When you’ve come into sudden wealth, a good attorney is worth his weight in gold. The problem is knowing what type of attorney you need. There are thousands of specialties within the legal profession, from criminal to copyright to bankruptcy to divorce to real estate and everything in between. Think of law as being similar to the medical field where “doctor” is a generic term used for anyone who has gone to medical school. You wouldn’t go to a dermatologist for an appendectomy and you wouldn’t want to hire a business attorney for tax matters.
The following are the types of attorneys you may need:
Depending on the type of sudden wealth you receive, you may need the specialized knowledge of a tax attorney on your team. For large sums coming from lawsuit judgments/settlements, business sales, stock options, sports/entertainment contracts, and to a lesser extent, the lottery, a tax attorney will be invaluable. (For related reading from this author, see: Lottery Winnings: Take the Lump Sum or Annuity?)
The tax attorney will play a highly specialized role. She will ensure you are taking advantage of all the tax minimization strategies possible. Even if you have a CPA on your team, which you should and we’ll discuss below, you will still need a tax attorney. Why? A CPA has a broad knowledge of taxes whereas the tax attorney understands the tax laws and may be highly specialized in just one area of tax law. For example, if you are expecting a large lawsuit settlement, there are tax attorneys who focus exclusively on the tax issues regarding damages. If you are expecting hundreds of thousands or millions of dollars, you will need a tax attorney to cut your tax bill as low as legally possible.
The tax attorney is a hired gun who works with you for a limited amount of time, usually a few weeks to a few months, in an effort to minimize the amount of tax you pay the year you receive the sudden wealth. It pays to bring the tax attorney in as early as possible, ideally even before you receive the money, because they can advise you on how to structure the business sale, judgment, etc., in the best tax manner possible. After you pay taxes that first year, their job is usually done and the CPA calculates your taxes thereafter.
Estate attorneys, also called trust and estate attorneys, specialize in minimizing estate/gift taxes and drafting documents that address the distribution of your assets before and after death. Stage 2 is usually a good time to bring in the estate attorney. Unlike the tax attorney, whom you will probably never need to speak to after their initial work, you will need to continue your relationship with your estate attorney. (For related reading, see: Do You Need an Estate Planning Lawyer?)
Asset Protection Attorney
Money is a magnet for lawsuits. The more money you have, the greater the chance someone (and their attorney) will see you as a target. There are legal ways to shield your assets and to protect yourself against lawsuits, and this is where the knowledge of an asset protection attorney is needed. Some asset protection attorneys focus on this area exclusively, but you’ll often see estate attorneys who provide asset protection to clients. If you find the right estate attorney, they can do both effectively. If your estate attorney is less qualified in asset protection, this is an area where it can make sense to hire a specialist.
General Business Attorney
A general business attorney may have their hands in different areas of law, but they can be a valuable member of your team, if only to help you find more specialized attorneys. I've seen clients run into problems when they hire a general business attorney to do everything—reduce taxes, draft trusts, set up LLCs, etc. I’ve had clients come to me after they had the same attorney help them with a divorce, draft their estate plan and create a buy-sell agreement for their company. It doesn’t matter how smart or seemingly qualified an attorney appears, one person cannot effectively practice three areas of law. Avoid this by specializing. (For related reading, see: How to Pick the Right Lawyer.)
Other Things to Consider When Hiring an Attorney
There are a few things you should consider when hiring an attorney. The first was already discussed. Make sure you hire a specialist in the area(s) you need rather than a one-size-fits-all legal generalist. Specialists will cost more, and you may have to hire more than one, but they should pay for themselves many times over.
Second, does it make more sense to hire an attorney from a big firm or a small firm? I think the same rule applies to music. You don’t download songs because Universal Music Group is the record label; you download the artist you like. Law firms are a collection of attorneys. Don’t hire the firm, hire the attorney. Some of the very best attorneys in the country have firms with fewer than 10 employees.
Cost is another issue to consider. Many sudden wealth recipients are aghast at the retainers and fees their advisory team charges. It is not at all uncommon for the first year’s advisory fees to exceed the annual income of the client before their sudden wealth. There are two ways to pay less in fees. You can hire an advisory team that is sub-par or you can choose to go it alone and come up with your own tax, legal and financial strategies. Obviously, these are both terrible options. This doesn’t mean you should pay more than what is fair, and it doesn’t mean because someone charges more they are better. (For more from this author, see: The 6 Biggest Sudden Wealth Mistakes.)
Lastly, each state regulates the attorneys who are licensed to practice law in their state. An attorney only licensed in California cannot provide legal advice if you live in Missouri, so it’s important that your attorney is licensed to practice law in your state.
It’s important to do your research and make an informed decision when you pick your attorney. When it comes to protecting your assets, it’s crucial to choose an attorney worth his weight in gold!
(For more from this author, see: How Your Body Responds to a Financial Windfall.)
This article is adapted from the book, "The Sudden Wealth Solution: 12 Principles to Transform Sudden Wealth Into Lasting Wealth."
Investment advisory services are offered by Financial Management Network, Inc.(“FMN”) and Pacifica Wealth Advisors, Inc. (“PWA”). Securities offered through FMN Capital Corporation, (“FMNCC”), member FINRA & SIPC. FMN Capital Corporation is affiliated with Financial Management Network, Inc. Securities are not FDIC-Insured, are not bank-guaranteed, may lose value. Information herein is taken from sources deemed reliable and neither FMN, PWA, nor FMNCC are responsible for any errors that might occur. Neither asset allocation nor diversification guarantee a profit or protect against a loss in a declining market. They are methods used to help manage investment risk. FMN, PWA, and FMN Capital Corp. do not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance.