Silicon Valley’s Dirty Little Secret

Dear Clients, Colleagues, and Friends,

Silicon Valley has been such a leader in technology for over two decades that it has sported a dizzying number of IPOs and huge stock option payoffs creating enormously wealthy entrepreneurs and its own class of marital problems when their marriages breakup.

As a community property state, California divorce law generally holds that property obtained during a marriage is fair game, while separate property brought into marriage belongs to that person and isn’t part of the community estate when the marriage ends. It sounds simple, but for affluent entrepreneurs living in the boom and bust economy of Silicon Valley tech start-ups, it’s anything but fair.

What happens when you make your fortune at a very young age and then get married and start a family?

Common sense dictates that your pre-marriage fortune would be separate property as long as it was not co-mingled. Unfortunately, family court judges have broad discretion to determine whether a division of community property is fair and equitable based on the facts of each individual case.

Take the case of In Re Marriage of Christopher Ross Larson v. Julia Larson Calhoun. The Washington State trial court awarded the ex-wife of an early Microsoft employee 100% of the couple’s community property worth $139 million, no debt, and an additional $40 million in cash and stocks of separate property. Ex-husband Larson appealed the court’s decision regarding the award of his separate property to no avail. The Court of Appeals upheld the trial court judge’s award of the husband’s portion of his separate estate to “achieve a just result,” citing the wife’s intangible marital contributions and the desire to ensure her financial security because the community property consisted mainly of illiquid assets and no cash.

This frightening case proves that a family court judge’s broad discretion can result in the invasion and award of separate, pre-marital property in divorce proceedings.

With this in mind, how can tech entrepreneurs protect considerable pre- marital wealth from divorcing spouses? Prenuptial agreements are difficult to negotiate and can be defeated by a skilled litigator on claims of lack of “full disclosure.” And as seen above, one cannot rely on the fact that property is defined as “separate.”

Former Chief Justice of the West Virginia Supreme Court Richard Neely has recently litigated these types of cases and believes the answer lies in well-constructed foreign separate property trusts created prior to marriage. There are several benefits to such trusts. First, there is no need to negotiate difficult prenuptial agreements with a potential spouse because the trust would already be in place. This could keep the romance and mystery of getting married intact and prevent contentious legal negotiations from straining relationships before marriage even begins. Next, inquiring spouses will learn that the trust is in place to protect the “family” from lawsuits by greedy plaintiffs’ lawyers, which is in fact one added benefit of such trusts. Lastly, these trusts protect the settlor against overreaching courts and vindictive ex-spouses attempting to take them to the cleaners by invading their separate property in divorce proceedings. It’s a win-win-win solution.

If you have amassed considerable wealth, whether prior to marriage or have wealth following a divorce, don’t let your faith in the courts or your reliance on the “separate property” doctrine give a future ex-spouse the opportunity to take you to the cleaners. Our team of specialists are available to help you design the right “firewalls” to protect what you own. You have nothing to lose but half of your assets.

See No Evil Hear No Evil Speak No Evil

Dear Clients, Colleagues, and Friends,

The weather was gorgeous, the food was delicious, and the conversation had been informative. While the topic was not anyone’s favorite to engage in, Rich and Alice had just updated their two children, ages 23 and 27, on recent changes they had made to their estate planning documents. While the four were waiting for dessert, Rich asked his children, Chris and Chelsea, if they had done any planning for themselves.

Chris looked up from his phone and gave Chelsea a side glance before asking his parents why in the world they would need estate planning documents. He and his sister are “Millennials” after all – neither is married or has children, one lives at home, the other rents an apartment, and their savings, while growing, do not yet amount to much. Rich and Alice had anticipated the rebuttal and asked their kids an uncomfortable question – if either child were in an accident and became incapacitated, did they know who would be making medical and financial decisions on their behalf, and if the person making those decisions had interests in alignment with that of their own? That got the kids thinking about the subject, which they had never thought of before – and the answer for both was no.

Millennials have many worries on their mind ranging from the climate, the state of world affairs, how to pay off student loans, which concert festival to attend this year… the list goes on. Many of their worries are seemingly out of their control to solve. But one issue they can easily control is who will make their medical decisions and handle their financial affairs should they become incapacitated, and they can outline what those decisions should look like before they are unable to make them autonomously. Two simple documents – an Advance Healthcare Directive and a Durable Power of Attorney – are all that are needed to appoint an agent, or co-agents, and to explain one’s wishes, easing decisions of the appointed agent in what is bound to be a very emotional and difficult time.

We urge parents and grandparents to engage their adult children and grandchildren in a conversation about putting an Advance Healthcare Directive and Durable Power of Attorney in place. Both documents may be updated over the course of one’s lifetime, but the earlier they are adopted, the sooner everyone can have peace of mind.

To discuss these, or other estate planning needs, please contact our office.

The Loaded Question

“Dad, are we rich?”

Ethan’s father drops his fork mid-bite. “That’s an unusual question,” Roger carefully responds.

Ethan, who just turned 16 and still fears his father’s disapproval, hesitates before continuing. He knows there is an unspoken rule in his family to never speak about money. Despite his nerves he plows on determined to get to the bottom of the wild claims his classmates made.

“So, the guys said I didn’t need to get a summer job and I was like, ‘yeah, right,’ and then they asked if I had ever Googled you – I mean us – as a family. I hadn’t so I did.”

“Ah,” responds Roger, “You want to know if it’s true.”

Ethan shrugs, embarrassed. “I guess,” he mumbles, eyes locked onto his plate.

Roger sets down his fork, gently folds his large hands and looks Ethan in the eyes. “Yes, it’s true, son. But that changes nothing. You are to work, you are to study hard and you are to go to college. You are to find a career – any career – and you are to live a productive life. An inheritance changes nothing. I know from experience, understand?”

