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Preventing Disaster:  Planning Across Lines of Business,  Personal and Estates Russ Pike Sherman, Sherman, Johnnie & Hoyt,...
Overview <ul><li>Risk Planning Concepts </li></ul><ul><li>Different Types of Trusts and Their Uses </li></ul><ul><li>Diffe...
Why Risk Planning? <ul><li>Victim oriented society </li></ul><ul><li>Deep pockets </li></ul><ul><ul><li>Substantial insura...
Risk Planning Basics <ul><li>Risk Planning is: </li></ul><ul><li>A structure that makes assets difficult or impossible to ...
Risk Planning Concepts <ul><li>Judgment creditors can only take what you own. </li></ul><ul><li>Without your permission, n...
Planning Limitations  <ul><li>Fraudulent Conveyance Statute </li></ul><ul><li>Timing the transfer- 4 years look back; one ...
Planning Limitations, Cont’d <ul><li>Bankruptcy </li></ul><ul><li>Preferential transfers </li></ul><ul><li>Nondischargeabl...
Reducing Risk: Insurance <ul><li>Business Insurance Coverage </li></ul><ul><li>Compare premiums/coverage before purchasing...
Reducing Risk: Trusts <ul><li>Types of Trusts </li></ul><ul><li>Irrevocable Life Insurance Trust (ILIT) </li></ul><ul><li>...
Irrevocable Life Insurance Trust <ul><li>Protects value from creditors of insured and trust beneficiaries </li></ul><ul><l...
Self Settled Trust <ul><li>Creates trust for your benefit, contains provision that prevents creditors from reaching your i...
Domestic Asset Protection Trusts <ul><li>Selected jurisdictions’ statutes allow a DAPT Irrevocable Trust (11 states) </li>...
Other Considerations for a DAPT <ul><li>Bankruptcy claw-back </li></ul><ul><li>Irrevocability </li></ul><ul><li>Discretion...
Why a Delaware Trust? <ul><li>Specific Benefits </li></ul><ul><li>Carry out wishes of trustor (Maker) </li></ul><ul><li>Pr...
Foreign Asset Protection Trust <ul><li>How it works </li></ul><ul><li>Independent Foreign Trustee more protection </li></u...
Key Features of FAPT <ul><li>Arms Length Transaction </li></ul><ul><ul><li>Irrevocable </li></ul></ul><ul><ul><li>Letter o...
Key Features of FAPT (Cont.) <ul><li>Foreign plaintiff often has to post bond or cash to sue </li></ul><ul><li>No disclosu...
Disadvantages of FAPT <ul><li>Complexity </li></ul><ul><li>Cost (Legal, Appraisals, Maintenance) </li></ul><ul><li>IRS Rep...
Limited Use of Asset Protection Trusts for Risk Reduction <ul><li>Valid uses of trusts, but limited for risk reduction </l...
Choice of Business Entity <ul><li>Factors Driving the Choice </li></ul><ul><li>Management Control & Duties </li></ul><ul><...
Key Terms <ul><li>Inside Liability </li></ul><ul><li>Risk from operation of the business or property itself  </li></ul><ul...
Corporations <ul><li>Pros </li></ul><ul><li>Inside out risk reduction </li></ul><ul><li>Graduated tax rates </li></ul><ul>...
General Partnership <ul><li>Pros </li></ul><ul><li>Easy to form </li></ul><ul><li>Low cost to form and operate </li></ul><...
Limited Partnership <ul><li>Purpose </li></ul><ul><li>Holding company--Hold safe assets </li></ul><ul><li>Hold interest in...
Limited Partnership <ul><li>Pros </li></ul><ul><li>Risk reduction </li></ul><ul><li>Pass thru taxation </li></ul><ul><li>M...
Limited Liability Company <ul><li>Pros </li></ul><ul><li>Use for rental property </li></ul><ul><li>Insulate dangerous asse...
S Corporation <ul><li>Pros </li></ul><ul><li>Pass thru taxation </li></ul><ul><li>SE tax minimization planning </li></ul><...
Risk Reduction   <ul><li>Outside Creditors </li></ul><ul><li>Claims outside purview of business entity asserted against ow...
