Asset Protection Planning

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Information about Asset Protection Planning

Published on April 7, 2009

Author: karenlynnbrady

Source: slideshare.net

Description

An introduction to the levels of asset protection techniques

Estate & Asset Protection Planning Karen Brady & Associates, P.C. Attorneys at Law © Karen Brady, 2005

Definition of Asset Protection Organizing assets and affairs to minimize against risks of future loss Preventative, not curative (vaccines, not antibiotics)

Organizing assets and affairs to minimize against risks of future loss

Preventative, not curative (vaccines, not antibiotics)

Reasons to Protect Assets Why Build Estate But Not Consider Risks? Potential for Lawsuits Reduce Insurance Coverage Peace of Mind Concentrate on Your Job

Why Build Estate But Not Consider Risks?

Potential for Lawsuits

Reduce Insurance Coverage

Peace of Mind

Concentrate on Your Job

What Asset Protection Is Not Hiding assets, i.e. confidentiality is a plus, but secrecy is not the lynchpin of the plan Taxation avoidance

Hiding assets, i.e. confidentiality is a plus, but secrecy is not the lynchpin of the plan

Taxation avoidance

Title to Assets The Manner of Holding Title to Property Affects a Creditor’s Rights

The Manner of Holding Title to Property Affects a Creditor’s Rights

Community Property Community Property Acquired During Marriage Created by Law or by Agreement Result of an “Onerous Acquisition”, e.g. work

Community Property

Acquired During Marriage

Created by Law or by Agreement

Result of an “Onerous Acquisition”, e.g. work

Separate Property Separate Property Acquired Before Marriage Acquired By Gift or Inheritance

Separate Property

Acquired Before Marriage

Acquired By Gift or Inheritance

Joint Tenancy 100% Co-ownership by More Than One Person “ Last One Left Standing Rule”: Survivor Owns It All!

100% Co-ownership by More Than One Person

Creditor Rights Can Set Aside Fraudulent Transfers Community Creditor/Marital Purpose: All Community Property is Exposed to Community Creditors Separate Creditor: Separate Property is Exposed to Separate Creditor, 1/2 Community Property May Be Exposed to Separate Creditor

Can Set Aside Fraudulent Transfers

Community Creditor/Marital Purpose: All Community Property is Exposed to Community Creditors

Separate Creditor: Separate Property is Exposed to Separate Creditor, 1/2 Community Property May Be Exposed to Separate Creditor

Creditor Rights (cont.) Divorce Court May Have Jurisdiction Over Both Community and Separate Property All Joint Tenancy Property is at Risk of Any Single Joint Tenant’s Creditors!

Divorce Court May Have Jurisdiction Over Both Community and Separate Property

All Joint Tenancy Property is at Risk of Any Single Joint Tenant’s Creditors!

One Threat Creditor Claims

Creditor Claims

Types of Claims Officer/Director Liability (Corp.) Professional Liability Divorce Creditor Lawsuits Liability for Other People’s Debts Partnership Liability Hard to Control Claims Product Liability Environmental Liability

Officer/Director Liability (Corp.)

Professional Liability

Divorce

Creditor Lawsuits

Liability for Other People’s Debts

Partnership Liability

Hard to Control Claims

Product Liability

Environmental Liability

Attempts to Avoid Creditor Claims Methods That Don’t Work Fraudulent Transfers “Hiding” Assets (2005 Bankruptcy Act now requires 3 years of tax returns) “Constitutional” Trusts, “Pure Trusts” and the like

Methods That

Don’t Work

Fraudulent Transfers

“Hiding” Assets (2005 Bankruptcy Act now requires 3 years of tax returns)

“Constitutional” Trusts, “Pure Trusts” and the like

Fraudulent Transfers Intent to Defraud, Hinder or Delay Known or Likely Creditors Intent is Generally Presumed Badges of Fraud such as insolvency, lack of consideration for a transfer, close relationship with transferee, pending or threatened litigation, concealment, deviation from usual practice, transfer of all assets, retaining possession, benefit, or control after transfer

Intent to Defraud, Hinder or Delay Known or Likely Creditors

Intent is Generally Presumed

Badges of Fraud

such as insolvency, lack of consideration for a transfer, close relationship with transferee, pending or threatened litigation, concealment, deviation from usual practice, transfer of all assets, retaining possession, benefit, or control after transfer

Fraudulent Conveyance Pending or present creditors will have a greater presumption of a fraudulent conveyance than future creditors Generally, fraudulent conveyance is NOT our common understanding of fraud. Fraudulent conveyance is remedial, i.e. a conveyance which can be undone only to the point a creditor is hindered. No other damages are usually allowed. However, some states allow for criminal or civil penalties, including for the advisor.