Ethan nods.

“Now that this nonsense is cleared up, we will never speak of it again,” and true to Roger’s word, he didn’t.

The Fallout

Unfortunately, just eleven short years later, Roger and his newest wife die in an airplane accident on their honeymoon, and Ethan suddenly inherits the responsibility of his late father’s estate.

What Ethan quickly learns is that an inheritance does, in fact, change everything.

Ill-prepared, Ethan must suddenly shoulder a nearly half-billion-dollar empire consisting of several closely held businesses, a myriad of trust funds for his multiple half-siblings, step-siblings and cousins, and properties around the world about which he wasn’t even aware. He fails to fend off vultures purporting to give advice and guidance under the guise of feigned concern, which he realizes too late are really efforts at grabbing as much cash from his family as possible. His family’s businesses slide downhill as key personnel jump ship without the consistent vision of a well-
prepared leader. And, because money is a magnifier of all things, family infighting leads to mistrust, lack of communication and eventual lawsuits.

Feeling that his father threw him like a screaming lobster into a pot of boiling water, Ethan drops out of veterinary school to try to manage the estate. He’s not dumb, so he should be able to learn on the go. But as lawsuits mount and his family falls apart, Ethan becomes clinically depressed. Furious at being forced to change his life for this unexpected, stressful burden, Ethan blows through money like water, supporting a lavish lifestyle with several marriages and overly-entitled children. In defiance of everything his father wished, Ethan, who knows nothing about his family’s history, lets the estate’s businesses fail and real estate investments depreciate. At this rate, the next generation will be lucky to inherit anything.

Think something like this can’t happen to you or your loved ones? Think again.

Wealth Transfer Today

The United States is currently experiencing the largest wealth transfer in history. According to the Boston College Center for Retirement Research, two-thirds of baby boomers will inherit family money over their lifetime to the collective tune of $7.6 trillion, and over the next 46 years, the Boston College Center on Wealth and Philanthropy (CWP) estimates that over $59 trillion will change hands. Yes, that’s trillion with a “T.”

So, affluent families should expect to inherit huge estates that will keep generations rolling in it for years to come, right?

Wrong. Worldwide, including the United States, 70% of all wealth transitions fail. Used in this context, “wealth transition failure” means that financial “reversals” remove the estate’s assets – involuntarily – from the control of the beneficiaries. These reversals can occur due to poor financial or legal planning, taxes, economic downturns, litigation, mismanagement, inattention, incompetence, family feuding and simple financial loss. Furthermore, 70% of heir families lose family cohesion after receiving an inheritance, and only one-third of family businesses successfully make the transition from one generation to the next. This consistent failure rate gives rise to the phrase “shirtsleeves to shirtsleeves in three generations.”

Ethan’s story isn’t so unique after all.

Researchers at the family-wealth consultancy, The Williams Group in San Clemente, California, conducted a study of over 3,250 affluent families and asked why the 70% failure rate was so consistent around the world. Their results are eye-opening.

The reasons for wealth transfer failure most often cited by lawyers and financial planners, high taxes and poor investments, surprisingly only account for 15% of all failures. In fact, the single biggest factor of wealth transfer failure in 60% of all cases is poor trust and communication among family members. Additionally, the failure of parents to prepare their heirs for their wealth resulted in 25% of wealth transfer failures. Doing the math, a full 85% of wealth transfer failures are due to family dynamics rather than poor legal and financial planning.

So, it’s not enough to prepare your assets for your heirs….You must also prepare your heirs for your assets.

Talking about wealth transfer means talking about death and money, which are admittedly two of the most highly sensitive and uncomfortable subjects for families. But not talking about it risks your entire estate. Don’t let Ethan’s story become your own.

While our law firm has always prepared our client’s assets for the heirs, we now have a comprehensive program to prepare the heirs for the assets. The program is called the Heir Estate Education Program. We invite you to contact our office to learn more about the program. Let us help you start the conversation to preserve your wealth, and your family unity, for generations to come.

For more information about any of the information discussed in this Client Alert, or any other income or estate tax planning or asset protection planning assistance, please contact the Jeffrey M. Verdon Law Group at 949.333.8150.

Biblical Trial: The People vs. Moses

The Destruction of the Tablets of the Ten Commandments

Guilty? Not Guilty? You Decide

Dear Clients, Colleagues, and Friends,

Each year, the University Synagogue located in Irvine, CA, presents a hugely entertaining and informative Biblical Trial Program. Two of the legal profession’s most esteemed law professors, Erwin Chemerinsky, Dean of the UCI School of Law, and Prof. Laurie Levinson, present their legal arguments involving iconic events from the Bible.

Details for attending this very special and entertaining event on March 13, 2016, from 1 p.m. to 3:30 p.m. can be obtained on the link below.

This year’s trial: The People vs. Moses – The Destruction of the Tablets of the Ten Commandments. Moses, the man who freed the Israelites from slavery, just can’t catch a break! Several years ago at this same venue, he was on trial for murder. Now he is accused of theft by embezzlement and vandalism for the destruction of the tablets of the Ten Commandments. Was it an issue of anger management or something more insidious? Come see for yourself.

This intellectually stimulating presentation hits upon timeless and timely moral, ethical, and philosophical themes. After the submission of evidence, there will be a lively panel discussion.

For the People: Loyola Law School Professor Laurie Levenson
For the Defense: UCI Law School Dean Erwin Chemerinsky
Presiding: Hon. Richard Fybel, Chief Judge 4th District CA Court of Appeal

The program has been approved for 2.50 hours of general credit by the State Bar of California.

To access the flyer outlining the full program, click here.