GOAL! The Financial Physician's Ultimate Survival Guide for the Professional Athlete
attorney that he/she has millions of dollars in legally “protected” assets; and, if sued, the attorney will not be able to reach any of those assets.
Legal Asset Protection
Correctly set up, asset protection plans are ones that use existing laws and are 100% legal in the eyes of the U.S. Government (and foreign governments if offshore planning is needed). It might sound obvious to the reader that an asset protection plan needs to be legal, but as you will find if you search the country for information on asset protection planning, some of the solutions are what we would call a bit edgy, or based not in law but in the absence of law.
Unlike a lot of issues dealt with in estate planning, investment planning, and income tax reduction planning, proper asset protection is a fairly black-and-white legal issue. There are certain ways to put an asset protection plan together, and when an advisor is recommending something you cannot look up (or your local attorney cannot look up), chances are there is something not on the up-and-up with the recommended plan.
Reasonable minds might differ when it comes to determining what the best asset protection plan is; but reasonable minds of asset protection attorneys should not differ when it comes to determining if the asset protection plan options are, in fact, legal.
Keys to Asset Protection Planning
Do not wait. Due to the busy professional and personal lives of most clients, it is not easy to find several hours to sit down with a qualified attorney to put together an asset protection plan. If, after reading this section of the book, you believe you need help with an asset protection plan, have your assistant, agent, or trusted family member chalk off an hour on your calendar so you can focus, and call someone who can help you get the ball rolling with your asset protection plan.
Keep an open mind. The best asset protection plan for any client completely removes all the assets from the name of the client. The worst asset protection plan has all assets held individually by the client. A good asset protection plan is somewhere in between, and you need to work with your asset protection attorney to find a happy medium between the two.
Do not wait. Really. This is short list but “do not wait” is so vitally important that I put it in here twice. If, when reading this book, you know you need help, don’t wait. Implementing a plan after you know of a potential lawsuit will do you little good to protect against that impending claim. Hindsight is 20-20; and you do not want to look in the mirror after procrastinating for months only to say to yourself, “I told you so.” There is little consolation for knowing you should have done something, and because you didn’t, it put millions of dollars-worth of your family assets at risk.
Existing Laws Help Protect Your Assets
Homestead Exemption. They say a man’s home is his castle, but is that really true? Most states provide some sort of creditor exemption for a personal residence. Each state has different rules and limits for what that exemption is, and you should check with your local advisor, or call one of the authors, to determine just how much the homestead exemption is in your state.
The homestead exemption came from public policy concerns to protect the family. The theory is fairly simple⎯the legislators wanted to protect some portion (in some states it is unlimited) of the family residence so families (even those riddled with debt and hounded by creditors) have a safe haven.
Interest protected. The homestead exemption is a statutory right to protect “homestead property.” This is typically the real estate owned by a person as his/her personal residence. Again, each state varies on their definition so be sure to check with your local advisor to make sure the piece of property you are concerned about is covered.
Homestead exemption value. The amount of homestead exemption in each state varies widely. States such as Rhode Island, Delaware, New Jersey, Pennsylvania, and the District of Columbia have no homestead exemptions. Texas and Florida, and a few others, have unlimited homestead exemptions; however have some limits under the new bankruptcy laws.
Some states have a different amount for married couples, some vary the amount by the number of dependent children an individual or couple has; some states raise the exemption if someone incurs significant hospital or medical debts, and some increase the exemption in the case of bankruptcy.
We would say a general number for states that do not have an unlimited exemption, and those that have no exemption, is between $5,000 and $50,000 (depending on if you are married or single).
Debt exclusions. Certain debts in all states are excluded from being covered by the homestead exemption. Almost all states exempt out consensual liens, mechanic liens, and property taxes from being covered by the homestead exemption. Many states are now adding to the list of exemptions debts for child support or spousal support. The IRS is also a creditor that does not fall under the homestead exemption. So, if you owe a significant amount of taxes you cannot pay to the IRS, they can take your home notwithstanding the state-allotted homestead exemption.
Practical example of how the homestead exemption would work if sued. Assume an athlete is sued for negligence and a jury verdict comes back for $1,000,000 over any insurance coverage the may be available. Further, assume that the athlete is single and has a home worth $1,000,000 with $500,000 in equity.
If the athlete lived in a state with an unlimited homestead exemption, the creditor, through the collection process, could not force a sale of the $1,000,000 home to satisfy the judgment.
If the athlete lived in a state with NO homestead exemption, the creditor, through the collection process, could potentially force a sale of the $1,000,000 home to satisfy the judgment.
If the athlete lived in a state with a $50,000 homestead exemption, the creditor, through the collection process, could potentially force a sale of the $1,000,000 home to satisfy the judgment. In this example, the creditor could receive all the proceeds from the sale of the house above $50,000. That first $50,000 is the exempted amount and stays with the athlete.
Having a homestead exemption in most states does very little good for a high-end client with the potential for million-dollar creditors. States with an unlimited exemption are the exception.
If you would like to know what the laws are with your state’s homestead exemption, please see a local attorney or feel free to give one of the authors a call. We would be happy to give you the specifics of your state.
Life Insurance and Annuities
All assets are not created equal. This is proved by the fact that life insurance and annuities in many states are, by state law, specifically protected from creditors.
Like many laws, the laws protecting life insurance and annuities are rooted in public policy. The legislators in some states believe a life insurance and/or annuity benefit is essential for citizens and/or their families to maintain at least a minimum level of financial well-being and, most importantly, from becoming wards of the state.
The state’s interest to avoid paying for the indigent is tempered by a creditor’s right to collect a legal debt; but as you can understand from the government’s point of view, it is always better for someone to support themselves than for the government to dig deep into their pockets to support even more needy citizens.
State laws. Like the homestead exemption, state laws vary widely when it comes to protecting life insurance. Some states, Florida and Texas, give an unlimited exemption to life insurance policies that have cash value in them, and some states give none. South Carolina, for example, provides a limited protection for cash value in the amount of $4,000.
The death benefit in almost all jurisdictions is exempt from creditors who would be left to sue the estate of the deceased debtor. Hawaii specifically exempts the death benefit and the cash surrender value of policies provided that the policy is payable to a spouse