Protecting your assets, a guide to next steps in estate planning


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A survey of planning vehicles for estate planning. With an overview of some of the more complex currently employed strategies

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Protecting your assets, a guide to next steps in estate planning

  1. 1. PROTECTING YOUR ASSETS Sophisticated next steps to ensure the success of your estate plan
  2. 2. DISCLAIMER  CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, please be advised that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
  3. 3. Over the Compound Wall • Asset protection is a collection of structures that protect assets from attack • Asset Protection is putting a portion of your net worth behind some obstacles. The more obstacles, the greater the protection. • Asset Protection is planning for future liabilities
  4. 4. WHY YOU NEED ASSET PROTECTION  Creditor Protection  Safeguard against law suits for malpractice in high risk professions  Protection from law suits from personal injury  Tenants in a rental property  Car accidents  As an alternative to prenuptial agreements
  5. 5. Asset Protection Vehicles Strategies to Employ Family Limited Partnerships/LLCs Beyond the essential protection plans which include: Credit Shelter Trusts • Wills • Health Care Proxy • Durable Power of Attorney Living Trusts • Living Will and Conservator Designation GRATs and QPRT • HIPAA Medical records release The sophisticated estate plan will include various combinations of these vehicles. Life Insurance Trusts
  6. 6. FAMILY LIMITED PARTNERSHIPS General Partner 0-1% Has Control Has liability Limited Partner 80% No Liability No Control Limited Partner 10% No Liability No Control Limited Partner 10% No Liability No Control
  7. 7. FAMILY LIMITED PARTNERSHIPS Corporation as GP 0-1% Has Liability Has Control You as Primary LP 80% No Liability No Control You can be shareholder You can be director You can be an officer Personal Assets Protected Successor as LP 10% No Liability No Control Successor as LP 10% No Liability No Control
  8. 8. Asset protection with FAMILY LIMITED LIABILITY COMPANY
  9. 9. FAMILY L.L.C. Manager 0-1% Has Liability Has control Member 80% No liability No control Member 10% No liability No Control Member 10% No Liability No Control
  10. 10. How it Can Work • Limited Partners have no liability for entity debts • General Partner has liability, but only subject to corporate assets • Creditors of Limited Partner can get “Charging Order” • Charging Order no attractive to creditors
  11. 11. IMPROVE „FLP‟ AND „LLC‟ PROTECTION         Suggested Steps to take Choose an asset protection state for formation Non-asset protection purpose = true business purpose for formation Non-spousal Partners Non-family Partners True Capitalization Non-asset Protection Purpose FORMALITIES No Fraudulent Conveyances
  12. 12. ADVANTAGES AND DISADVANTAGES Advantages  Can begin to transfer ownership without control  Can transfer assets likely to appreciate and minimize estate tax  Can get discounts to minimize gift tax Disadvantages  IRS reporting obligations  Costs –Attorney‟s fees, appraisals, upkeep  Complexity  Ownership transfer is irrevocable
  13. 13. Irrevocable and Revocable TRUST STRUCTURES
  14. 14.  Qualified Personal Residence Trust (QPRT)  More tax planning than asset protection  Intentionally Defective Grantor Trust (IDIT) & Grantor Retained Annuity Trust (GRAT)  Low Asset Value / Lower Interest Rates  Caveat: “Zeroed Out” GRATs  Irrevocable Life Insurance Trust (ILIT)  Protects Death Benefit from Creditors IRREVOCABLE TRUSTS  Lifetime Credit Shelter Trust (LCST)
  15. 15. children for their LIFETIMES in order to provide enhanced protection  The trust should include spendthrift provisions  Decedent‟s half (B-C) Irrevocable at 1st Death & protected  Most living trusts distributed assets to heirs upon the heir attaining certain ages (e.g. half at age 30, remaining half at age 40) LIVING TRUSTS  Create trusts for surviving spouse and
  16. 16. protecting heirs from potential divorcing spouses or judgment creditors  It is also inefficient for the purpose of protecting assets from estate taxation for future generations  Consider loans to beneficiaries (rather than outright distributions) when trust assets applied for further investment or to purchase an asset with financial value  We prefer lifetime trusts, which enable GST exemption LIVING TRUSTS CONT…  This is inefficient for the purpose of
