The document outlines risk planning strategies for asset protection, emphasizing the importance of using trusts, entities, and insurance to shield assets from creditors. It distinguishes between valid risk planning approaches and common misconceptions, detailing various trust types and business entities that can enhance liability protection. Additionally, it addresses the challenges and limitations faced in effectively implementing these strategies, especially regarding bankruptcy and creditor enforcement.

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. Overview Risk Planning Concepts Different Types of Trusts and Their Uses Different Types of Entities and Their Uses Integrating Trusts, Entities, and Insurance Achieving Risk Reduction – Putting it All Together

3. Why Risk Planning? Victim oriented society Deep pockets Substantial insurance Significant personal assets Increased social media and awareness- nothing is private Publicity of judgments against high net worth individuals

4. Risk Planning Basics Risk Planning is: A structure that makes assets difficult or impossible to reach Places a portion of your net worth behind some obstacles Planning for future liabilities Risk Planning is Not: Fraud Tax Avoidance Transferring control of all your assets Reliance on Stealth Alone

5. Risk Planning Concepts Judgment creditors can only take what you own. Without your permission, no one can take what you own without winning a lawsuit. Timing is of the essence. Risk Planning must be done while the seas are calm. Risk protection is a cost-benefit analysis from your standpoint and the predators. Never mix liability generating assets (Dangerous Assets) in the same entity with other Dangerous Assets or Safe Assets. Insurance is the first line of defense for business and personal protection. Every asset you value must be protected and titled properly.

6. Planning Limitations Fraudulent Conveyance Statute Timing the transfer- 4 years look back; one year of discovery Not receive “reasonably equivalent value” Insolvency test for Oregon Debts greater than assets Not paying debts when due Cannot protect against already incurred debt Timing before Bankruptcy Present and Future Creditors- hinder, delay, defraud

7. Planning Limitations, Cont’d Bankruptcy Preferential transfers Nondischargeable debts Lien stripping Ten year claw back on Homestead exemption limitation Criminal Violations RICO Statute Bankruptcy Crimes Money Laundering Conspiracy to Defraud Mail and Wire Fraud Criminal Fraud Defenses Legitimate business purpose Valid estate planning motivation All of the facts/credibility of debtor will be considered by court

8. Reducing Risk: Insurance Business Insurance Coverage Compare premiums/coverage before purchasing Retain insurance policies indefinitely Give prompt verbal and written notice to the right person Enforce the duty to defend Rely on another party’s insurance Require another party to indemnify Factor liability insurance into the insolvency test Obtain umbrella coverage

9. Reducing Risk: Trusts Types of Trusts Irrevocable Life Insurance Trust (ILIT) Self-Settled and Spendthrift Trust Domestic Asset Protection Trust Foreign Asset Protection Trust

10. Irrevocable Life Insurance Trust Protects value from creditors of insured and trust beneficiaries Excludes death proceeds from taxation in insured’s estate Under certain conditions, may have access to cash values Requires annual maintenance to pay premiums Requires an independent trustee

11. Self Settled Trust Creates trust for your benefit, contains provision that prevents creditors from reaching your interest in trust assets Usually ineffective to reduce risk except in certain jurisdictions Creditors can reach interest of trust maker Spendthrift protection does not work when trustor and beneficiary are the same person Bankruptcy Code – Bankruptcy trustee can avoid transfer made within 10 years of filing bankruptcy.

12. Domestic Asset Protection Trusts Selected jurisdictions’ statutes allow a DAPT Irrevocable Trust (11 states) Incorporates the respective State’s law Discretionary benefits, not in trust maker's estate at death Done properly, can create some protection, but this vehicle is not yet well tested in court Works best if you reside in a state that allows it by statute and assets can be domiciled in state Limited use if bankruptcy is filed within 10 years and there exists actual intent to hinder, delay or defraud Some states have better protections than others

13. Other Considerations for a DAPT Bankruptcy claw-back Irrevocability Discretionary distributions Estate tax and income tax Risk of validity challenge Fees of creation and maintenance Full faith and credit attacks Supremacy clause argument – risk from federal courts Contract clause concerns State of domicile versus state of trust jurisdiction Limited existing case law on constitutional issues

14. Why a Delaware Trust? Specific Benefits Carry out wishes of trustor (Maker) Protect trustees from liability Delaware income tax benefit Effective enforcement of trust agreement No change in current trust current advisors Procedure to change situs of irrevocable trust

15. Foreign Asset Protection Trust How it works Independent Foreign Trustee more protection Independent Trust Protector with certain powers APT holds overseas money 99% LP Ownership LP holds US money LLC 1% GP of LP Move only liquid assets Less than 50% of net worth Reserve assets to pay government or large corporate creditors Creditor Attack is Less Likely Because Flight (Remove US Assets) Flight (Resign as US Trustee) Experienced Foreign Trustee, Trust Protector, Counsel Practical difficulties to enforce judgment are greater offshore