Pending or present creditors will have a greater presumption of a fraudulent conveyance than future creditors

Generally, fraudulent conveyance is NOT our common understanding of fraud. Fraudulent conveyance is remedial, i.e. a conveyance which can be undone only to the point a creditor is hindered. No other damages are usually allowed. However, some states allow for criminal or civil penalties, including for the advisor.

Another Threat Estate Taxes

Estate Taxes

Estate Taxes Changing ownership of assets often also removes them from the estate, offering the additional benefit of reduced estate taxes along with asset protection

Changing ownership of assets often also removes them from the estate, offering the additional benefit of reduced estate taxes along with asset protection

Asset Protection Techniques Methods That Work Save Administrative Fees and Costs Reduce Taxes Provide Multiple Layers of Defense Allow Opportunity for Early Settlement Voluntary Bankruptcy Now Less Attractive as Final Option

Methods That Work

Save Administrative Fees and Costs

Reduce Taxes

Provide Multiple Layers of Defense

Allow Opportunity for Early Settlement

Voluntary Bankruptcy Now Less Attractive as Final Option

First Defender Insurance

Insurance

Strengths and Weaknesses Covers Loss Cash to Settle Duty to Defend Getting Costly May not Qualify Insolvency of Carrier May get Cancelled Coverage Exemptions Hazardous Waste Intentional Acts Punitive Damages Strengths Weaknesses

Covers Loss

Cash to Settle

Duty to Defend

Getting Costly

May not Qualify

Insolvency of Carrier

May get Cancelled

Coverage Exemptions

Hazardous Waste

Intentional Acts

Punitive Damages

First Barrier Corporations Or LLCs

Corporations

Or LLCs

Corporate Features Limited Liability Still Liable for Personal Guarantees May have Income Tax Benefits Pension, Profit Sharing Plans Fringe Benefits, Etc. Must Keep Status Current with State Must Observe Formalities Adopt Bylaws Keep Minutes of Meetings Issue Stock

Limited Liability

Still Liable for Personal Guarantees

May have Income Tax Benefits

Pension, Profit Sharing Plans

Fringe Benefits, Etc.

Must Keep Status Current with State

Must Observe Formalities

Adopt Bylaws

Keep Minutes of Meetings

Issue Stock

LLC Features Limited Liability Like a Corporation Control is Flexible; May Choose Fewer Formalities Can be Taxable Like a Partnership All States Have Them

Limited Liability Like a Corporation

Control is Flexible; May Choose Fewer Formalities

Can be Taxable Like a Partnership

All States Have Them

Second Defender Exempt Property

Exempt Property

Homestead Colorado allows up to $30,000 Other states allow unlimited (e.g. Florida) but new 2005 bankruptcy act requires purchase 1215 days before filing or limit is $125,000 2005 Act also limits protection to $125,000 where claim arises from RICO, breach of securities laws, fiduciary fraud, and other specified crimes or torts

Colorado allows up to $30,000

Other states allow unlimited (e.g. Florida) but new 2005 bankruptcy act requires purchase 1215 days before filing or limit is $125,000

2005 Act also limits protection to $125,000 where claim arises from RICO, breach of securities laws, fiduciary fraud, and other specified crimes or torts

Insurance Federal exemption is for death benefits and limited cash value (less than $9,000) Colorado exemption is $50,000 where estate is beneficiary and contributions were more than 4 years before filing State exemptions can be more generous, e.g. Florida, Hawaii, Louisiana, but new 2005 Act requires residency in that state for at least 2 years

Federal exemption is for death benefits and limited cash value (less than $9,000)

Colorado exemption is $50,000 where estate is beneficiary and contributions were more than 4 years before filing

State exemptions can be more generous, e.g. Florida, Hawaii, Louisiana, but new 2005 Act requires residency in that state for at least 2 years

Retirement Plans 2005 Act makes clear contributions to ERISA covered plans are exempt, as are entire interest in IRAs (up to $1 million?).

