asset protection planning
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Estate & Asset Estate & Asset Protection Protection PlanningPlanning
Karen Brady & Associates, Karen Brady & Associates, P.C. Attorneys at LawP.C. Attorneys at Law
© Karen Brady, 2005
Definition of Asset ProtectionDefinition of Asset ProtectionDefinition of Asset ProtectionDefinition of Asset Protection
Organizing assets and affairs to minimize Organizing assets and affairs to minimize against risks of future lossagainst risks of future loss
Preventative, not curative (vaccines, not Preventative, not curative (vaccines, not antibiotics)antibiotics)
Organizing assets and affairs to minimize Organizing assets and affairs to minimize against risks of future lossagainst risks of future loss
Preventative, not curative (vaccines, not Preventative, not curative (vaccines, not antibiotics)antibiotics)
Reasons to Protect AssetsReasons to Protect AssetsReasons to Protect AssetsReasons to Protect Assets
Why Build Estate But Why Build Estate But Not Consider Risks?Not Consider Risks?
Potential for LawsuitsPotential for Lawsuits
Why Build Estate But Why Build Estate But Not Consider Risks?Not Consider Risks?
Potential for LawsuitsPotential for Lawsuits
Reduce Insurance Reduce Insurance CoverageCoverage
Peace of MindPeace of Mind Concentrate on Your Concentrate on Your
JobJob
Reduce Insurance Reduce Insurance CoverageCoverage
Peace of MindPeace of Mind Concentrate on Your Concentrate on Your
JobJob
What Asset Protection Is NotWhat Asset Protection Is NotWhat Asset Protection Is NotWhat Asset Protection Is Not
Hiding assets, i.e. Hiding assets, i.e. confidentiality is a plus, but confidentiality is a plus, but secrecy is not the lynchpin of secrecy is not the lynchpin of the planthe plan
Taxation avoidanceTaxation avoidance
Hiding assets, i.e. Hiding assets, i.e. confidentiality is a plus, but confidentiality is a plus, but secrecy is not the lynchpin of secrecy is not the lynchpin of the planthe plan
Taxation avoidanceTaxation avoidance
Title to AssetsTitle to AssetsTitle to AssetsTitle to Assets
The Manner of Holding Title to Property Affects The Manner of Holding Title to Property Affects a Creditor’s Rightsa Creditor’s Rights
The Manner of Holding Title to Property Affects The Manner of Holding Title to Property Affects a Creditor’s Rightsa Creditor’s Rights
Community PropertyCommunity PropertyCommunity PropertyCommunity Property
Community PropertyCommunity Property• Acquired During MarriageAcquired During Marriage• Created by Law or by AgreementCreated by Law or by Agreement• Result of an “Onerous Acquisition”, e.g. workResult of an “Onerous Acquisition”, e.g. work
Community PropertyCommunity Property• Acquired During MarriageAcquired During Marriage• Created by Law or by AgreementCreated by Law or by Agreement• Result of an “Onerous Acquisition”, e.g. workResult of an “Onerous Acquisition”, e.g. work
Separate PropertySeparate PropertySeparate PropertySeparate Property
Separate PropertySeparate Property• Acquired Before MarriageAcquired Before Marriage• Acquired By Gift or InheritanceAcquired By Gift or Inheritance
Separate PropertySeparate Property• Acquired Before MarriageAcquired Before Marriage• Acquired By Gift or InheritanceAcquired By Gift or Inheritance
Joint TenancyJoint TenancyJoint TenancyJoint Tenancy
100% Co-ownership by More Than One Person 100% Co-ownership by More Than One Person 100% Co-ownership by More Than One Person 100% Co-ownership by More Than One Person
““Last One Left Standing Rule”: Last One Left Standing Rule”: Survivor Owns It All!Survivor Owns It All!
Creditor RightsCreditor RightsCreditor RightsCreditor Rights
Can Set Aside Fraudulent TransfersCan Set Aside Fraudulent Transfers Community Creditor/Marital Purpose: All Community Creditor/Marital Purpose: All
Community Property is Exposed to Community Community Property is Exposed to Community CreditorsCreditors
Separate Creditor: Separate Property is Separate Creditor: Separate Property is Exposed to Separate Creditor, 1/2 Community Exposed to Separate Creditor, 1/2 Community Property May Be Exposed to Property May Be Exposed to Separate CreditorSeparate Creditor
Can Set Aside Fraudulent TransfersCan Set Aside Fraudulent Transfers Community Creditor/Marital Purpose: All Community Creditor/Marital Purpose: All
Community Property is Exposed to Community Community Property is Exposed to Community CreditorsCreditors
Separate Creditor: Separate Property is Separate Creditor: Separate Property is Exposed to Separate Creditor, 1/2 Community Exposed to Separate Creditor, 1/2 Community Property May Be Exposed to Property May Be Exposed to Separate CreditorSeparate Creditor
Creditor Rights (cont.)Creditor Rights (cont.)Creditor Rights (cont.)Creditor Rights (cont.)
