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Asset Protection Planning

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An introduction to the levels of asset protection techniques

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Asset Protection Planning

  1. 1. Estate & Asset Protection Planning Karen Brady & Associates, P.C. Attorneys at Law © Karen Brady, 2005
  2. 2. Definition of Asset Protection <ul><li>Organizing assets and affairs to minimize against risks of future loss </li></ul><ul><li>Preventative, not curative (vaccines, not antibiotics) </li></ul>
  3. 3. Reasons to Protect Assets <ul><li>Why Build Estate But Not Consider Risks? </li></ul><ul><li>Potential for Lawsuits </li></ul><ul><li>Reduce Insurance Coverage </li></ul><ul><li>Peace of Mind </li></ul><ul><li>Concentrate on Your Job </li></ul>
  4. 4. What Asset Protection Is Not <ul><li>Hiding assets, i.e. confidentiality is a plus, but secrecy is not the lynchpin of the plan </li></ul><ul><li>Taxation avoidance </li></ul>
  5. 5. Title to Assets <ul><li>The Manner of Holding Title to Property Affects a Creditor’s Rights </li></ul>
  6. 6. Community Property <ul><li>Community Property </li></ul><ul><ul><li>Acquired During Marriage </li></ul></ul><ul><ul><li>Created by Law or by Agreement </li></ul></ul><ul><ul><li>Result of an “Onerous Acquisition”, e.g. work </li></ul></ul>
  7. 7. Separate Property <ul><li>Separate Property </li></ul><ul><ul><li>Acquired Before Marriage </li></ul></ul><ul><ul><li>Acquired By Gift or Inheritance </li></ul></ul>
  8. 8. Joint Tenancy <ul><li>100% Co-ownership by More Than One Person </li></ul>“ Last One Left Standing Rule”: Survivor Owns It All!
  9. 9. Creditor Rights <ul><li>Can Set Aside Fraudulent Transfers </li></ul><ul><li>Community Creditor/Marital Purpose: All Community Property is Exposed to Community Creditors </li></ul><ul><li>Separate Creditor: Separate Property is Exposed to Separate Creditor, 1/2 Community Property May Be Exposed to Separate Creditor </li></ul>
  10. 10. Creditor Rights (cont.) <ul><li>Divorce Court May Have Jurisdiction Over Both Community and Separate Property </li></ul><ul><li>All Joint Tenancy Property is at Risk of Any Single Joint Tenant’s Creditors! </li></ul>
  11. 11. One Threat <ul><li>Creditor Claims </li></ul>
  12. 12. Types of Claims <ul><li>Officer/Director Liability (Corp.) </li></ul><ul><li>Professional Liability </li></ul><ul><li>Divorce </li></ul><ul><li>Creditor Lawsuits </li></ul><ul><li>Liability for Other People’s Debts </li></ul><ul><li>Partnership Liability </li></ul><ul><li>Hard to Control Claims </li></ul><ul><ul><li>Product Liability </li></ul></ul><ul><ul><li>Environmental Liability </li></ul></ul>
  13. 13. Attempts to Avoid Creditor Claims <ul><li>Methods That </li></ul><ul><li>Don’t Work </li></ul><ul><ul><li>Fraudulent Transfers </li></ul></ul><ul><ul><li>“Hiding” Assets (2005 Bankruptcy Act now requires 3 years of tax returns) </li></ul></ul><ul><ul><li>“Constitutional” Trusts, “Pure Trusts” and the like </li></ul></ul>
  14. 14. Fraudulent Transfers <ul><li>Intent to Defraud, Hinder or Delay Known or Likely Creditors </li></ul><ul><li>Intent is Generally Presumed </li></ul><ul><li>Badges of Fraud </li></ul><ul><ul><li>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 </li></ul></ul>
  15. 15. Fraudulent Conveyance <ul><li>Pending or present creditors will have a greater presumption of a fraudulent conveyance than future creditors </li></ul><ul><li>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. </li></ul>
  16. 16. Another Threat <ul><li>Estate Taxes </li></ul>
  17. 17. Estate Taxes <ul><li>Changing ownership of assets often also removes them from the estate, offering the additional benefit of reduced estate taxes along with asset protection </li></ul>