  17. 17. GRAT  GRAT makes a gift to QPRT  QPRT requires gifting of children which must be paid back over a term of years. the primary residence  Methods the grantor can continue to live in the home  Recently targeted by President Obama for potential reform or limitations on “zero out” policy  Consider multiple GRATs as QPRTs and GRATs are a hedge protected during Initial Terms 1. set up a rental agreement with trustee 2. If the trustee is the not spouse, she is able to do with her property whatever she pleases, including allowing the grantor to remain as a tenant 3. Consider dual QPRTs as a hedge
  18. 18. Planning with LIFE INSURANCE
  19. 19. LIFE INSURANCE  Under state law beneficiary‟s interest in policy is protected against policy owner‟s creditors  If the owner of policy insures life of another, owner is protected from creditors of the insured  If owner of the policy insures life of spouse for owner‟s own benefit, owner is protected from own creditors  Policy owner‟s interest in case surrender value is protected from claims of owner‟s own creditors
  20. 20. Life Insurance Trusts • Greatest protection afforded by owning life insurance in an Irrevocable Life Insurance Trust (ILIT) • ILIT protects value from creditors of insured and trust beneficiaries • ILIT also excludes taxation in insured‟s estate • Distributions pass to children in trust for lifetime
  21. 21. ACCESS TO ILIT CASH VALUE  ILIT may be drafted to provide that discretionary distributions of trust assets to spouse and/or descendants  Allows ready access to cash surrender value  If no spouse, trust may be established in jurisdiction (i.e. Alaska, Nevada, Delaware) which allows discretionary distributions to the grantor  When trust is funded it can be set up in same jurisdiction to avoid state income tax
  22. 22. KEY FEATURES  Proper trust planning avoids rule against perpetuities – allows for “dynasty” planning  Allows for discretionary distributions to trust maker/grantor without assets being included in taxable estate
  23. 23. WILL LOCAL LAW APPLY?  Home of the trustee is the home of the trust  In general, law of a jurisdiction where administration takes place controls. For example, if a Delaware institution is trustee then the trust falls under Delaware law.  Trust should include specific intent that the trust be subject to law of the asset protected jurisdiction that will serve as situs for the trust  Some assets must be deposited in that state/tax jurisdiction  At least one trustee must be based in that state/jurisdiction
  24. 24. REQUIREMENTS FOR CREDITOR PROTECTION  Transfer into trust cannot be  Trust maker/grantor cannot a fraudulent conveyance**  Transfer cannot render the trust maker/grantor insolvent  Transfer cannot be intended to remove assets from the reach of a specifically known or anticipated creditor  There are various statutes of limitations to commence a suit claiming fraudulent conveyance including child support retain power to revoke the trust  Trust maker/grantor cannot retain entitlement to income or principal form the trust; rather trust maker may be eligible for discretionary distributions in sole and absolute discretion of a trustee other than the trust maker **each state is different in its definition of fraud including time and amount of transfer
  25. 25. POTENTIAL LIMITATIONS  Full faith credit attacks  May be shielded by limiting trustees only to persons or entities residing in state where trust created and who do not have “minimum contact” in trust maker‟s domicile state  Supremacy clause arguments  May apply in bankruptcy context; however, bankruptcy laws use state laws to determine interests of trust makers and beneficiaries  Conflict of laws  Claim that laws of the trust maker‟s state of domicile govern the rights of the trust maker‟s creditors  However, the trust may (and should) specify which state‟s law governs the instrument  Restatement of trusts sanctions choice of law clause in trust  No existing case law
  26. 26. OFFSHORE ASSETS US Trustee (You) Foreign Trust Company Asset Protection trust 99% LP of FLP ownership (holds overseas$) You, Corp, LLC 1% GP of FLP FLP hold US $ Separates Ownership (Trust) Form control (GP)
  27. 27. IMPORTANT CONCEPTS  Trust protector  Don‟t transfer to foreign trustee without protection  Asset protection is only one part of the Estate Planning puzzle  Some simple asset techniques can protect a high percentage of your assets
  28. 28. QUESTIONS? Thank you!