16. Key Features of FAPT Arms Length Transaction Irrevocable Letter of Wishes- non-binding control Supervised by Trust Protector Cannot be fraudulent conveyance Action usually limited to actual creditors who have the burden of proof Short statute of limitations Does not recognize U.S. judgment Legal proceedings brought in foreign jurisdiction Difficult to establish jurisdiction if not physically within jurisdiction

17. Key Features of FAPT (Cont.) Foreign plaintiff often has to post bond or cash to sue No disclosure laws for trusts Usually enough of a barrier to lead to settlement Options to move trust situs Limited to amount of creditor claim General Rule: Minimum $1,000,000 liquid assets Contempt Decisions- Anderson, Lawrence, Brennan

18. Disadvantages of FAPT Complexity Cost (Legal, Appraisals, Maintenance) IRS Reporting Obligations Ownership Transfer is Irrevocable Contempt Cases for not returning assets Security of foreign jurisdiction

19. Limited Use of Asset Protection Trusts for Risk Reduction Valid uses of trusts, but limited for risk reduction Bankruptcy 10 year claw back- severe limit in bankruptcy context Anderson, Lawrence and Brennan decisions provide risk for both Domestic and Offshore Trusts All bets are off if the creditor is the US Government Most bets are off if the creditor is a powerful corporation In these cases, creditor did not get complete recovery Bad facts make bad law Six contempt citation cases for ignoring a repatriation order No cases of recovery other than voluntary settlement Will have to have strong non-protection reasons for the trust Prepare an affidavit of solvency before setting up FAPT or DAPT Must balance risks with the benefit- probablity of limited value for most high net worth individuals Goal : Deter Litigation, Incentive for Early Settlement, Enhance Bargaining Position, Level the Playing Field, Provide Options in Litigation

20. Choice of Business Entity Factors Driving the Choice Management Control & Duties Tax Considerations Risk Reduction Flexibility Cost to Form and Operate Restrictions on Structure and Capital Integration with Estate Plan

21. Key Terms Inside Liability Risk from operation of the business or property itself Outside Liability Risk from matter not related to the business which exposes the business to liability Dangerous Assets Assets that have a high potential of creating liability Safe Assets Assets with a low probability of creating lawsuit liability

22. Corporations Pros Inside out risk reduction Graduated tax rates Dividends taxed at lower rates Medical reimbursement plans Cons No outside-in risk reduction Double tax on sales Year end tax planning to zero out earnings Unreasonable compensation Accumulated tax earnings Strict corporate formalities Double tax on operating income Piercing the Corporate Veil

23. General Partnership Pros Easy to form Low cost to form and operate Cons Unlimited liability for acts of partnership and other partners Loss of protection if participate in management

24. Limited Partnership Purpose Holding company--Hold safe assets Hold interest in other entities Estate planning technique Not Used For Dangerous assets Operations Personal residence

25. Limited Partnership Pros Risk reduction Pass thru taxation Maintain control even if ownership gifted or vested in another person or entity Step up basis at death of partner (IRC 754) Inexpensive to operate Flexible management and economic structures Use as a holding company in other entities Estate Planning transfer of assets out of estate; discounting; freeze appreciation Cons Expense of formation Charging Order Foreclosure of Interest

26. Limited Liability Company Pros Use for rental property Insulate dangerous assets Operating businesses Financial privacy Protection for inside liability Flexibility-reduced formalities Ownership-Trust; Special Purpose Vehicles Tax options-pass through Estate planning Can be set up offshore Cons Must carefully draft operating agreement Business mergers, divisions and reorganizations are more difficult Not valuable for single member LLC Oregon allows charging order

27. S Corporation Pros Pass thru taxation SE tax minimization planning Inside-out risk reduction Eligible for qualified plans Easy for mergers and reorganizations Cons Restrictions on ownership No outside-in risk reduction Strict corporate formalities

28. Risk Reduction Outside Creditors Claims outside purview of business entity asserted against owner personally Inside Creditors Claim against business operation or real estate operated and owned inside a business entity Risk Reduction Inside Claims C or S Corporation LLC Protection of Real Estate LLC or FLP Insurance Not held as individual or General Partnership

29. Use of Multiple Entities Segregate Business Assets Dangerous Assets versus Safe Assets Real estate in LLC and leased to operating business Equipment in LLC and leased to business Separate liability entity for different business functions and operations Separate entity for trademarks, patents and copyrights

30. Funding the Entities Owner owns and leases exempt assets to operating entity Combination of debt and equity financing Encumbering operating entities assets with liens in favor of owner or holding company Regular withdrawals of funds generated Do not put dangerous and safe assets in same entity

31. Buy-Sell Agreements Structure: Owner Purchase Agreement among business owners to purchase each other’s share –mandatory or optional Triggering Events Owner’s death Retirement Disability Gift or sell interest Bankruptcy Divorce Leave employment Advice Avoid making business decisions with partner’s spouse Make sure your spouse and family gets your share of value from your business so they can pay the bills