  18. 18. Asset Protection Techniques <ul><li>Methods That Work </li></ul><ul><ul><li>Save Administrative Fees and Costs </li></ul></ul><ul><ul><li>Reduce Taxes </li></ul></ul><ul><ul><li>Provide Multiple Layers of Defense </li></ul></ul><ul><ul><li>Allow Opportunity for Early Settlement </li></ul></ul><ul><ul><li>Voluntary Bankruptcy Now Less Attractive as Final Option </li></ul></ul>
  19. 19. First Defender <ul><li>Insurance </li></ul>
  20. 20. Strengths and Weaknesses <ul><li>Covers Loss </li></ul><ul><li>Cash to Settle </li></ul><ul><li>Duty to Defend </li></ul><ul><li>Getting Costly </li></ul><ul><li>May not Qualify </li></ul><ul><li>Insolvency of Carrier </li></ul><ul><li>May get Cancelled </li></ul><ul><li>Coverage Exemptions </li></ul><ul><ul><li>Hazardous Waste </li></ul></ul><ul><ul><li>Intentional Acts </li></ul></ul><ul><ul><li>Punitive Damages </li></ul></ul>Strengths Weaknesses
  21. 21. First Barrier <ul><li>Corporations </li></ul><ul><li>Or LLCs </li></ul>
  22. 22. Corporate Features <ul><li>Limited Liability </li></ul><ul><li>Still Liable for Personal Guarantees </li></ul><ul><li>May have Income Tax Benefits </li></ul><ul><ul><li>Pension, Profit Sharing Plans </li></ul></ul><ul><ul><li>Fringe Benefits, Etc. </li></ul></ul><ul><li>Must Keep Status Current with State </li></ul><ul><li>Must Observe Formalities </li></ul><ul><ul><li>Adopt Bylaws </li></ul></ul><ul><ul><li>Keep Minutes of Meetings </li></ul></ul><ul><ul><li>Issue Stock </li></ul></ul>
  23. 23. LLC Features <ul><li>Limited Liability Like a Corporation </li></ul><ul><li>Control is Flexible; May Choose Fewer Formalities </li></ul><ul><li>Can be Taxable Like a Partnership </li></ul><ul><li>All States Have Them </li></ul>
  24. 24. Second Defender <ul><li>Exempt Property </li></ul>
  25. 25. Homestead <ul><li>Colorado allows up to $30,000 </li></ul><ul><li>Other states allow unlimited (e.g. Florida) but new 2005 bankruptcy act requires purchase 1215 days before filing or limit is $125,000 </li></ul><ul><li>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 </li></ul>
  26. 26. Insurance <ul><li>Federal exemption is for death benefits and limited cash value (less than $9,000) </li></ul><ul><li>Colorado exemption is $50,000 where estate is beneficiary and contributions were more than 4 years before filing </li></ul><ul><li>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 </li></ul>
  27. 27. Retirement Plans <ul><li>2005 Act makes clear contributions to ERISA covered plans are exempt, as are entire interest in IRAs (up to $1 million?). </li></ul>
  28. 28. 529 Plans <ul><li>529 Plans are Exempt if: </li></ul><ul><li>Funded more than 2 years before filing </li></ul><ul><li>Funded by parent, grandparent, stepparent, stepgrandparent of beneficiary of plan </li></ul><ul><li>$5,000 limit if funded more than one year but less than two years before filing </li></ul><ul><li>Fraudulent transfer rules still apply </li></ul>
  29. 29. Other Exemptions in Colorado <ul><li>Property of business partnership where held in name of partnership </li></ul><ul><li>Burial plot </li></ul><ul><li>Health Aids </li></ul><ul><li>Business or professional supplies up to $10,000 </li></ul>
  30. 30. Second Barrier <ul><li>Revocable Living Trust (RLT) </li></ul>
  31. 31. RLT Asset Protection Features <ul><li>No Court Involvement on Death </li></ul><ul><ul><li>Private </li></ul></ul><ul><ul><li>No Forum Provided for Creditor </li></ul></ul><ul><ul><li>Can “Cut Off” Creditors through “insolvent” probate or other methods </li></ul></ul><ul><li>If Property is Partitioned: </li></ul><ul><ul><li>Two Separate Property Trusts; Each Spouse Shares Management </li></ul></ul>
  32. 32. Asset Protection Features (Cont.) <ul><li>Can Provide “Spendthrift” Protection for Heirs </li></ul><ul><ul><li>Grantor not Protected </li></ul></ul><ul><ul><li>Creditors of Non-Grantor Beneficiaries Cannot Look to Trust for Payment </li></ul></ul><ul><ul><li>Beneficiary Cannot be Forced to Pledge or Assign Trust Assets </li></ul></ul><ul><ul><li>Protect Children from Divorce, Lawsuits </li></ul></ul>
  33. 33. Third Defender <ul><li>Property Agreements </li></ul>
