The Most Important Parts of Estate Planning Can’t Get Legislated Away

Asset Protection Philosophy 101

The Most Important Parts of Estate Planning Can’t Get Legislated Away

Matthew T. McClintock, JD, Vice President, Education, WealthCounsel
There is always a media swarm around the death of a celebrity, especially when they’re young, active in their careers, beloved, and tragic. The death of actor Philip Seymour Hoffman in early February is no exception. Hoffman was an incredibly talented actor who appeared to be in the prime of his career. But that career was cut short by a history of depression and substance abuse. His long-time partner found him dead in their Manhattan apartment after Hoffman apparently overdosed on heroin, cocaine, amphetamines, and other drugs.

Most often, articles about the estate plans of dead celebrities focus on the legal challenges they raise or the amount of estate tax that could have otherwise been avoided. Many of the articles about Hoffman’s death — and Sopranos star James Gandolfini before him — bear this out. But recently an article surfaced about Philip Seymour Hoffman’s estate plan that caught my eye. Published in JD Supra’s Business Advisor, author Anne Bjerken noted that Hoffman’s estate plan specifically included instructions for the guardian of his minor son. The instructions serve as a reminder that some of the most important things to clients have NOTHING to do with financial or tax-related matters. (For many sophisticated planners, this borders on heresy!)

“ it is my strong desire…that my son, COOPER HOFFMAN, be raised and reside in or near the borough of Manhattan in the State of New York, or Chicago, Illinois, or San Francisco, California, and if my guardian cannot reside in those cities, then it is my strong desire, and not direction, that my son, COOPER HOFFMAN, visit these cities at least twice per year throughout such guardianship. The purpose of this request is so that my son will be exposed to the culture, arts, and architecture that such cities offer.” [1]

This is a reminder to us all that many clients — and probably the ones we enjoy the most — care about their personal “values” legacy. What do I want my kids/grandkids to know was important to me? What kind of humans should they become? How can my estate plan help to influence that? Hoffman felt strongly enough about providing cultural exposure for his kids that he had it written into his will.

Values statements take many forms, from separate “letters of wishes” to firmer instructions to guardians and fiduciaries within the terms of a will or trust. Most are written as precatory guidelines — carrying influence, but no real legal effect — while others serve as incentive distribution provisions (or limitations on distributions) that are binding on the fiduciary.

These are the really important things that don’t get legislated away and that have little to do with the size of one’s estate, the federal Applicable Exclusion Amount, the rate of tax, or any other sterile, soulless legal or tax provision.

While parents and forebears should take the time to imbue their values on younger generations in real time during their lives, the estate plan is an important place to reinforce those values. Through the planning process we can capture those best elements of our clients’ passions and help to articulate those for the loved ones they leave behind.

We can’t know how well Philip Seymour Hoffman communicated his values to his kids. We do know that his opportunity to do so was cut short by a tragic death. The broader message to me is that even for the wealthiest Americans, often the personal, non-financial part of the estate plan is as important as — if not more important than — the financial and tax-driven side.

For some sample provisions to get your creative juices flowing, check out some of the examples various members have shared in the Knowledge Base over the years. (https://www.wealthcounsel.com/Knowledge-Base/)

Asset Protection Philosophy 101

Steven J. Oshins, Esq., AEP (Distinguished)

Asset protection has become a necessary part of every estate planner’s practice. As we see case law develop, it seems that every time a new decision is issued there are numerous blogs and comments made about the case at conferences, whether positive or negative. The litigators generally claim that the new case spells the end of the technique that was used and failed to work in this particular case. They will often claim that a technique “doesn’t work” based on one bad case. The asset protection planners generally claim that “bad facts make bad law.” So who is right?

The Goal
What is the goal when attempting to protect your assets? Isn’t the goal simply to structure your assets in such a way that they are less desirable to potential creditors?  This is Asset Protection Philosophy 101. The asset protection structure should not be judged solely based on whether there is a similar structure that did not work when tested in the court system. Each situation stands on its own. No two fact patterns are exactly the same, no two parties to a lawsuit have exactly the same levels of fear and desire for compromise, and no two attorneys will approach the dispute in exactly the same way.

The goal isn’t necessarily to take a case through the court system and convince a judge to rule in your favor. The goal is to walk away with some or most of your assets intact.  A settlement for substantially less than what could have been lost should be considered a victory. Unfortunately, case law generally glorifies the losing cases — not the winning cases — because the plaintiff tends to press the matter when the facts are more heavily on the plaintiff’s side. Therefore, we tend to see the bad results (from the debtor’s perspective) in the case law, but the good results (from the debtor’s perspective) very often go unreported because the disputes were settled. Those who practice in this area, however, have seen numerous clients settle matters, in large part because of the asset protection structure that was in place — which helped the creditor see the benefits in settling and the uphill battle that may exist without settlement.

Playing the Game
Asset protection is a game of probabilities. Every legitimate wall that is placed around the assets should move the settlement number more in favor of the debtor.  And every bad case that comes down the pike should move the settlement number more in favor of the creditor. Uncertainty over collectability causes most disputes to settle long before they reach the trial level. The creditor must assess the probability that he will be able to collect the debt and the expenses that will be involved in trying to collect, and then make a rational decision about how far to press the dispute and whether to attempt to settle and the likely settlement amount.

Asset Protection Philosophy 101
Assuming there is no creditor on the horizon, or that any current creditor is excluded from the asset protection structure and that it is only set up to protect from future creditors, if you were the client:

• Would you proceed with an asset protection structure that has a 99% probability of protecting your assets? [Absolutely.]
• Would you proceed with an asset protection structure that has a 90% probability of protecting your assets? [Very highly likely.]
• Would you proceed with an asset protection structure that has a 75% probability of protecting your assets? [Probably, but you would hope to find a better alternative.]
• Would you proceed with an asset protection structure that has a 50% probability of protecting your assets? [Maybe, but you would likely look for other alternatives.]

It is important to remember that nothing exists that assures a 100% probability of success.  If hundreds of debtors are able to successfully use a particular asset protection structure to induce creditors to settle disputes and therefore avoid going all the way through the court process, would you avoid using that strategy if one bad case comes down?  If two bad cases come down? If three bad cases come down? Each advisor and each client will ask themselves whether the cost and complexity are worth the degree and probability of protection obtained using the particular structure.

Summary
Asset protection planning is about putting the client in a strong negotiating position by using accepted, legitimate techniques so that the client will ultimately settle the dispute for less than the amount that the client otherwise may have lost had the structure not been in place. It is not solely about case law. The asset protection scorecard not only includes case law, but also includes favorable settlements.

To the extent that the asset protection structure has moved the settlement number in favor of the debtor, the asset protection planner has done a good job. Asset Protection Philosophy 101 is to structure the client’s assets so that, if the client is ever sued, the client will keep some or most of the assets on account of the structure being in place well in advance of the creditor issue.