Use of Multiple Entities <ul><li>Segregate Business Assets </li></ul><ul><li>Dangerous Assets versus Safe Assets </li></ul...
Funding the Entities <ul><li>Owner owns and leases exempt assets to operating entity </li></ul><ul><li>Combination of debt...
Buy-Sell Agreements <ul><li>Structure: Owner Purchase </li></ul><ul><li>Agreement among business owners to purchase each o...
Funding the Buy-Sell Agreement <ul><li>Installment Notes </li></ul><ul><li>Security </li></ul><ul><li>Personal guarantees ...
Stock Redemption <ul><li>Structure: Sale to Entity </li></ul><ul><li>Corporation redeems the shares of a deceased sharehol...
Stock Redemption <ul><li>Disadvantages </li></ul><ul><li>Loss of step up basis surviving shareholders </li></ul><ul><li>In...
Cross Purchase <ul><li>Structure: Purchase from Decedent’s Estate </li></ul><ul><li>Surviving owners purchase deceased mem...
Cross Purchases <ul><li>Disadvantages </li></ul><ul><li>Difficult to administer if numerous shareholders buying a plan for...
Valuation <ul><li>Book Value </li></ul><ul><li>Recorded in accounting records </li></ul><ul><li>Snapshot of assets/liabili...
Insurance Trust Agreement <ul><li>Structure: Purchase Policies with Trust </li></ul><ul><li>Policies owned by an irrevocab...
Issues When Withdrawing Funds: Fraud Potential <ul><li>Fraud Restrictions </li></ul><ul><li>Covers all transactions of bus...
Issues When Withdrawing Funds: Withdrawl Methods <ul><li>Dividends </li></ul><ul><li>Statutory Test </li></ul><ul><li>Earn...
Transferring Business Interest  to the Family <ul><li>LLC Interest </li></ul><ul><li>Voting and Non-Voting Interest </li><...
Risk Reduction:  What Probably Won’t Work <ul><li>Revocable Living Trusts </li></ul><ul><li>Nevada Corporation alone </li>...
Risk Reduction: What Might Work <ul><li>Limited liability companies </li></ul><ul><li>Limited partnerships </li></ul><ul><...
Questions? <ul><li>Let me be a resource to you and your clients. </li></ul><ul><li>Russ Pike </li></ul><ul><li>[email_addr...
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Integrated Risk Planning

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This presentation was for financial planners and insurance professions on risk planning concepts including trusts, business entities and estate planning strategies.

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Integrated Risk Planning

  1. 1. Preventing Disaster: Planning Across Lines of Business, Personal and Estates Russ Pike Sherman, Sherman, Johnnie & Hoyt, LLP russ@shermlaw.com or 503-364-2281
  2. 2. Overview <ul><li>Risk Planning Concepts </li></ul><ul><li>Different Types of Trusts and Their Uses </li></ul><ul><li>Different Types of Entities and Their Uses </li></ul><ul><li>Integrating Trusts, Entities, and Insurance </li></ul><ul><li>Achieving Risk Reduction – Putting it All Together </li></ul>
  3. 3. Why Risk Planning? <ul><li>Victim oriented society </li></ul><ul><li>Deep pockets </li></ul><ul><ul><li>Substantial insurance </li></ul></ul><ul><ul><li>Significant personal assets </li></ul></ul><ul><li>Increased social media and awareness- nothing is private </li></ul><ul><li>Publicity of judgments against high net worth individuals </li></ul>
  4. 4. Risk Planning Basics <ul><li>Risk Planning is: </li></ul><ul><li>A structure that makes assets difficult or impossible to reach </li></ul><ul><li>Places a portion of your net worth behind some obstacles </li></ul><ul><li>Planning for future liabilities </li></ul><ul><li>Risk Planning is Not: </li></ul><ul><li>Fraud </li></ul><ul><li>Tax Avoidance </li></ul><ul><li>Transferring control of all your assets </li></ul><ul><li>Reliance on Stealth Alone </li></ul>
