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Being a high-net-worth individual makes you vulnerable just by the simple fact of your net worth. However, the legal mistakes that you make can lead to financial losses and damages. That is why it is important to know the most common mistakes and how to avoid them. Here is a look at the most common legal mistakes and how you can avoid them.
1. Improperly Titling Your Assets
The Mistake:
One of the biggest oversights of high-net-worth individuals is failing to recognize the need to title assets properly. If your assets are held in your name rather than in trusts or partnerships, this can lead to a lack of legal protection, probate, or over-taxation.
How you can avoid it:
This can be easily avoidable by consulting with an attorney to determine the proper structure for certain assets. This includes considering revocable trusts and family LLCs). Assets such as businesses and real estate should also be properly titled to align with your estate plan.
2. Ignoring Asset Protection
The mistake:
One of the most common legal mistakes for high-net-worth individuals is not protecting your assets correctly. For someone with a lot of financial worth, you are immediately the target of lawsuits, creditors, and other legal attacks. If these attacks are successful, it can result in huge financial losses.
How you can avoid it:
Obviously, you can avoid this by using asset protection trusts from either domestic or offshore companies. This will include structuring your businesses and finances using LPs, LLCs, or detached corporations so that you can separate your business from personal liabilities. It is also good sense to carry liability insurance for extra coverage.
3. Overlooking Tax Efficiency
The Mistake:
It may sound like a little thing, but overlooking your tax efficiency can lead to substantial losses. Most high-net-worth individuals overlook opportunities to minimize income tax, capital gains tax, and estate taxes. And while this can be minimal, the fees and penalties can pile up and add to a significant amount at the end of the year.
How you can avoid it:
You can easily avoid this mistake by using tax-advantaged accounts such as retirement accounts, donor-advised funds, and legal exchanges. You can also work with tax professionals to utilize international tax strategies if you have assets abroad. Certain charitable giving strategies can also be employed as leverage.
4. Not Having a Succession Plan for a Business
The Mistake:
It is only human to be complacent and not think about the future while you are developing your business. But there will come a time when your net worth reaches a certain point that you have to think about succession. Failure to do so can lead to business instability and conflicts in your personal and professional life.
How you can avoid it:
One of the best ways to avoid this is to plan out a clear plan of succession ahead of time. This plan must include an outline of the transition for leadership as well as the transfer of ownership. This includes using buy-sell agreements that are defined within the terms of the business should ownership change.
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5. Not Updating your Estate Plan
The mistake:
Most high-net-worth individuals do not update their estate planning, even as there are changes to their assets, their overall wealth, and the dynamics of their relations. This can lead to several problems, including excessive state taxes, legal disputes, and probate issues.
How you can avoid it:
One of the best ways to avoid this is to work with an estate lawyer so that you can draft a will and a trust and establish power of attorney. Once this is established, you can plan to update all of these every three to five years or after major life events such as marriages, divorces, or having children.
6. Failure to have Proper Legal Compliance
The mistake:
Most high-net-worth individuals fail to have proper legal compliance with their taxes, financial disclosure, and laws and regulations. This can lead to audits, fines, and in some cases, even legal action.
How you can avoid it:
This mistake can be easily avoided by working with a lawyer to ensure that you comply with all regulatory bodies, including the SEC and the IRS. You should also have accurate financial records and a report of any and all foreign assets if it is required under law.
High-net-worth individuals cannot wait to make these mistakes because it can be costly. They must have a proactive approach and plan accordingly. This means working with a legal team that knows their way around asset protection, estate planning, and tax preparation so you can avoid these costly mistakes.