2005 Act makes clear contributions to ERISA covered plans are exempt, as are entire interest in IRAs (up to $1 million?).

529 Plans 529 Plans are Exempt if: Funded more than 2 years before filing Funded by parent, grandparent, stepparent, stepgrandparent of beneficiary of plan $5,000 limit if funded more than one year but less than two years before filing Fraudulent transfer rules still apply

529 Plans are Exempt if:

Funded more than 2 years before filing

Funded by parent, grandparent, stepparent, stepgrandparent of beneficiary of plan

$5,000 limit if funded more than one year but less than two years before filing

Fraudulent transfer rules still apply

Other Exemptions in Colorado Property of business partnership where held in name of partnership Burial plot Health Aids Business or professional supplies up to $10,000

Property of business partnership where held in name of partnership

Burial plot

Health Aids

Business or professional supplies up to $10,000

Second Barrier Revocable Living Trust (RLT)

Revocable Living Trust (RLT)

RLT Asset Protection Features No Court Involvement on Death Private No Forum Provided for Creditor Can “Cut Off” Creditors through “insolvent” probate or other methods If Property is Partitioned: Two Separate Property Trusts; Each Spouse Shares Management

No Court Involvement on Death

Private

No Forum Provided for Creditor

Can “Cut Off” Creditors through “insolvent” probate or other methods

If Property is Partitioned:

Two Separate Property Trusts; Each Spouse Shares Management

Asset Protection Features (Cont.) Can Provide “Spendthrift” Protection for Heirs Grantor not Protected Creditors of Non-Grantor Beneficiaries Cannot Look to Trust for Payment Beneficiary Cannot be Forced to Pledge or Assign Trust Assets Protect Children from Divorce, Lawsuits

Can Provide “Spendthrift” Protection for Heirs

Grantor not Protected

Creditors of Non-Grantor Beneficiaries Cannot Look to Trust for Payment

Beneficiary Cannot be Forced to Pledge or Assign Trust Assets

Protect Children from Divorce, Lawsuits

Third Defender Property Agreements

Property Agreements

Partitioning Property Works for Families Where One Spouse has Significant Liability Exposure Use With Additional Techniques CAUTION: WHAT ABOUT POTENTIAL FOR DIVORCE?

Works for Families Where One Spouse has Significant Liability Exposure

Use With Additional Techniques

CAUTION: WHAT ABOUT POTENTIAL FOR DIVORCE?

Example “ At-Risk” Spouse Owns: Exempt Assets Risky Asset “ Safe” Spouse Owns: Non-Exempt Assets Family Home

“ At-Risk” Spouse Owns:

Exempt Assets

Risky Asset

“ Safe” Spouse

Owns:

Non-Exempt Assets

Family Home

Third Barrier Family Limited Partnerships (FLP) or FLLC

Family Limited Partnerships (FLP) or FLLC

FLP Features Partners: General and Limited General Partner has 100% Control Usually Income Tax Neutral Easy to Gift Shares Use of Discounts May Substantially Lower Federal Estate Tax

Partners: General and Limited

General Partner has 100% Control

Usually Income Tax Neutral

Easy to Gift Shares

Use of Discounts May Substantially Lower Federal Estate Tax

FLP Features (Cont.) Converts Real Property to Personal Property Can Set Up Multiple FLPs to Protect Different Assets Divide and Conquer Charging Order May Be the Exclusive Remedy for Claims Against a Partner

Converts Real Property to Personal Property

Can Set Up Multiple FLPs to Protect Different Assets

Divide and Conquer

Charging Order May Be the Exclusive Remedy for Claims Against a Partner

Claims vs. Partnership Take Insurance Take Partnership Assets Collect Against General Partner Use Entity General Partner Use Multiple Partnerships Divide and Conquer

Take Insurance

Take Partnership Assets

Collect Against General Partner

Use Entity General Partner

Use Multiple Partnerships

Divide and Conquer

Claims vs. Individual Partner Does Not Become Partner No Right to Partnership Assets Charging Order Sole Remedy If GP Distributes, Can Get Creditor MUST PAY INCOME TAX Even if No Income Received! Phantom Income

Does Not Become Partner

No Right to Partnership Assets

Charging Order Sole Remedy

If GP Distributes, Can Get

Creditor MUST PAY INCOME TAX Even if No Income Received!