  34. 34. Partitioning Property <ul><li>Works for Families Where One Spouse has Significant Liability Exposure </li></ul><ul><li>Use With Additional Techniques </li></ul><ul><li>CAUTION: WHAT ABOUT POTENTIAL FOR DIVORCE? </li></ul>
  35. 35. Example <ul><li>“ At-Risk” Spouse Owns: </li></ul><ul><li>Exempt Assets </li></ul><ul><li>Risky Asset </li></ul><ul><li>“ Safe” Spouse </li></ul><ul><li>Owns: </li></ul><ul><li>Non-Exempt Assets </li></ul><ul><li>Family Home </li></ul>
  36. 36. Third Barrier <ul><li>Family Limited Partnerships (FLP) or FLLC </li></ul>
  37. 37. FLP Features <ul><li>Partners: General and Limited </li></ul><ul><li>General Partner has 100% Control </li></ul><ul><li>Usually Income Tax Neutral </li></ul><ul><li>Easy to Gift Shares </li></ul><ul><li>Use of Discounts May Substantially Lower Federal Estate Tax </li></ul>
  38. 38. FLP Features (Cont.) <ul><li>Converts Real Property to Personal Property </li></ul><ul><li>Can Set Up Multiple FLPs to Protect Different Assets </li></ul><ul><ul><li>Divide and Conquer </li></ul></ul><ul><li>Charging Order May Be the Exclusive Remedy for Claims Against a Partner </li></ul>
  39. 39. Claims vs. Partnership <ul><li>Take Insurance </li></ul><ul><li>Take Partnership Assets </li></ul><ul><li>Collect Against General Partner </li></ul><ul><li>Use Entity General Partner </li></ul><ul><li>Use Multiple Partnerships </li></ul><ul><ul><li>Divide and Conquer </li></ul></ul>
  40. 40. Claims vs. Individual Partner <ul><li>Does Not Become Partner </li></ul><ul><li>No Right to Partnership Assets </li></ul><ul><li>Charging Order Sole Remedy </li></ul><ul><ul><li>If GP Distributes, Can Get </li></ul></ul><ul><li>Creditor MUST PAY INCOME TAX Even if No Income Received! </li></ul><ul><ul><li>Phantom Income </li></ul></ul>
  41. 41. Creditor Nightmare <ul><li>Does not Become a Limited Partner </li></ul><ul><li>No Right to Demand Assets </li></ul><ul><li>No Transfer of Assets Without Partner Approval </li></ul><ul><li>No Fraudulent Transfer When FLP Established </li></ul><ul><li>Can’t Force Termination of FLP </li></ul><ul><li>General Partner Maintains Income Control </li></ul>
  42. 42. FLPs Leverage Gifts <ul><li>Each Person May Gift Up to $10,000 per Person in Shares </li></ul><ul><li>Value of Gifts is the Fair Market Value of Gift </li></ul><ul><li>Partnership Rules Can Allow Value of Shares to be Deeply Discounted! </li></ul>
  43. 43. FLP Discounts <ul><li>What is a FLP Share Worth? </li></ul><ul><ul><li>Can’t be Easily Sold or Transferred </li></ul></ul><ul><ul><li>Can’t be Pledged </li></ul></ul><ul><ul><li>Can’t Demand Distributions </li></ul></ul><ul><ul><li>Income Allocated to LP for Income Tax Even if not Paid </li></ul></ul><ul><li>FMV of LP Share May Be Substantially Less than the Value of the Assets! </li></ul>
  44. 44. FLP Summary <ul><li>Juicy Red Apple is a Sour Lemon for Creditors </li></ul><ul><li>Family Involved, Parents Control the Assets </li></ul><ul><li>Estate Tax Reduction </li></ul><ul><li>Can Distribute Income to Children or Others at Lower Tax Rates </li></ul>
  45. 45. Common FLP Structure FLP <ul><li>Entity </li></ul><ul><li>Corp, LLC, Trust </li></ul>Husband RLT Child Trust Wife RLT General Partner Limited Partners
  46. 46. LLC vs. FLP <ul><li>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 </li></ul>
  47. 47. Third Barrier <ul><li>Irrevocable Trusts </li></ul>
  48. 48. Irrevocable Trust Features <ul><li>Grantor is Usually not Trustee </li></ul><ul><li>Not Part of Grantor’s Taxable Estate </li></ul><ul><li>May Own Life Insurance </li></ul><ul><ul><li>Income and Federal Estate Tax-Free When Received </li></ul></ul><ul><li>Spendthrift Protection </li></ul><ul><li>Controlled Distribution to Beneficiaries </li></ul>
  49. 49. Special Irrevocable Trusts <ul><li>BERT Trusts </li></ul><ul><ul><li>Each spouse is trustee and beneficiary of separate trust </li></ul></ul><ul><ul><li>Grantor is other spouse </li></ul></ul><ul><ul><li>Assets of trust are separate property providing asset protection from claims against other spouse </li></ul></ul><ul><ul><li>Assets of trust are outside estate of either spouse </li></ul></ul>
