has enough to do some nice things for her grandchildren.
The loss of Peter is an emotional event for Mary, but she determines to carry on. She gets out into the community and begins to meet new people. Happily, her children bring her into their families more and she is able to spend more time with the grandchildren. She is even allowed to drive them to soccer games. Mary defies the odds (she says) and a new man, Ronald, a widower, enters her life. Within two years, they marry and move into a new home. Ronald persuades Mary that it is natural and right for married people to combine their assets, which she does.
Ronald agrees to take care of Mary and Mary agrees to take care of him.
Scenario 1: A few months later, Mary becomes very ill and enters the intensive care unit at the hospital. She has a life-threatening illness. She emerges from the intensive care unit two months later, fully recovered, but owing a $2.5 million health care bill. She has enough healthcare insurance to cover $1.5 million only. The medical center is forced to sue Mary. They obtain a judgment and seize Mary’s investment account of $1 million. Result: Catastrophic health care expenses dashed Peter’s goal of taking care of Mary.
Scenario 2: Mary is driving the grandkids and friends across town to a soccer practice; the kids are acting up, which distracts Mary. Mary is also distracted by talking to her daughter on the cell phone about the kids. Mary does not see the stopped pickup truck ahead, sitting partially on the road and partially off the road. She slams into the truck at 25 mph. The truck contains 4 migrant construction workers and the driver. The four migrant workers say they are injured, complaining of permanent neck and back pain. They sue for a combined total of $10 million. With a sympathetic jury, and knowledge of Mary’s insurance money, and her home, they are awarded $5 million by a jury. Mary has auto insurance of $1 million, and umbrella liability insurance of another $1million. The plaintiffs’ lawyer collects on the remaining amount of the judgment by seizing Mary’s investment account. Result: Creditors of Mary dashed Peter’s goal of taking care of Mary.
Scenario 3: Mary dies before Ronald, and Ronald inherits by survivorship the investment account and the home. Peter and Mary’s children receive only a small IRA and a few family mementos which Ronald gives them. Mary’s remarriage to Ronald dashed Peter’s goal of passing all remaining wealth to the children. Result: Mary’s legacy to her children is “we were disinherited.”
Scenario 4: Mary’s will provides that at her death all of her wealth will pass to her children. Mary is survived by her three children. Her son, Peter, Jr., adds his share of the $1million investment account to his own investment account, which is jointly-owned with his wife, Sara. After a 20 year marriage, Peter, Jr., and Sara undergo a painful divorce. Sara demands, and gets, half of the joint investment account. Result: Divorce claims dashed Peter’s goal of passing his and Mary’s wealth to his children and keeping it in the family.
Scenario 5: Mary and Peter’s youngest child, Heather, has been a rebel all her life. She is not married and has a drug problem. She lives with different men at different times. She has undergone bankruptcy once. Mary’s will gives an equal share of Mary’s estate to Heather. Heather quickly dissipates her inheritance on indulgent consumption. Result: Peter and Mary’s values did not attach to the transfer of wealth to Heather.
Under any one - or all - of the scenarios, Peter and Mary’s planning goals were frustrated! In fact, it was outright ownership of the wealth that caused the negative results in all five scenarios.
Had Peter and Mary passed their wealth by trusts, all of the bad results could have been avoided, without denying the intended recipient the use of the wealth exactly as Peter and Mary desired.
A trust protects wealth because a trust separates the use of wealth from the ownership of wealth. Trusts can confer the five personal protections even though the beneficiary can be named trustee of his or her own trust! A trust can be so liberal as to mimic outright ownership without actually conferring ownership. The key to providing the five personal protections is to deny ownership of family wealth, but not deny proper use of the wealth.
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Nathaniel E. Clement, J.D.
1709 Legion Rd., Ste 214, Chapel Hill, N.C. 27517
www.planwealth.com