Phantom Income

Creditor Nightmare Does not Become a Limited Partner No Right to Demand Assets No Transfer of Assets Without Partner Approval No Fraudulent Transfer When FLP Established Can’t Force Termination of FLP General Partner Maintains Income Control

Does not Become a Limited Partner

No Right to Demand Assets

No Transfer of Assets Without Partner Approval

No Fraudulent Transfer When FLP Established

Can’t Force Termination of FLP

General Partner Maintains Income Control

FLPs Leverage Gifts Each Person May Gift Up to $10,000 per Person in Shares Value of Gifts is the Fair Market Value of Gift Partnership Rules Can Allow Value of Shares to be Deeply Discounted!

Each Person May Gift Up to $10,000 per Person in Shares

Value of Gifts is the Fair Market Value of Gift

Partnership Rules Can Allow Value of Shares to be Deeply Discounted!

FLP Discounts What is a FLP Share Worth? Can’t be Easily Sold or Transferred Can’t be Pledged Can’t Demand Distributions Income Allocated to LP for Income Tax Even if not Paid FMV of LP Share May Be Substantially Less than the Value of the Assets!

What is a FLP Share Worth?

Can’t be Easily Sold or Transferred

Can’t be Pledged

Can’t Demand Distributions

Income Allocated to LP for Income Tax Even if not Paid

FMV of LP Share May Be Substantially Less than the Value of the Assets!

FLP Summary Juicy Red Apple is a Sour Lemon for Creditors Family Involved, Parents Control the Assets Estate Tax Reduction Can Distribute Income to Children or Others at Lower Tax Rates

Juicy Red Apple is a Sour Lemon for Creditors

Family Involved, Parents Control the Assets

Estate Tax Reduction

Can Distribute Income to Children or Others at Lower Tax Rates

Common FLP Structure FLP Entity Corp, LLC, Trust Husband RLT Child Trust Wife RLT General Partner Limited Partners

Entity

Corp, LLC, Trust

LLC vs. FLP May be comparable. Some states, like Wyoming, allow for “Close Limited Liability Companies”, which specify the only remedy for creditors of a member is a charging order

May be comparable. Some states, like Wyoming, allow for “Close Limited Liability Companies”, which specify the only remedy for creditors of a member is a charging order

Third Barrier Irrevocable Trusts

Irrevocable Trusts

Irrevocable Trust Features Grantor is Usually not Trustee Not Part of Grantor’s Taxable Estate May Own Life Insurance Income and Federal Estate Tax-Free When Received Spendthrift Protection Controlled Distribution to Beneficiaries

Grantor is Usually not Trustee

Not Part of Grantor’s Taxable Estate

May Own Life Insurance

Income and Federal Estate Tax-Free When Received

Spendthrift Protection

Controlled Distribution to Beneficiaries

Special Irrevocable Trusts BERT Trusts Each spouse is trustee and beneficiary of separate trust Grantor is other spouse Assets of trust are separate property providing asset protection from claims against other spouse Assets of trust are outside estate of either spouse

BERT Trusts

Each spouse is trustee and beneficiary of separate trust

Grantor is other spouse

Assets of trust are separate property providing asset protection from claims against other spouse

Assets of trust are outside estate of either spouse

Fifth Barrier Personal Asset Protection Trusts

Personal Asset Protection Trusts

Concept Set Up a Trust that Limits or Eliminates Creditor Rights to Seize Assets Integrated With Your Estate Plan You can be a Beneficiary You can Remove Assets from Your Estate You can Sleep Soundly

