Protecting Your Assets
Kroll, Arthur H., Chief Executive (U.S.)
Your life is complicated enough. Here are some ways to put your mind at ease.
In "Divorce in the Workplace" (June 2006), we described Jack Welch's woes and Gary Wendt's folly in their divorce situations, coterminous affairs and financial settlements. We strongly recommended a prenuptial agreement in order to protect the depletion of the executives' assets. Many executives marry long before they accumulate wealth and do not have such an agreement. Obtaining a postnuptial agreement is very difficult both financially and emotionally. The article generated a number of questions concerning how to protect your assets, which this article will discuss.
Prenuptial agreements remain the most effective tool in protecting one's assets, and the Paul McCartney-Heather Mills divorce will accentuate that point. The singer was offered a prenuptial by his wife, which he declined. He is reported to have $15 billion in assets, and under British law as opposed to U.S. law, his wife is entitled to exactly one-half or $7.5 billion.
As described in the Wendt decision, the judge applying U.S. law has pointed out that equitable distribution does not mean equal, but he still awarded $20 million to Wendt's wife in hard assets.
Protecting your assets is required not only because of divorce but under the Sarbanes-Oxley Act, civil awards against CEOs can be quite large. Here's are some ways to protect your assets:
* Personal liability rider, boring but necessary. Personal injury claims both around the house and in automobile accidents are covered by standard insurance, but usually the amount is minimal, such as $100,000. I advise CEOs and other high net worth individuals to obtain personal liability riders of $10 million to $15 million, which are available and will free you from worries.
For example, the CEO of a large utility in Atlanta was also chairman of the Salvation Army. He held a party at his house for board members who were on the deck when it promptly collapsed. Some individuals were paralyzed or severely injured, which led to suits seeking several million dollars in damages. Fortunately, the CEO was covered by the personal liability rider. Clearly, it's a good idea to increase your personal liability insurance and ensure your charitable activities are covered.
* Stuffing retirement plans. Put away as much as you can in your qualified plan because assets in qualified plans under ERISA are not subject to attachment. (Exceptions include the IRS and the spouse, to a limited extent, through a qualified domestic relations order). Take advantage of IRAs and personal savings accounts because under state law they are also exempt. Put your nonqualified plan into an irrevocable trust even though this causes immediate taxation. It is beneficial to the company because it funds its liability and gives it an immediate tax deduction. Sometimes the company will even gross you up for taxes (e.g., Marsh Mac). The trust can be established so that it is exempt from creditors. The bottom line? Stuff your qualified plans and nonqualified plans with as much money as possible.
* Homestead exemption. You should buy that mansion you always coveted. Remember O.J. Simpson, the football player? He got sued civilly for wrongful death and was held liable for millions of dollars many years ago. The plaintiffs have yet to collect a nickel while O.J. lives in his mansion, which under local state law is exempt from attachment by creditors. The new U.S. Bankruptcy Court has limited the exemption so that mansions will not be covered. However, it does not override state laws, most of which provide for the homestead exemption.
* Vacation home. You can buy a vacation home and then strip it of any value. You do this by taking on a 100 percent mortgage with interest-only payments and investing the assets in exempt property such as annuities or insurance.
* Domestic trusts. Alaska and Delaware have passed laws permitting personal trusts to be established, which will be exempt from creditors, and they are being used. …