  5. 5. Risk Planning Concepts <ul><li>Judgment creditors can only take what you own. </li></ul><ul><li>Without your permission, no one can take what you own without winning a lawsuit. </li></ul><ul><li>Timing is of the essence. Risk Planning must be done while the seas are calm. </li></ul><ul><li>Risk protection is a cost-benefit analysis from your standpoint and the predators. </li></ul><ul><li>Never mix liability generating assets (Dangerous Assets) in the same entity with other Dangerous Assets or Safe Assets. </li></ul><ul><li>Insurance is the first line of defense for business and personal protection. </li></ul><ul><li>Every asset you value must be protected and titled properly. </li></ul>
  6. 6. Planning Limitations <ul><li>Fraudulent Conveyance Statute </li></ul><ul><li>Timing the transfer- 4 years look back; one year of discovery </li></ul><ul><li>Not receive “reasonably equivalent value” </li></ul><ul><li>Insolvency test for Oregon </li></ul><ul><ul><li>Debts greater than assets </li></ul></ul><ul><ul><li>Not paying debts when due </li></ul></ul><ul><li>Cannot protect against already incurred debt </li></ul><ul><li>Timing before Bankruptcy </li></ul><ul><li>Present and Future Creditors- hinder, delay, defraud </li></ul>
  7. 7. Planning Limitations, Cont’d <ul><li>Bankruptcy </li></ul><ul><li>Preferential transfers </li></ul><ul><li>Nondischargeable debts </li></ul><ul><li>Lien stripping </li></ul><ul><li>Ten year claw back on </li></ul><ul><li>Homestead exemption limitation </li></ul><ul><li>Criminal Violations </li></ul><ul><li>RICO Statute </li></ul><ul><li>Bankruptcy Crimes </li></ul><ul><li>Money Laundering </li></ul><ul><li>Conspiracy to Defraud </li></ul><ul><li>Mail and Wire Fraud </li></ul><ul><li>Criminal Fraud </li></ul><ul><li>Defenses </li></ul><ul><li>Legitimate business purpose </li></ul><ul><li>Valid estate planning motivation </li></ul><ul><li>All of the facts/credibility of debtor will be considered by court </li></ul>
  8. 8. Reducing Risk: Insurance <ul><li>Business Insurance Coverage </li></ul><ul><li>Compare premiums/coverage before purchasing </li></ul><ul><li>Retain insurance policies indefinitely </li></ul><ul><li>Give prompt verbal and written notice to the right person </li></ul><ul><li>Enforce the duty to defend </li></ul><ul><li>Rely on another party’s insurance </li></ul><ul><li>Require another party to indemnify </li></ul><ul><li>Factor liability insurance into the insolvency test </li></ul><ul><li>Obtain umbrella coverage </li></ul>
  9. 9. Reducing Risk: Trusts <ul><li>Types of Trusts </li></ul><ul><li>Irrevocable Life Insurance Trust (ILIT) </li></ul><ul><li>Self-Settled and Spendthrift Trust </li></ul><ul><li>Domestic Asset Protection Trust </li></ul><ul><li>Foreign Asset Protection Trust </li></ul>
  10. 10. Irrevocable Life Insurance Trust <ul><li>Protects value from creditors of insured and trust beneficiaries </li></ul><ul><li>Excludes death proceeds from taxation in insured’s estate </li></ul><ul><li>Under certain conditions, may have access to cash values </li></ul><ul><li>Requires annual maintenance to pay premiums </li></ul><ul><li>Requires an independent trustee </li></ul>
  11. 11. Self Settled Trust <ul><li>Creates trust for your benefit, contains provision that prevents creditors from reaching your interest in trust assets </li></ul><ul><li>Usually ineffective to reduce risk except in certain jurisdictions </li></ul><ul><li>Creditors can reach interest of trust maker </li></ul><ul><li>Spendthrift protection does not work when trustor and beneficiary are the same person </li></ul><ul><li>Bankruptcy Code – Bankruptcy trustee can avoid transfer made within 10 years of filing bankruptcy. </li></ul>
  12. 12. Domestic Asset Protection Trusts <ul><li>Selected jurisdictions’ statutes allow a DAPT Irrevocable Trust (11 states) </li></ul><ul><li>Incorporates the respective State’s law </li></ul><ul><li>Discretionary benefits, not in trust maker's estate at death </li></ul><ul><li>Done properly, can create some protection, but this vehicle is not yet well tested in court </li></ul><ul><li>Works best if you reside in a state that allows it by statute and assets can be domiciled in state </li></ul><ul><li>Limited use if bankruptcy is filed within 10 years and there exists actual intent to hinder, delay or defraud </li></ul><ul><li>Some states have better protections than others </li></ul>
  13. 13. Other Considerations for a DAPT <ul><li>Bankruptcy claw-back </li></ul><ul><li>Irrevocability </li></ul><ul><li>Discretionary distributions </li></ul><ul><li>Estate tax and income tax </li></ul><ul><li>Risk of validity challenge </li></ul><ul><li>Fees of creation and maintenance </li></ul><ul><li>Full faith and credit attacks </li></ul><ul><li>Supremacy clause argument – risk from federal courts </li></ul><ul><li>Contract clause concerns </li></ul><ul><li>State of domicile versus state of trust jurisdiction </li></ul><ul><li>Limited existing case law on constitutional issues </li></ul>
  14. 14. Why a Delaware Trust? <ul><li>Specific Benefits </li></ul><ul><li>Carry out wishes of trustor (Maker) </li></ul><ul><li>Protect trustees from liability </li></ul><ul><li>Delaware income tax benefit </li></ul><ul><li>Effective enforcement of trust agreement </li></ul><ul><li>No change in current trust current advisors </li></ul><ul><li>Procedure to change situs of irrevocable trust </li></ul>
  15. 15. Foreign Asset Protection Trust <ul><li>How it works </li></ul><ul><li>Independent Foreign Trustee more protection </li></ul><ul><li>Independent Trust Protector with certain powers </li></ul><ul><li>APT holds overseas money </li></ul><ul><li>99% LP Ownership </li></ul><ul><li>LP holds US money </li></ul><ul><li>LLC 1% GP of LP </li></ul><ul><li>Move only liquid assets </li></ul><ul><li>Less than 50% of net worth </li></ul><ul><li>Reserve assets to pay government or large corporate creditors </li></ul><ul><li>Creditor Attack is Less Likely Because </li></ul><ul><li>Flight (Remove US Assets) </li></ul><ul><li>Flight (Resign as US Trustee) </li></ul><ul><li>Experienced Foreign Trustee, Trust Protector, Counsel </li></ul><ul><li>Practical difficulties to enforce judgment are greater offshore </li></ul>
  16. 16. Key Features of FAPT <ul><li>Arms Length Transaction </li></ul><ul><ul><li>Irrevocable </li></ul></ul><ul><ul><li>Letter of Wishes- non-binding control </li></ul></ul><ul><ul><li>Supervised by Trust Protector </li></ul></ul><ul><ul><li>Cannot be fraudulent conveyance </li></ul></ul><ul><li>Action usually limited to actual creditors who have the burden of proof </li></ul><ul><li>Short statute of limitations </li></ul><ul><li>Does not recognize U.S. judgment </li></ul><ul><li>Legal proceedings brought in foreign jurisdiction </li></ul><ul><li>Difficult to establish jurisdiction if not physically within jurisdiction </li></ul>
  17. 17. Key Features of FAPT (Cont.) <ul><li>Foreign plaintiff often has to post bond or cash to sue </li></ul><ul><li>No disclosure laws for trusts </li></ul><ul><li>Usually enough of a barrier to lead to settlement </li></ul><ul><li>Options to move trust situs </li></ul><ul><li>Limited to amount of creditor claim </li></ul><ul><li>General Rule: Minimum $1,000,000 liquid assets </li></ul><ul><li>Contempt Decisions- Anderson, Lawrence, Brennan </li></ul>
  18. 18. Disadvantages of FAPT <ul><li>Complexity </li></ul><ul><li>Cost (Legal, Appraisals, Maintenance) </li></ul><ul><li>IRS Reporting Obligations </li></ul><ul><li>Ownership Transfer is Irrevocable </li></ul><ul><li>Contempt Cases for not returning assets </li></ul><ul><li>Security of foreign jurisdiction </li></ul>
  19. 19. Limited Use of Asset Protection Trusts for Risk Reduction <ul><li>Valid uses of trusts, but limited for risk reduction </li></ul><ul><li>Bankruptcy 10 year claw back- severe limit in bankruptcy context </li></ul><ul><li>Anderson, Lawrence and Brennan decisions provide risk for both Domestic and Offshore Trusts </li></ul><ul><ul><li>All bets are off if the creditor is the US Government </li></ul></ul><ul><ul><li>Most bets are off if the creditor is a powerful corporation </li></ul></ul><ul><ul><li>In these cases, creditor did not get complete recovery </li></ul></ul><ul><ul><li>Bad facts make bad law </li></ul></ul><ul><ul><li>Six contempt citation cases for ignoring a repatriation order </li></ul></ul><ul><ul><li>No cases of recovery other than voluntary settlement </li></ul></ul><ul><li>Will have to have strong non-protection reasons for the trust </li></ul><ul><li>Prepare an affidavit of solvency before setting up FAPT or DAPT </li></ul><ul><li>Must balance risks with the benefit- probablity of limited value for most high net worth individuals </li></ul><ul><li>Goal : Deter Litigation, Incentive for Early Settlement, Enhance Bargaining Position, Level the Playing Field, Provide Options in Litigation </li></ul>
  20. 20. Choice of Business Entity <ul><li>Factors Driving the Choice </li></ul><ul><li>Management Control & Duties </li></ul><ul><li>Tax Considerations </li></ul><ul><li>Risk Reduction </li></ul><ul><li>Flexibility </li></ul><ul><li>Cost to Form and Operate </li></ul><ul><li>Restrictions on Structure and Capital </li></ul><ul><li>Integration with Estate Plan </li></ul>
  21. 21. Key Terms <ul><li>Inside Liability </li></ul><ul><li>Risk from operation of the business or property itself </li></ul><ul><li>Outside Liability </li></ul><ul><li>Risk from matter not related to the business which exposes the business to liability </li></ul><ul><li>Dangerous Assets </li></ul><ul><li>Assets that have a high potential of creating liability </li></ul><ul><li>Safe Assets </li></ul><ul><li>Assets with a low probability of creating lawsuit liability </li></ul>
  22. 22. Corporations <ul><li>Pros </li></ul><ul><li>Inside out risk reduction </li></ul><ul><li>Graduated tax rates </li></ul><ul><li>Dividends taxed at lower rates </li></ul><ul><li>Medical reimbursement plans </li></ul><ul><li>Cons </li></ul><ul><li>No outside-in risk reduction </li></ul><ul><li>Double tax on sales </li></ul><ul><li>Year end tax planning to zero out earnings </li></ul><ul><li>Unreasonable compensation </li></ul><ul><li>Accumulated tax earnings </li></ul><ul><li>Strict corporate formalities </li></ul><ul><li>Double tax on operating income </li></ul><ul><li>Piercing the Corporate Veil </li></ul>
  23. 23. General Partnership <ul><li>Pros </li></ul><ul><li>Easy to form </li></ul><ul><li>Low cost to form and operate </li></ul><ul><li>Cons </li></ul><ul><li>Unlimited liability for acts of partnership and other partners </li></ul><ul><li>Loss of protection if participate in management </li></ul>
  24. 24. Limited Partnership <ul><li>Purpose </li></ul><ul><li>Holding company--Hold safe assets </li></ul><ul><li>Hold interest in other entities </li></ul><ul><li>Estate planning technique </li></ul><ul><li>Not Used For </li></ul><ul><li>Dangerous assets </li></ul><ul><li>Operations </li></ul><ul><li>Personal residence </li></ul>
  25. 25. Limited Partnership <ul><li>Pros </li></ul><ul><li>Risk reduction </li></ul><ul><li>Pass thru taxation </li></ul><ul><li>Maintain control even if ownership gifted or vested in another person or entity </li></ul><ul><li>Step up basis at death of partner (IRC 754) </li></ul><ul><li>Inexpensive to operate </li></ul><ul><li>Flexible management and economic structures </li></ul><ul><li>Use as a holding company in other entities </li></ul><ul><li>Estate Planning transfer of assets out of estate; discounting; freeze appreciation </li></ul><ul><li>Cons </li></ul><ul><li>Expense of formation </li></ul><ul><li>Charging Order </li></ul><ul><li>Foreclosure of Interest </li></ul>