Set Up a Trust that Limits or Eliminates Creditor Rights to Seize Assets

Integrated With Your Estate Plan

You can be a Beneficiary

You can Remove Assets from Your Estate

You can Sleep Soundly

APT Planning Choose Your Jurisdiction (e.g. Alaska or Offshore) Generally Unfriendly to Creditors Offshore has Similar Legal Concepts English Language Tax Neutral for U.S. Tax Purposes Domestic is Convenient and Familiar Offshore is Disclosable, but not Answerable to U.S. Courts

Choose Your Jurisdiction (e.g. Alaska or Offshore)

Generally Unfriendly to Creditors

Offshore has Similar Legal Concepts

English Language

Tax Neutral for U.S. Tax Purposes

Domestic is Convenient and Familiar

Offshore is Disclosable, but not Answerable to U.S. Courts

APT Planning (cont.) Eliminates or Reduces Coercion in Lawsuits Is Done For Estate Planning and Business Reasons Is not a Violation of U.S. Law (2005 Act seems to acknowledge validity after 10 years) Is not Tax Evasion

Eliminates or Reduces Coercion in Lawsuits

Is Done For Estate Planning and Business Reasons

Is not a Violation of U.S. Law (2005 Act seems to acknowledge validity after 10 years)

Is not Tax Evasion

Domestic Jurisdiction A Castle Moat Judgments May not Be Enforceable Against Trust U.S. Jurisdiction Perpetual Trusts Use With Domestic FLPs and LLCs Power to Relocate States with APT laws include Alaska, Delaware, Nevada

A Castle Moat

Judgments May not Be Enforceable Against Trust

U.S. Jurisdiction

Perpetual Trusts

Use With Domestic FLPs and LLCs

Power to Relocate

States with APT laws include Alaska, Delaware, Nevada

Offshore Jurisdictions The Ultimate Castle Moat U.S. Judgments not Enforceable Actions Must be Relitigated Short Statutes of Limitation Power to Relocate

The Ultimate

Castle Moat

U.S. Judgments not Enforceable

Actions Must be Relitigated

Short Statutes of Limitation

Power to Relocate

New 2005 Act Restrictions Can avoid transfers made 10 years before the date of the filing of the petition, if-- (A) such transfer was made to a self-settled trust or similar device; (B) such transfer was by the debtor; (C) the debtor is a beneficiary of such trust or similar device; and (D) the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.

Can avoid transfers made 10 years before the date of the filing of the petition, if--

(A) such transfer was made to a self-settled trust or similar device;

(B) such transfer was by the debtor;

(C) the debtor is a beneficiary of such trust or similar device; and

(D) the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.

Some debts not dischargeable in bankruptcy Examples include domestic support (alimony and child support) and liability from operating motor vehicle while under influence alcohol or drugs

Examples include domestic support (alimony and child support) and liability from operating motor vehicle while under influence alcohol or drugs

Case Study The Surgeon

Leon Cutter, M.D., F.A.C.S. Orthopedic Surgeon Six Suits in Ten Years; All Settled Large Insurance Premiums Professional Corp. Leases Building Owns Equipment Married to Janet Former Teacher Expert Investor Two Children Mary, Tim Family Owns Home, Investments, Retirement Plan

Orthopedic Surgeon

Six Suits in Ten Years; All Settled

Large Insurance Premiums

Professional Corp.

Leases Building

Owns Equipment

Married to Janet

Former Teacher

Expert Investor

Two Children

Mary, Tim

Family Owns Home, Investments, Retirement Plan

Cutter Family Goals Protect Nonexempt Assets Keep Home Absolutely Safe Protect Practice Assets Building and Equipment Lower Malpractice Premiums Maintain Control and Privacy Plan for Federal Estate Taxes

Protect Nonexempt Assets

Keep Home Absolutely Safe

Protect Practice Assets

Building and Equipment

Lower Malpractice Premiums

Maintain Control and Privacy

Plan for Federal Estate Taxes

Before Planning Your Entire Estate is at Risk!

After Planning Your Estate has Defenses!

Keys to a Successful Plan Team Approach Custom Design Cutting Edge Solutions

Team Approach

Custom Design

Cutting Edge Solutions

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