After months of worrying about the “fiscal cliff,” financial advisors are again focusing on risk assessment. Risk assessment involves a series of steps.
The first one is to identify the assets that are under control, and therefore at risk in an individual's estate or in a corporate entity controlled by an individual. Next, the financial planner needs to evaluate the extent of risk and the many different attributes to the individual risks involved. The third step is to determine the client's needs followed by a fourth step of defining the client's desires beyond his or her basic needs. The fifth step is to determine strategies that are available to assist the client in accomplishing their risk management and asset protection objectives. The sixth and final step is the development and implementation of the plan.
Often it will take a team of advisors to put together the proper risk assessment paradigm to be used in formulating the asset protection plan. Several techniques including gifting, multiple ownership arrangements (corporations or limited liability entities), marital or civil union agreements, domestic trusts (both revocable and irrevocable), federal and state exemption plans, debt shields, off shore entities, and insurance products have their place in a well developed plan. Each of these tools has its own set of risk management advantages or disadvantages.
An advisor begins by having a complete understanding of a client's assets, both personal and business, the risks involved or the threshold of risk that the client is willing to take, the client's needs and desires, and finally the tools and the team that are appropriate to accomplish the goals. Failure to do risk management planning can, with a simple car accident, customer bankruptcy, or other tragedy, wipe out both the client's business and personal assets. In today's society it is happening too often simply because a business owner has not sat down with their advisor and performed an analysis of what assets are at risk in what situations. This analysis is an item everyone should add to their 2013 to-do list.
- Steven Sorenson is an attorney at Milwaukee-based Davis & Kuelthau, S.C.