  26. 26. Limited Liability Company <ul><li>Pros </li></ul><ul><li>Use for rental property </li></ul><ul><li>Insulate dangerous assets </li></ul><ul><li>Operating businesses </li></ul><ul><li>Financial privacy </li></ul><ul><li>Protection for inside liability </li></ul><ul><li>Flexibility-reduced formalities </li></ul><ul><li>Ownership-Trust; Special Purpose Vehicles </li></ul><ul><li>Tax options-pass through </li></ul><ul><li>Estate planning </li></ul><ul><li>Can be set up offshore </li></ul><ul><li>Cons </li></ul><ul><li>Must carefully draft operating agreement </li></ul><ul><li>Business mergers, divisions and reorganizations are more difficult </li></ul><ul><li>Not valuable for single member LLC </li></ul><ul><li>Oregon allows charging order </li></ul>
  27. 27. S Corporation <ul><li>Pros </li></ul><ul><li>Pass thru taxation </li></ul><ul><li>SE tax minimization planning </li></ul><ul><li>Inside-out risk reduction </li></ul><ul><li>Eligible for qualified plans </li></ul><ul><li>Easy for mergers and reorganizations </li></ul><ul><li>Cons </li></ul><ul><li>Restrictions on ownership </li></ul><ul><li>No outside-in risk reduction </li></ul><ul><li>Strict corporate formalities </li></ul>
  28. 28. Risk Reduction <ul><li>Outside Creditors </li></ul><ul><li>Claims outside purview of business entity asserted against owner personally </li></ul><ul><li>Inside Creditors </li></ul><ul><li>Claim against business operation or real estate operated and owned inside a business entity </li></ul><ul><li>Risk Reduction Inside Claims </li></ul><ul><li>C or S Corporation </li></ul><ul><li>LLC </li></ul><ul><li>Protection of Real Estate </li></ul><ul><li>LLC or FLP </li></ul><ul><li>Insurance </li></ul><ul><li>Not held as individual or General Partnership </li></ul>
  29. 29. Use of Multiple Entities <ul><li>Segregate Business Assets </li></ul><ul><li>Dangerous Assets versus Safe Assets </li></ul><ul><li>Real estate in LLC and leased to operating business </li></ul><ul><li>Equipment in LLC and leased to business </li></ul><ul><li>Separate liability entity for different business functions and operations </li></ul><ul><li>Separate entity for trademarks, patents and copyrights </li></ul>
  30. 30. Funding the Entities <ul><li>Owner owns and leases exempt assets to operating entity </li></ul><ul><li>Combination of debt and equity financing </li></ul><ul><li>Encumbering operating entities assets with liens in favor of owner or holding company </li></ul><ul><li>Regular withdrawals of funds generated </li></ul><ul><li>Do not put dangerous and safe assets in same entity </li></ul>
  31. 31. Buy-Sell Agreements <ul><li>Structure: Owner Purchase </li></ul><ul><li>Agreement among business owners to purchase each other’s share –mandatory or optional </li></ul><ul><li>Triggering Events </li></ul><ul><li>Owner’s death </li></ul><ul><li>Retirement </li></ul><ul><li>Disability </li></ul><ul><li>Gift or sell interest </li></ul><ul><li>Bankruptcy </li></ul><ul><li>Divorce </li></ul><ul><li>Leave employment </li></ul><ul><li>Advice </li></ul><ul><li>Avoid making business decisions with partner’s spouse </li></ul><ul><li>Make sure your spouse and family gets your share of value from your business so they can pay the bills </li></ul>
  32. 32. Funding the Buy-Sell Agreement <ul><li>Installment Notes </li></ul><ul><li>Security </li></ul><ul><li>Personal guarantees </li></ul><ul><li>Time needed to accumulate capital-useful for retirement </li></ul><ul><li>Life Insurance </li></ul><ul><li>Regular Review- type of policy; value of corporation; guaranteed insurability option </li></ul><ul><li>No deduction for premiums </li></ul><ul><li>Lack of insurability </li></ul><ul><li>Transfer for value rule applies absent exception </li></ul><ul><li>Charitable Remainder Trust </li></ul><ul><li>Asset value low </li></ul><ul><li>Owner receives income for life; remainder to charity </li></ul><ul><li>Trust does not pay capital gains tax </li></ul>
  33. 33. Stock Redemption <ul><li>Structure: Sale to Entity </li></ul><ul><li>Corporation redeems the shares of a deceased shareholder at death/disability </li></ul><ul><li>Advantages </li></ul><ul><li>Simplicity of one life insurance policy per shareholder </li></ul><ul><li>Premium costs are allocated to the shareholders according to their percentage ownership </li></ul><ul><li>Policy protected from shareholders’ creditors </li></ul>
  34. 34. Stock Redemption <ul><li>Disadvantages </li></ul><ul><li>Loss of step up basis surviving shareholders </li></ul><ul><li>Insurance polices subject to attachment by business creditors </li></ul><ul><li>C Corp death proceeds may be subject to AMT </li></ul><ul><li>If policies overfunded to provide non-qualified retirement benefits, benefits are taxable </li></ul><ul><li>Proceeds increase earnings, redemption decrease in earnings for dividends </li></ul><ul><li>Estate tax issues if deceased shareholder has control-ownership interest results in inclusion in estate </li></ul>
  35. 35. Cross Purchase <ul><li>Structure: Purchase from Decedent’s Estate </li></ul><ul><li>Surviving owners purchase deceased member shares from estate </li></ul><ul><li>Advantages </li></ul><ul><li>Individuals own policies, receive death benefit, family of deceased has stepped up basis by buying the stock directly </li></ul><ul><li>Life Insurance proceeds to surviving owners not subject to income tax; tax basis is purchase price </li></ul><ul><li>Estate tax—life insurance proceeds not included in estate of deceased shareholder </li></ul><ul><li>Wait and see approach allows decision on source of funds to buy stock </li></ul><ul><li>Policies protected from corporate creditors </li></ul><ul><li>Proceeds of policy not subject to AMT </li></ul>
  36. 36. Cross Purchases <ul><li>Disadvantages </li></ul><ul><li>Difficult to administer if numerous shareholders buying a plan for each other </li></ul><ul><li>Number of policies expand if disability insurance is purchased </li></ul><ul><li>Age or insurability creates disparity in premiums </li></ul><ul><li>Subject to attachment by shareholders’ creditors </li></ul><ul><li>Shareholder may fail to pay premiums </li></ul><ul><li>May fail to pay benefits pursuant to buy sell agreement </li></ul>
  37. 37. Valuation <ul><li>Book Value </li></ul><ul><li>Recorded in accounting records </li></ul><ul><li>Snapshot of assets/liabilities </li></ul><ul><li>No appraisal </li></ul><ul><li>Fair Market Value </li></ul><ul><li>Willing buyer-willing seller </li></ul><ul><li>Requires appraisal </li></ul><ul><li>Parties can agree on value if provided in agreement </li></ul><ul><li>Formula Approach </li></ul><ul><li>Book value plus percentage </li></ul><ul><li>Capitalization of future earnings </li></ul><ul><li>Method can be different for different triggers </li></ul>
  38. 38. Insurance Trust Agreement <ul><li>Structure: Purchase Policies with Trust </li></ul><ul><li>Policies owned by an irrevocable trust </li></ul><ul><li>Advantages </li></ul><ul><li>Simplicity of one policy </li></ul><ul><li>Premiums based on ownership interest </li></ul><ul><li>Assures compliance with buy-sell </li></ul><ul><li>Not included in estate of deceased shareholder </li></ul><ul><li>Disadvantages </li></ul><ul><li>Potential for income tax under transfer for value rules </li></ul>
  39. 39. Issues When Withdrawing Funds: Fraud Potential <ul><li>Fraud Restrictions </li></ul><ul><li>Covers all transactions of business with owners </li></ul><ul><li>Must have intent to defraud creditors </li></ul><ul><ul><li>Motive </li></ul></ul><ul><ul><li>Timing </li></ul></ul><ul><ul><li>Insolvency at time </li></ul></ul><ul><ul><li>Adequate consideration </li></ul></ul><ul><ul><li>Substantially all the debtor’s assets </li></ul></ul><ul><ul><li>Concealment </li></ul></ul><ul><ul><li>Transfer to lien holder for insider </li></ul></ul><ul><li>Constructive Fraud Restrictions </li></ul><ul><li>Receives less than full value </li></ul><ul><li>Transferor is insolvent –cash flow or balance sheet test </li></ul><ul><li>Transfer to owner for return value-avoids constructive fraud </li></ul><ul><li>Statutory Fraud Limits </li></ul><ul><li>Less than full value </li></ul><ul><li>Restrictive Balance Sheet test </li></ul><ul><li>Cash Flow Test </li></ul>
  40. 40. Issues When Withdrawing Funds: Withdrawl Methods <ul><li>Dividends </li></ul><ul><li>Statutory Test </li></ul><ul><li>Earned Surplus </li></ul><ul><li>Delaware less restrictive test </li></ul><ul><li>Salary </li></ul><ul><li>Reasonable compensation </li></ul><ul><li>Regular and in Writing </li></ul><ul><li>All subject to self employment tax </li></ul><ul><li>Not paid because of ownership interest </li></ul><ul><li>Loans and Leases </li></ul><ul><li>Business owner secured creditor </li></ul><ul><li>Courts held legitimate business expenses </li></ul><ul><li>Exempt self employment taxes if multi-owner </li></ul><ul><li>Contractual Obligation of Guaranteed Payments </li></ul><ul><li>Does not reduce tax basis in LLC </li></ul><ul><li>Make to owners without reference to ownership interest </li></ul><ul><li>Sales of Accounts Receivables </li></ul><ul><li>Sell to holding company </li></ul><ul><li>Operating entity withdraws for salary, leases, loans and operating expenses </li></ul>
  41. 41. Transferring Business Interest to the Family <ul><li>LLC Interest </li></ul><ul><li>Voting and Non-Voting Interest </li></ul><ul><li>Transfer Value without Transferring Control </li></ul><ul><li>Discounted Value </li></ul><ul><li>Lack of Control </li></ul><ul><li>Lack of Marketability </li></ul><ul><li>Appraisal </li></ul><ul><li>Tax Free Gifts </li></ul><ul><li>Annual Gifting </li></ul><ul><li>Gift Splitting for Married Couples </li></ul><ul><li>Lifetime Exemption </li></ul><ul><li>Issues for the Business Owner </li></ul><ul><li>Planning methods under IRS scrutiny </li></ul><ul><li>Children receive share on liquidation </li></ul><ul><li>Still must plan for transfer of control </li></ul><ul><li>Must be a capital income producing business, not service of parent or taxed to parent </li></ul><ul><li>Only appropriate to family owned business </li></ul>
  42. 42. Risk Reduction: What Probably Won’t Work <ul><li>Revocable Living Trusts </li></ul><ul><li>Nevada Corporation alone </li></ul><ul><li>Leaving no equity anywhere </li></ul><ul><li>Giving it away (but not really) </li></ul><ul><li>Lying </li></ul><ul><li>Some types of Trusts </li></ul><ul><li>Transferring assets after claim </li></ul>
  43. 43. Risk Reduction: What Might Work <ul><li>Limited liability companies </li></ul><ul><li>Limited partnerships </li></ul><ul><li>Multiple entities </li></ul><ul><li>Buy-sell agreements </li></ul><ul><li>Statutory exemptions </li></ul><ul><li>Life insurance/ Life insurance trusts </li></ul><ul><li>Personal residence trusts </li></ul><ul><li>Domestic Asset Protection Trust (Limited-Non Oregon) </li></ul><ul><li>Offshore Asset Protection Trusts (Limited) </li></ul><ul><li>Divide and conquer- properly title assets </li></ul><ul><li>Maintain adequate insurance </li></ul><ul><li>Avoid general partnerships </li></ul><ul><li>Planning when the seas are calm </li></ul><ul><li>Planning done for non-asset protection reasons </li></ul><ul><li>Don’t use a Ferrari to cut the lawn </li></ul>
  44. 44. Questions? <ul><li>Let me be a resource to you and your clients. </li></ul><ul><li>Russ Pike </li></ul><ul><li>[email_address] </li></ul><ul><li>503-364-2281 </li></ul><ul><li>www.shermlaw.com </li></ul><ul><li>Also find us on LinkedIn or facebook </li></ul>

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