This document discusses various estate planning and asset protection strategies, including: 1) Using corporations or LLCs to obtain liability protection while maintaining control over assets. 2) Protecting exempt assets like homes and retirement accounts which have protections under state law. 3) Establishing revocable living trusts to avoid probate and allow control over assets if incapacitated. 4) Using property agreements, family limited partnerships (FLPs), and irrevocable trusts to partition assets between family members and take advantage of discounts and creditor protections. 5) Considering domestic and offshore asset protection trusts to further shield assets from lawsuits under favorable jurisdictions. Proper planning requires a customized approach.

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

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

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

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

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

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

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

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

9. 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

10. 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!

11. One Threat Creditor Claims

12. 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

13. 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

14. 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

15. 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.

16. Another Threat Estate Taxes

17. 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

18. 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

19. First Defender Insurance

20. 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

21. First Barrier Corporations Or LLCs

22. 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

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

24. Second Defender Exempt Property

25. 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

26. 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

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

28. 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

29. 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

30. Second Barrier Revocable Living Trust (RLT)

31. 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

32. 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

33. Third Defender Property Agreements

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

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

36. Third Barrier Family Limited Partnerships (FLP) or FLLC

37. 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

38. 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

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

40. 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

41. 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

42. 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!

43. 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!

44. 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

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

46. 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

47. Third Barrier Irrevocable Trusts

48. 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

49. 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

50. Fifth Barrier Personal Asset Protection Trusts

51. 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

52. 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

53. 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

54. 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

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

56. 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.

57. 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

58. Case Study The Surgeon

59. 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

60. 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

61. Before Planning Your Entire Estate is at Risk!

62. After Planning Your Estate has Defenses!

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

64. Thank You for Attending Questions?