  50. 50. Fifth Barrier <ul><li>Personal Asset Protection Trusts </li></ul>
  51. 51. Concept <ul><li>Set Up a Trust that Limits or Eliminates Creditor Rights to Seize Assets </li></ul><ul><li>Integrated With Your Estate Plan </li></ul><ul><ul><li>You can be a Beneficiary </li></ul></ul><ul><ul><li>You can Remove Assets from Your Estate </li></ul></ul><ul><ul><li>You can Sleep Soundly </li></ul></ul>
  52. 52. APT Planning <ul><li>Choose Your Jurisdiction (e.g. Alaska or Offshore) </li></ul><ul><ul><li>Generally Unfriendly to Creditors </li></ul></ul><ul><ul><li>Offshore has Similar Legal Concepts </li></ul></ul><ul><ul><li>English Language </li></ul></ul><ul><li>Tax Neutral for U.S. Tax Purposes </li></ul><ul><li>Domestic is Convenient and Familiar </li></ul><ul><li>Offshore is Disclosable, but not Answerable to U.S. Courts </li></ul>
  53. 53. APT Planning (cont.) <ul><li>Eliminates or Reduces Coercion in Lawsuits </li></ul><ul><li>Is Done For Estate Planning and Business Reasons </li></ul><ul><li>Is not a Violation of U.S. Law (2005 Act seems to acknowledge validity after 10 years) </li></ul><ul><li>Is not Tax Evasion </li></ul>
  54. 54. Domestic Jurisdiction <ul><li>A Castle Moat </li></ul><ul><ul><li>Judgments May not Be Enforceable Against Trust </li></ul></ul><ul><ul><li>U.S. Jurisdiction </li></ul></ul><ul><ul><li>Perpetual Trusts </li></ul></ul><ul><ul><li>Use With Domestic FLPs and LLCs </li></ul></ul><ul><ul><li>Power to Relocate </li></ul></ul><ul><ul><li>States with APT laws include Alaska, Delaware, Nevada </li></ul></ul>
  55. 55. Offshore Jurisdictions <ul><li>The Ultimate </li></ul><ul><li>Castle Moat </li></ul><ul><ul><li>U.S. Judgments not Enforceable </li></ul></ul><ul><ul><li>Actions Must be Relitigated </li></ul></ul><ul><ul><li>Short Statutes of Limitation </li></ul></ul><ul><ul><li>Power to Relocate </li></ul></ul>
  56. 56. New 2005 Act Restrictions <ul><li>Can avoid transfers made 10 years before the date of the filing of the petition, if-- </li></ul><ul><li>(A) such transfer was made to a self-settled trust or similar device; </li></ul><ul><li>(B) such transfer was by the debtor; </li></ul><ul><li>(C) the debtor is a beneficiary of such trust or similar device; and </li></ul><ul><li>(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. </li></ul>
  57. 57. Some debts not dischargeable in bankruptcy <ul><li>Examples include domestic support (alimony and child support) and liability from operating motor vehicle while under influence alcohol or drugs </li></ul>
  58. 58. Case Study The Surgeon
  59. 59. Leon Cutter, M.D., F.A.C.S. <ul><li>Orthopedic Surgeon </li></ul><ul><ul><li>Six Suits in Ten Years; All Settled </li></ul></ul><ul><ul><li>Large Insurance Premiums </li></ul></ul><ul><li>Professional Corp. </li></ul><ul><ul><li>Leases Building </li></ul></ul><ul><ul><li>Owns Equipment </li></ul></ul><ul><li>Married to Janet </li></ul><ul><ul><li>Former Teacher </li></ul></ul><ul><ul><li>Expert Investor </li></ul></ul><ul><li>Two Children </li></ul><ul><ul><li>Mary, Tim </li></ul></ul><ul><li>Family Owns Home, Investments, Retirement Plan </li></ul>
  60. 60. Cutter Family Goals <ul><li>Protect Nonexempt Assets </li></ul><ul><ul><li>Keep Home Absolutely Safe </li></ul></ul><ul><li>Protect Practice Assets </li></ul><ul><ul><li>Building and Equipment </li></ul></ul><ul><li>Lower Malpractice Premiums </li></ul><ul><li>Maintain Control and Privacy </li></ul><ul><li>Plan for Federal Estate Taxes </li></ul>
  61. 61. Before Planning Your Entire Estate is at Risk!
  62. 62. After Planning Your Estate has Defenses!
  63. 63. Keys to a Successful Plan <ul><li>Team Approach </li></ul><ul><li>Custom Design </li></ul><ul><li>Cutting Edge Solutions </li></ul>
  64. 64. Thank You for Attending <ul><li>Questions? </li></ul>

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