32. Funding the Buy-Sell Agreement Installment Notes Security Personal guarantees Time needed to accumulate capital-useful for retirement Life Insurance Regular Review- type of policy; value of corporation; guaranteed insurability option No deduction for premiums Lack of insurability Transfer for value rule applies absent exception Charitable Remainder Trust Asset value low Owner receives income for life; remainder to charity Trust does not pay capital gains tax

33. Stock Redemption Structure: Sale to Entity Corporation redeems the shares of a deceased shareholder at death/disability Advantages Simplicity of one life insurance policy per shareholder Premium costs are allocated to the shareholders according to their percentage ownership Policy protected from shareholders’ creditors

34. Stock Redemption Disadvantages Loss of step up basis surviving shareholders Insurance polices subject to attachment by business creditors C Corp death proceeds may be subject to AMT If policies overfunded to provide non-qualified retirement benefits, benefits are taxable Proceeds increase earnings, redemption decrease in earnings for dividends Estate tax issues if deceased shareholder has control-ownership interest results in inclusion in estate

35. Cross Purchase Structure: Purchase from Decedent’s Estate Surviving owners purchase deceased member shares from estate Advantages Individuals own policies, receive death benefit, family of deceased has stepped up basis by buying the stock directly Life Insurance proceeds to surviving owners not subject to income tax; tax basis is purchase price Estate tax—life insurance proceeds not included in estate of deceased shareholder Wait and see approach allows decision on source of funds to buy stock Policies protected from corporate creditors Proceeds of policy not subject to AMT

36. Cross Purchases Disadvantages Difficult to administer if numerous shareholders buying a plan for each other Number of policies expand if disability insurance is purchased Age or insurability creates disparity in premiums Subject to attachment by shareholders’ creditors Shareholder may fail to pay premiums May fail to pay benefits pursuant to buy sell agreement

37. Valuation Book Value Recorded in accounting records Snapshot of assets/liabilities No appraisal Fair Market Value Willing buyer-willing seller Requires appraisal Parties can agree on value if provided in agreement Formula Approach Book value plus percentage Capitalization of future earnings Method can be different for different triggers

38. Insurance Trust Agreement Structure: Purchase Policies with Trust Policies owned by an irrevocable trust Advantages Simplicity of one policy Premiums based on ownership interest Assures compliance with buy-sell Not included in estate of deceased shareholder Disadvantages Potential for income tax under transfer for value rules

39. Issues When Withdrawing Funds: Fraud Potential Fraud Restrictions Covers all transactions of business with owners Must have intent to defraud creditors Motive Timing Insolvency at time Adequate consideration Substantially all the debtor’s assets Concealment Transfer to lien holder for insider Constructive Fraud Restrictions Receives less than full value Transferor is insolvent –cash flow or balance sheet test Transfer to owner for return value-avoids constructive fraud Statutory Fraud Limits Less than full value Restrictive Balance Sheet test Cash Flow Test

40. Issues When Withdrawing Funds: Withdrawl Methods Dividends Statutory Test Earned Surplus Delaware less restrictive test Salary Reasonable compensation Regular and in Writing All subject to self employment tax Not paid because of ownership interest Loans and Leases Business owner secured creditor Courts held legitimate business expenses Exempt self employment taxes if multi-owner Contractual Obligation of Guaranteed Payments Does not reduce tax basis in LLC Make to owners without reference to ownership interest Sales of Accounts Receivables Sell to holding company Operating entity withdraws for salary, leases, loans and operating expenses

41. Transferring Business Interest to the Family LLC Interest Voting and Non-Voting Interest Transfer Value without Transferring Control Discounted Value Lack of Control Lack of Marketability Appraisal Tax Free Gifts Annual Gifting Gift Splitting for Married Couples Lifetime Exemption Issues for the Business Owner Planning methods under IRS scrutiny Children receive share on liquidation Still must plan for transfer of control Must be a capital income producing business, not service of parent or taxed to parent Only appropriate to family owned business

42. Risk Reduction: What Probably Won’t Work Revocable Living Trusts Nevada Corporation alone Leaving no equity anywhere Giving it away (but not really) Lying Some types of Trusts Transferring assets after claim

43. Risk Reduction: What Might Work Limited liability companies Limited partnerships Multiple entities Buy-sell agreements Statutory exemptions Life insurance/ Life insurance trusts Personal residence trusts Domestic Asset Protection Trust (Limited-Non Oregon) Offshore Asset Protection Trusts (Limited) Divide and conquer- properly title assets Maintain adequate insurance Avoid general partnerships Planning when the seas are calm Planning done for non-asset protection reasons Don’t use a Ferrari to cut the lawn

44. Questions? Let me be a resource to you and your clients. Russ Pike [email_address] 503-364-2281 www.shermlaw.com Also find us on LinkedIn or facebook