The Plight Of The Middle-Class Millionaire
At a recent conference, a colleague suggested that the definition of being wealthy is having enough passive income to cover your living expenses. A reasonable interpretation, but, by that definition, few of us are truly wealthy.
Yet many of us have at least some wealth to protect and most don’t take any action to that end.
I see a growing number of what I call “middle-class millionaires.” These people have built some wealth but wouldn’t fit the definition my colleague offered for “being wealthy.” Middle-class millionaires, as I’ve come to think of them, earn a good living, have a nice house, and have saved a fair amount of money presumably for retirement. However, many of them don’t feel that they have enough assets to merit investing in or, more important, that they can afford to invest in setting up some asset protection structure to keep their wealth safe from potential predators.
Who Are The Potential Predators?
One of the biggest potential threats to anyone’s wealth today is a frivolous lawsuit.
A quick search on the internet connects you with all kinds of lawsuits that no sane person would be able to imagine without help. Someone sued Anheuser-Busch when somebody else used a broken beer bottle as a weapon in a bar fight (presumably to the detriment to the guy bringing suit though, alas, I couldn’t find more details). A minister and his wife sued the school that trained the seeing-eye-dog that stepped on the wife’s toe in a Florida shopping mall.
And a 13-year-old was sued by a spectator who was hit by a baseball (presumably that the kid had hit? thrown? failed to catch?) at a game.
What's Wrong With People?
My point here is that, if you have exposed assets, chances are good that you’ll fall victim to a lawsuit at some point in your lifetime. The more assets you have, the bigger a target you become. Note that the beer company was sued in the broken bottle incident, rather than the perpetrator or the bar. Anheuser-Busch has deeper pockets. Same thing with the training school for the seeing-eye-dog versus the owner. Maybe the parents of the 13-year-old have money.
The plaintiffs and their attorneys go after the deepest available pockets. The key, therefore, is to make your pockets, however deep, unavailable. You want to move your money somewhere beyond reach into an offshore structure, for example somewhere the attorneys of any potential plaintiff will recognize as too much work to get at as too difficult to get a judgment against.
Okay, it’s not quite that simple, which is why the middle-class millionaire finds himself in a dilemma. He has enough to be a target, but he doesn’t think he can afford the high costs of fancy structures to protect what he’s got.
The structures you put in place, whatever form they take, don’t have to be fancy. The simpler the better. The most important thing is that, whatever you do, it’s compliant for U.S. tax purposes. That’s why many offshore attorneys can get away with charging US$100,000 for a trust. A more complicated trust may indeed require enough time and thought to warrant a price tag that big. However, most often, boilerplate-type documents can suffice, meaning the cost shouldn’t be anywhere near that much.
What Should It Cost?
A standard trust in an offshore jurisdiction should cost you maybe US$1,000 to US$1,500 if you work directly with the offshore trust company. The risk going that route is compliance. A trust you create directly with an offshore provider will be compliant with local law, but it won’t necessarily be compliant with U.S. law. In addition, that document may not include everything you want or need in a trust, because some pieces may fall outside that jurisdiction. This is where a U.S. offshore attorney comes in.
Depending on the complexity and the attorney, you can get a quality offshore trust document put together for US$15,000 to US$20,000. A far cry from the US$100k some charge but still a big enough number to make even someone with a couple of million in net worth question whether or not he really needs a structure. This is how so many middle-class millionaires end up in asset-protection limbo.
The risk of not doing anything is getting hit with a frivolous lawsuit or, worse, a non-frivolous one. You can make most frivolous lawsuits go away for US$50,000. That’s the amount that insurance companies have determined to be the break-even threshold for fighting a lawsuit. As a result, this is a common number put forth by attorneys. A non-frivolous lawsuit can chew through your wealth quickly and cost you much more than US$50,000.
Let’s try to put this into perspective. Say you have US$2 million in net worth. The US$20,000 it might cost you to form a trust to protect that would amount to 1% of your assets. You’d spend 1% of the value of your house to keep it maintained wouldn’t you? You’d spend 1% of the value of your car to keep it on the road right? Why wouldn’t you spend 1% of your net worth to keep it safe?
Of course, the guy with US$2 to US$5 million in net worth is a potential target for a lawsuit, but he isn’t a target for most asset protection attorneys or financial managers. Most of those guys only want to work with people who have enough wealth to warrant high fees and complicated structures. That leaves our middle-class millionaires out in the cold.