Divorce Court May Have Jurisdiction Over Divorce Court May Have Jurisdiction Over Both Community and Separate PropertyBoth Community and Separate Property
All Joint Tenancy Property is at Risk of Any All Joint Tenancy Property is at Risk of Any Single Joint Tenant’s Creditors!Single Joint Tenant’s Creditors!
Divorce Court May Have Jurisdiction Over Divorce Court May Have Jurisdiction Over Both Community and Separate PropertyBoth Community and Separate Property
All Joint Tenancy Property is at Risk of Any All Joint Tenancy Property is at Risk of Any Single Joint Tenant’s Creditors!Single Joint Tenant’s Creditors!
One ThreatOne ThreatOne ThreatOne Threat
Creditor ClaimsCreditor Claims Creditor ClaimsCreditor Claims
Types of ClaimsTypes of ClaimsTypes of ClaimsTypes of Claims
Officer/Director Officer/Director Liability (Corp.)Liability (Corp.)
Professional LiabilityProfessional Liability DivorceDivorce Creditor LawsuitsCreditor Lawsuits
Officer/Director Officer/Director Liability (Corp.)Liability (Corp.)
Professional LiabilityProfessional Liability DivorceDivorce Creditor LawsuitsCreditor Lawsuits
Liability for Other Liability for Other People’s DebtsPeople’s Debts
Partnership LiabilityPartnership Liability Hard to Control ClaimsHard to Control Claims
• Product LiabilityProduct Liability
• Environmental LiabilityEnvironmental Liability
Liability for Other Liability for Other People’s DebtsPeople’s Debts
Partnership LiabilityPartnership Liability Hard to Control ClaimsHard to Control Claims
• Product LiabilityProduct Liability
• Environmental LiabilityEnvironmental Liability
Attempts to Avoid Creditor ClaimsAttempts to Avoid Creditor ClaimsAttempts to Avoid Creditor ClaimsAttempts to Avoid Creditor Claims
Methods ThatMethods That
Don’t WorkDon’t Work• Fraudulent TransfersFraudulent Transfers• ““Hiding” Assets (2005 Bankruptcy Act Hiding” Assets (2005 Bankruptcy Act
now requires 3 years of tax returns)now requires 3 years of tax returns)• ““Constitutional” Trusts, “Pure Trusts” Constitutional” Trusts, “Pure Trusts”
and the likeand the like
Methods ThatMethods That
Don’t WorkDon’t Work• Fraudulent TransfersFraudulent Transfers• ““Hiding” Assets (2005 Bankruptcy Act Hiding” Assets (2005 Bankruptcy Act
now requires 3 years of tax returns)now requires 3 years of tax returns)• ““Constitutional” Trusts, “Pure Trusts” Constitutional” Trusts, “Pure Trusts”
and the likeand the like
Fraudulent TransfersFraudulent TransfersFraudulent TransfersFraudulent Transfers
Intent to Defraud, Hinder or Delay Known or Intent to Defraud, Hinder or Delay Known or Likely CreditorsLikely Creditors
Intent is Generally PresumedIntent is Generally Presumed Badges of FraudBadges of Fraud
such as insolvency, lack of consideration for a transfer, such as insolvency, lack of consideration for a transfer, close relationship with transferee, pending or close relationship with transferee, pending or threatened litigation, concealment, deviation from usual threatened litigation, concealment, deviation from usual practice, transfer of all assets, retaining possession, practice, transfer of all assets, retaining possession, benefit, or control after transferbenefit, or control after transfer
Intent to Defraud, Hinder or Delay Known or Intent to Defraud, Hinder or Delay Known or Likely CreditorsLikely Creditors
Intent is Generally PresumedIntent is Generally Presumed Badges of FraudBadges of Fraud
such as insolvency, lack of consideration for a transfer, such as insolvency, lack of consideration for a transfer, close relationship with transferee, pending or close relationship with transferee, pending or threatened litigation, concealment, deviation from usual threatened litigation, concealment, deviation from usual practice, transfer of all assets, retaining possession, practice, transfer of all assets, retaining possession, benefit, or control after transferbenefit, or control after transfer
Fraudulent ConveyanceFraudulent ConveyanceFraudulent ConveyanceFraudulent Conveyance
Pending or present creditors will have a greater Pending or present creditors will have a greater presumption of a fraudulent conveyance than future presumption of a fraudulent conveyance than future creditorscreditors
Generally, fraudulent conveyance is NOT our common Generally, fraudulent conveyance is NOT our common understanding of fraud. Fraudulent conveyance is understanding of fraud. Fraudulent conveyance is remedial, i.e. a conveyance which can be undone only remedial, i.e. a conveyance which can be undone only to the point a creditor is hindered. No other damages to the point a creditor is hindered. No other damages are usually allowed. However, some states allow for are usually allowed. However, some states allow for criminal or civil penalties, including for the advisor.criminal or civil penalties, including for the advisor.
Pending or present creditors will have a greater Pending or present creditors will have a greater presumption of a fraudulent conveyance than future presumption of a fraudulent conveyance than future creditorscreditors
Generally, fraudulent conveyance is NOT our common Generally, fraudulent conveyance is NOT our common understanding of fraud. Fraudulent conveyance is understanding of fraud. Fraudulent conveyance is remedial, i.e. a conveyance which can be undone only remedial, i.e. a conveyance which can be undone only to the point a creditor is hindered. No other damages to the point a creditor is hindered. No other damages are usually allowed. However, some states allow for are usually allowed. However, some states allow for criminal or civil penalties, including for the advisor.criminal or civil penalties, including for the advisor.
Another ThreatAnother ThreatAnother ThreatAnother Threat
Estate TaxesEstate Taxes Estate TaxesEstate Taxes
Estate TaxesEstate TaxesEstate TaxesEstate Taxes
Changing ownership of assets often also Changing ownership of assets often also removes them from the estate, offering the removes them from the estate, offering the additional benefit of reduced estate taxes along additional benefit of reduced estate taxes along with asset protectionwith asset protection
Changing ownership of assets often also Changing ownership of assets often also removes them from the estate, offering the removes them from the estate, offering the additional benefit of reduced estate taxes along additional benefit of reduced estate taxes along with asset protectionwith asset protection
Asset Protection TechniquesAsset Protection TechniquesAsset Protection TechniquesAsset Protection Techniques
Methods That WorkMethods That Work• Save Administrative Fees and CostsSave Administrative Fees and Costs• Reduce TaxesReduce Taxes• Provide Multiple Layers of DefenseProvide Multiple Layers of Defense• Allow Opportunity for Early SettlementAllow Opportunity for Early Settlement• Voluntary Bankruptcy Now Less Attractive as Final Voluntary Bankruptcy Now Less Attractive as Final
OptionOption
Methods That WorkMethods That Work• Save Administrative Fees and CostsSave Administrative Fees and Costs• Reduce TaxesReduce Taxes• Provide Multiple Layers of DefenseProvide Multiple Layers of Defense• Allow Opportunity for Early SettlementAllow Opportunity for Early Settlement• Voluntary Bankruptcy Now Less Attractive as Final Voluntary Bankruptcy Now Less Attractive as Final
OptionOption
First DefenderFirst DefenderFirst DefenderFirst Defender
InsuranceInsurance InsuranceInsurance
Strengths and WeaknessesStrengths and WeaknessesStrengths and WeaknessesStrengths and Weaknesses
Covers LossCovers Loss Cash to SettleCash to Settle Duty to DefendDuty to Defend
Covers LossCovers Loss Cash to SettleCash to Settle Duty to DefendDuty to Defend
Getting CostlyGetting Costly May not QualifyMay not Qualify Insolvency of CarrierInsolvency of Carrier May get CancelledMay get Cancelled Coverage ExemptionsCoverage Exemptions
• Hazardous WasteHazardous Waste
• Intentional ActsIntentional Acts
• Punitive DamagesPunitive Damages
Getting CostlyGetting Costly May not QualifyMay not Qualify Insolvency of CarrierInsolvency of Carrier May get CancelledMay get Cancelled Coverage ExemptionsCoverage Exemptions
• Hazardous WasteHazardous Waste
• Intentional ActsIntentional Acts
• Punitive DamagesPunitive Damages
StrengthsStrengths WeaknessesWeaknesses
First BarrierFirst BarrierFirst BarrierFirst Barrier
CorporationsCorporations
Or LLCsOr LLCs
CorporationsCorporations
Or LLCsOr LLCs
Corporate FeaturesCorporate FeaturesCorporate FeaturesCorporate Features
Limited LiabilityLimited Liability Still Liable for Personal Still Liable for Personal
GuaranteesGuarantees May have Income Tax May have Income Tax
BenefitsBenefits• Pension, Profit Sharing Pension, Profit Sharing
PlansPlans
• Fringe Benefits, Etc.Fringe Benefits, Etc.
Limited LiabilityLimited Liability Still Liable for Personal Still Liable for Personal
GuaranteesGuarantees May have Income Tax May have Income Tax
BenefitsBenefits• Pension, Profit Sharing Pension, Profit Sharing
PlansPlans
• Fringe Benefits, Etc.Fringe Benefits, Etc.
Must Keep Status Must Keep Status Current with StateCurrent with State
Must Observe Must Observe FormalitiesFormalities• Adopt BylawsAdopt Bylaws
• Keep Minutes of MeetingsKeep Minutes of Meetings
• Issue StockIssue Stock
Must Keep Status Must Keep Status Current with StateCurrent with State
Must Observe Must Observe FormalitiesFormalities• Adopt BylawsAdopt Bylaws
• Keep Minutes of MeetingsKeep Minutes of Meetings
• Issue StockIssue Stock
LLC FeaturesLLC FeaturesLLC FeaturesLLC Features
Limited Liability Like a CorporationLimited Liability Like a Corporation Control is Flexible; May Choose Fewer Control is Flexible; May Choose Fewer
FormalitiesFormalities Can be Taxable Like a PartnershipCan be Taxable Like a Partnership All States Have ThemAll States Have Them
Limited Liability Like a CorporationLimited Liability Like a Corporation Control is Flexible; May Choose Fewer Control is Flexible; May Choose Fewer
FormalitiesFormalities Can be Taxable Like a PartnershipCan be Taxable Like a Partnership All States Have ThemAll States Have Them
Second DefenderSecond DefenderSecond DefenderSecond Defender
Exempt Exempt PropertyProperty
Exempt Exempt PropertyProperty
HomesteadHomesteadHomesteadHomestead
Colorado allows up to $30,000 Colorado allows up to $30,000 Other states allow unlimited (e.g. Florida) but Other states allow unlimited (e.g. Florida) but
new 2005 bankruptcy act requires purchase new 2005 bankruptcy act requires purchase 1215 days before filing or limit is $125,0001215 days before filing or limit is $125,000
2005 Act also limits protection to $125,000 2005 Act also limits protection to $125,000 where claim arises from RICO, breach of where claim arises from RICO, breach of securities laws, fiduciary fraud, and other securities laws, fiduciary fraud, and other specified crimes or tortsspecified crimes or torts
Colorado allows up to $30,000 Colorado allows up to $30,000 Other states allow unlimited (e.g. Florida) but Other states allow unlimited (e.g. Florida) but
new 2005 bankruptcy act requires purchase new 2005 bankruptcy act requires purchase 1215 days before filing or limit is $125,0001215 days before filing or limit is $125,000
2005 Act also limits protection to $125,000 2005 Act also limits protection to $125,000 where claim arises from RICO, breach of where claim arises from RICO, breach of securities laws, fiduciary fraud, and other securities laws, fiduciary fraud, and other specified crimes or tortsspecified crimes or torts
InsuranceInsuranceInsuranceInsurance
Federal exemption is for death benefits and limited Federal exemption is for death benefits and limited cash value (less than $9,000)cash value (less than $9,000)
Colorado exemption is $50,000 where estate is Colorado exemption is $50,000 where estate is beneficiary and contributions were more than 4 years beneficiary and contributions were more than 4 years before filingbefore filing
State exemptions can be more generous, e.g. Florida, State exemptions can be more generous, e.g. Florida, Hawaii, Louisiana, but new 2005 Act requires Hawaii, Louisiana, but new 2005 Act requires residency in that state for at least 2 yearsresidency in that state for at least 2 years
Federal exemption is for death benefits and limited Federal exemption is for death benefits and limited cash value (less than $9,000)cash value (less than $9,000)
Colorado exemption is $50,000 where estate is Colorado exemption is $50,000 where estate is beneficiary and contributions were more than 4 years beneficiary and contributions were more than 4 years before filingbefore filing
State exemptions can be more generous, e.g. Florida, State exemptions can be more generous, e.g. Florida, Hawaii, Louisiana, but new 2005 Act requires Hawaii, Louisiana, but new 2005 Act requires residency in that state for at least 2 yearsresidency in that state for at least 2 years
Retirement PlansRetirement PlansRetirement PlansRetirement Plans
2005 Act makes clear contributions to ERISA 2005 Act makes clear contributions to ERISA covered plans are exempt, as are entire interest covered plans are exempt, as are entire interest in IRAs (up to $1 million?).in IRAs (up to $1 million?).
2005 Act makes clear contributions to ERISA 2005 Act makes clear contributions to ERISA covered plans are exempt, as are entire interest covered plans are exempt, as are entire interest in IRAs (up to $1 million?).in IRAs (up to $1 million?).
529 Plans529 Plans529 Plans529 Plans
529 Plans are Exempt if:529 Plans are Exempt if:
Funded more than 2 years before filingFunded more than 2 years before filing
Funded by parent, grandparent, stepparent, Funded by parent, grandparent, stepparent, stepgrandparent of beneficiary of plan stepgrandparent of beneficiary of plan
$5,000 limit if funded more than one year $5,000 limit if funded more than one year but less than two years before filing but less than two years before filing
Fraudulent transfer rules still applyFraudulent transfer rules still apply
529 Plans are Exempt if:529 Plans are Exempt if:
Funded more than 2 years before filingFunded more than 2 years before filing
Funded by parent, grandparent, stepparent, Funded by parent, grandparent, stepparent, stepgrandparent of beneficiary of plan stepgrandparent of beneficiary of plan
$5,000 limit if funded more than one year $5,000 limit if funded more than one year but less than two years before filing but less than two years before filing
Fraudulent transfer rules still applyFraudulent transfer rules still apply
Other Exemptions in ColoradoOther Exemptions in ColoradoOther Exemptions in ColoradoOther Exemptions in Colorado
Property of business partnership where held in Property of business partnership where held in name of partnershipname of partnership
Burial plotBurial plot Health AidsHealth Aids Business or professional supplies up to $10,000Business or professional supplies up to $10,000
Property of business partnership where held in Property of business partnership where held in name of partnershipname of partnership
Burial plotBurial plot Health AidsHealth Aids Business or professional supplies up to $10,000Business or professional supplies up to $10,000
Second BarrierSecond BarrierSecond BarrierSecond Barrier
Revocable Revocable Living Trust Living Trust (RLT)(RLT)
Revocable Revocable Living Trust Living Trust (RLT)(RLT)
RLT Asset Protection FeaturesRLT Asset Protection FeaturesRLT Asset Protection FeaturesRLT Asset Protection Features
No Court Involvement on DeathNo Court Involvement on Death• PrivatePrivate
• No Forum Provided for CreditorNo Forum Provided for Creditor
• Can “Cut Off” Creditors through “insolvent” probate or Can “Cut Off” Creditors through “insolvent” probate or other methodsother methods
If Property is Partitioned:If Property is Partitioned:• Two Separate Property Trusts; Each Spouse Shares Two Separate Property Trusts; Each Spouse Shares
ManagementManagement
No Court Involvement on DeathNo Court Involvement on Death• PrivatePrivate
• No Forum Provided for CreditorNo Forum Provided for Creditor
• Can “Cut Off” Creditors through “insolvent” probate or Can “Cut Off” Creditors through “insolvent” probate or other methodsother methods
If Property is Partitioned:If Property is Partitioned:• Two Separate Property Trusts; Each Spouse Shares Two Separate Property Trusts; Each Spouse Shares
ManagementManagement
Asset Protection Features (Cont.)Asset Protection Features (Cont.)Asset Protection Features (Cont.)Asset Protection Features (Cont.)
Can Provide Can Provide “Spendthrift” “Spendthrift” Protection for HeirsProtection for Heirs• Grantor not ProtectedGrantor not Protected• Creditors of Non-Grantor Beneficiaries Cannot Creditors of Non-Grantor Beneficiaries Cannot
Look to Trust for PaymentLook to Trust for Payment• Beneficiary Cannot be Forced to Pledge or Assign Beneficiary Cannot be Forced to Pledge or Assign
Trust AssetsTrust Assets• Protect Children from Divorce, LawsuitsProtect Children from Divorce, Lawsuits
Can Provide Can Provide “Spendthrift” “Spendthrift” Protection for HeirsProtection for Heirs• Grantor not ProtectedGrantor not Protected• Creditors of Non-Grantor Beneficiaries Cannot Creditors of Non-Grantor Beneficiaries Cannot
Look to Trust for PaymentLook to Trust for Payment• Beneficiary Cannot be Forced to Pledge or Assign Beneficiary Cannot be Forced to Pledge or Assign
Trust AssetsTrust Assets• Protect Children from Divorce, LawsuitsProtect Children from Divorce, Lawsuits
Third DefenderThird DefenderThird DefenderThird Defender
Property Property AgreementsAgreements
Property Property AgreementsAgreements
Partitioning PropertyPartitioning PropertyPartitioning PropertyPartitioning Property
Works for Families Where One Spouse has Works for Families Where One Spouse has Significant Liability ExposureSignificant Liability Exposure
Use With Additional TechniquesUse With Additional Techniques
CAUTION: WHAT ABOUT POTENTIAL CAUTION: WHAT ABOUT POTENTIAL FOR DIVORCE?FOR DIVORCE?
Works for Families Where One Spouse has Works for Families Where One Spouse has Significant Liability ExposureSignificant Liability Exposure
Use With Additional TechniquesUse With Additional Techniques
CAUTION: WHAT ABOUT POTENTIAL CAUTION: WHAT ABOUT POTENTIAL FOR DIVORCE?FOR DIVORCE?
ExampleExampleExampleExample
““At-Risk” Spouse Owns:At-Risk” Spouse Owns:
Exempt AssetsExempt Assets
Risky AssetRisky Asset
““At-Risk” Spouse Owns:At-Risk” Spouse Owns:
Exempt AssetsExempt Assets
Risky AssetRisky Asset
““Safe” SpouseSafe” Spouse
Owns:Owns:
Non-Exempt AssetsNon-Exempt Assets
Family HomeFamily Home
““Safe” SpouseSafe” Spouse
Owns:Owns:
Non-Exempt AssetsNon-Exempt Assets
Family HomeFamily Home
Third BarrierThird BarrierThird BarrierThird Barrier
Family Limited Family Limited PartnershipsPartnerships(FLP) or FLLC(FLP) or FLLC
Family Limited Family Limited PartnershipsPartnerships(FLP) or FLLC(FLP) or FLLC
FLP FeaturesFLP FeaturesFLP FeaturesFLP Features
Partners: General and LimitedPartners: General and Limited General Partner has 100% ControlGeneral Partner has 100% Control Usually Income Tax NeutralUsually Income Tax Neutral Easy to Gift SharesEasy to Gift Shares Use of Discounts May Substantially Lower Use of Discounts May Substantially Lower
Federal Estate TaxFederal Estate Tax
Partners: General and LimitedPartners: General and Limited General Partner has 100% ControlGeneral Partner has 100% Control Usually Income Tax NeutralUsually Income Tax Neutral Easy to Gift SharesEasy to Gift Shares Use of Discounts May Substantially Lower Use of Discounts May Substantially Lower
Federal Estate TaxFederal Estate Tax
FLP Features (Cont.)FLP Features (Cont.)FLP Features (Cont.)FLP Features (Cont.)
Converts Real Property to Personal PropertyConverts Real Property to Personal Property Can Set Up Multiple FLPs to Protect Different Can Set Up Multiple FLPs to Protect Different
AssetsAssets• Divide and ConquerDivide and Conquer
Charging Order May Be the Exclusive Remedy Charging Order May Be the Exclusive Remedy for Claims Against a Partnerfor Claims Against a Partner
Converts Real Property to Personal PropertyConverts Real Property to Personal Property Can Set Up Multiple FLPs to Protect Different Can Set Up Multiple FLPs to Protect Different
AssetsAssets• Divide and ConquerDivide and Conquer
Charging Order May Be the Exclusive Remedy Charging Order May Be the Exclusive Remedy for Claims Against a Partnerfor Claims Against a Partner
Claims vs. PartnershipClaims vs. PartnershipClaims vs. PartnershipClaims vs. Partnership
Take InsuranceTake Insurance Take Partnership AssetsTake Partnership Assets Collect Against General PartnerCollect Against General Partner
Use Entity General PartnerUse Entity General Partner Use Multiple PartnershipsUse Multiple Partnerships
• Divide and ConquerDivide and Conquer
Take InsuranceTake Insurance Take Partnership AssetsTake Partnership Assets Collect Against General PartnerCollect Against General Partner
Use Entity General PartnerUse Entity General Partner Use Multiple PartnershipsUse Multiple Partnerships
• Divide and ConquerDivide and Conquer
Claims vs. Individual PartnerClaims vs. Individual PartnerClaims vs. Individual PartnerClaims vs. Individual Partner
Does Not Become PartnerDoes Not Become Partner No Right to Partnership AssetsNo Right to Partnership Assets Charging Order Sole RemedyCharging Order Sole Remedy
• If GP Distributes, Can GetIf GP Distributes, Can Get Creditor MUST PAY INCOME TAX Even if Creditor MUST PAY INCOME TAX Even if
No Income Received!No Income Received!• Phantom IncomePhantom Income
Does Not Become PartnerDoes Not Become Partner No Right to Partnership AssetsNo Right to Partnership Assets Charging Order Sole RemedyCharging Order Sole Remedy
• If GP Distributes, Can GetIf GP Distributes, Can Get Creditor MUST PAY INCOME TAX Even if Creditor MUST PAY INCOME TAX Even if
No Income Received!No Income Received!• Phantom IncomePhantom Income
Creditor NightmareCreditor NightmareCreditor NightmareCreditor Nightmare
Does not Become a Does not Become a Limited PartnerLimited Partner
No Right to Demand No Right to Demand AssetsAssets
No Transfer of Assets No Transfer of Assets Without Partner Without Partner ApprovalApproval
Does not Become a Does not Become a Limited PartnerLimited Partner
No Right to Demand No Right to Demand AssetsAssets
No Transfer of Assets No Transfer of Assets Without Partner Without Partner ApprovalApproval
No Fraudulent Transfer No Fraudulent Transfer When FLP EstablishedWhen FLP Established
Can’t Force Termination Can’t Force Termination of FLPof FLP
General Partner General Partner Maintains Income Maintains Income ControlControl
No Fraudulent Transfer No Fraudulent Transfer When FLP EstablishedWhen FLP Established
Can’t Force Termination Can’t Force Termination of FLPof FLP
General Partner General Partner Maintains Income Maintains Income ControlControl
FLPs Leverage GiftsFLPs Leverage GiftsFLPs Leverage GiftsFLPs Leverage Gifts
Each Person May Gift Up to $10,000 per Each Person May Gift Up to $10,000 per Person in SharesPerson in Shares
Value of Gifts is the Fair Market Value of GiftValue of Gifts is the Fair Market Value of Gift Partnership Rules Can Allow Value of Shares Partnership Rules Can Allow Value of Shares
to be Deeply Discounted!to be Deeply Discounted!
Each Person May Gift Up to $10,000 per Each Person May Gift Up to $10,000 per Person in SharesPerson in Shares
Value of Gifts is the Fair Market Value of GiftValue of Gifts is the Fair Market Value of Gift Partnership Rules Can Allow Value of Shares Partnership Rules Can Allow Value of Shares
to be Deeply Discounted!to be Deeply Discounted!
FLP DiscountsFLP DiscountsFLP DiscountsFLP Discounts
What is a FLP Share Worth?What is a FLP Share Worth?• Can’t be Easily Sold or TransferredCan’t be Easily Sold or Transferred• Can’t be PledgedCan’t be Pledged• Can’t Demand DistributionsCan’t Demand Distributions• Income Allocated to LP for Income Tax Even if not Income Allocated to LP for Income Tax Even if not
PaidPaid FMV of LP Share May Be Substantially Less FMV of LP Share May Be Substantially Less
than the Value of the Assets! than the Value of the Assets!
What is a FLP Share Worth?What is a FLP Share Worth?• Can’t be Easily Sold or TransferredCan’t be Easily Sold or Transferred• Can’t be PledgedCan’t be Pledged• Can’t Demand DistributionsCan’t Demand Distributions• Income Allocated to LP for Income Tax Even if not Income Allocated to LP for Income Tax Even if not
PaidPaid FMV of LP Share May Be Substantially Less FMV of LP Share May Be Substantially Less
than the Value of the Assets! than the Value of the Assets!
FLP SummaryFLP SummaryFLP SummaryFLP Summary
Juicy Red Apple is a Sour Lemon for CreditorsJuicy Red Apple is a Sour Lemon for Creditors Family Involved, Parents Control the AssetsFamily Involved, Parents Control the Assets Estate Tax ReductionEstate Tax Reduction Can Distribute Income to Children or Others at Can Distribute Income to Children or Others at
Lower Tax RatesLower Tax Rates
Juicy Red Apple is a Sour Lemon for CreditorsJuicy Red Apple is a Sour Lemon for Creditors Family Involved, Parents Control the AssetsFamily Involved, Parents Control the Assets Estate Tax ReductionEstate Tax Reduction Can Distribute Income to Children or Others at Can Distribute Income to Children or Others at
Lower Tax RatesLower Tax Rates
Common FLP StructureCommon FLP Structure
FLPFLP*EntityEntity*Corp, LLC, Corp, LLC,
TrustTrust
Husband RLTHusband RLT
Child TrustChild TrustWife RLTWife RLT
General PartnerGeneral Partner
Limited PartnersLimited Partners
LLC vs. FLPLLC vs. FLPLLC vs. FLPLLC vs. FLP
May be comparable. Some states, like May be comparable. Some states, like Wyoming, allow for “Close Limited Liability Wyoming, allow for “Close Limited Liability Companies”, which specify the only remedy for Companies”, which specify the only remedy for creditors of a member is a charging ordercreditors of a member is a charging order
May be comparable. Some states, like May be comparable. Some states, like Wyoming, allow for “Close Limited Liability Wyoming, allow for “Close Limited Liability Companies”, which specify the only remedy for Companies”, which specify the only remedy for creditors of a member is a charging ordercreditors of a member is a charging order
Third BarrierThird BarrierThird BarrierThird Barrier
Irrevocable Irrevocable TrustsTrusts
Irrevocable Irrevocable TrustsTrusts
Irrevocable Trust FeaturesIrrevocable Trust FeaturesIrrevocable Trust FeaturesIrrevocable Trust Features
Grantor is Usually not TrusteeGrantor is Usually not Trustee Not Part of Grantor’s Taxable EstateNot Part of Grantor’s Taxable Estate May Own Life InsuranceMay Own Life Insurance
• Income and Federal Estate Tax-Free Income and Federal Estate Tax-Free When ReceivedWhen Received
Spendthrift ProtectionSpendthrift Protection Controlled Distribution to BeneficiariesControlled Distribution to Beneficiaries
Grantor is Usually not TrusteeGrantor is Usually not Trustee Not Part of Grantor’s Taxable EstateNot Part of Grantor’s Taxable Estate May Own Life InsuranceMay Own Life Insurance
• Income and Federal Estate Tax-Free Income and Federal Estate Tax-Free When ReceivedWhen Received
Spendthrift ProtectionSpendthrift Protection Controlled Distribution to BeneficiariesControlled Distribution to Beneficiaries
Special Irrevocable TrustsSpecial Irrevocable TrustsSpecial Irrevocable TrustsSpecial Irrevocable Trusts
BERT TrustsBERT Trusts• Each spouse is trustee and beneficiary of separate Each spouse is trustee and beneficiary of separate
trusttrust• Grantor is other spouseGrantor is other spouse• Assets of trust are separate property providing asset Assets of trust are separate property providing asset
protection from claims against other spouseprotection from claims against other spouse• Assets of trust are outside estate of either spouseAssets of trust are outside estate of either spouse
BERT TrustsBERT Trusts• Each spouse is trustee and beneficiary of separate Each spouse is trustee and beneficiary of separate
trusttrust• Grantor is other spouseGrantor is other spouse• Assets of trust are separate property providing asset Assets of trust are separate property providing asset
protection from claims against other spouseprotection from claims against other spouse• Assets of trust are outside estate of either spouseAssets of trust are outside estate of either spouse
Fifth BarrierFifth BarrierFifth BarrierFifth Barrier
PersonalPersonalAssetAssetProtectionProtectionTrustsTrusts
PersonalPersonalAssetAssetProtectionProtectionTrustsTrusts
ConceptConceptConceptConcept
Set Up a Trust that Limits or Eliminates Set Up a Trust that Limits or Eliminates Creditor Rights to Seize AssetsCreditor Rights to Seize Assets
Integrated With Your Estate PlanIntegrated With Your Estate Plan• You can be a BeneficiaryYou can be a Beneficiary• You can Remove Assets from Your EstateYou can Remove Assets from Your Estate• You can Sleep SoundlyYou can Sleep Soundly
Set Up a Trust that Limits or Eliminates Set Up a Trust that Limits or Eliminates Creditor Rights to Seize AssetsCreditor Rights to Seize Assets
Integrated With Your Estate PlanIntegrated With Your Estate Plan• You can be a BeneficiaryYou can be a Beneficiary• You can Remove Assets from Your EstateYou can Remove Assets from Your Estate• You can Sleep SoundlyYou can Sleep Soundly
APT PlanningAPT PlanningAPT PlanningAPT Planning
Choose Your Jurisdiction (e.g. Alaska or Offshore)Choose Your Jurisdiction (e.g. Alaska or Offshore)• Generally Unfriendly to CreditorsGenerally Unfriendly to Creditors
• Offshore has Similar Legal ConceptsOffshore has Similar Legal Concepts
• English LanguageEnglish Language Tax Neutral for U.S. Tax PurposesTax Neutral for U.S. Tax Purposes Domestic is Convenient and FamiliarDomestic is Convenient and Familiar Offshore is Disclosable, but not Answerable to Offshore is Disclosable, but not Answerable to
U.S. Courts U.S. Courts
Choose Your Jurisdiction (e.g. Alaska or Offshore)Choose Your Jurisdiction (e.g. Alaska or Offshore)• Generally Unfriendly to CreditorsGenerally Unfriendly to Creditors
• Offshore has Similar Legal ConceptsOffshore has Similar Legal Concepts
• English LanguageEnglish Language Tax Neutral for U.S. Tax PurposesTax Neutral for U.S. Tax Purposes Domestic is Convenient and FamiliarDomestic is Convenient and Familiar Offshore is Disclosable, but not Answerable to Offshore is Disclosable, but not Answerable to
U.S. Courts U.S. Courts
APT Planning (cont.)APT Planning (cont.)APT Planning (cont.)APT Planning (cont.)
Eliminates or Reduces Coercion in LawsuitsEliminates or Reduces Coercion in Lawsuits Is Done For Estate Planning and Business Is Done For Estate Planning and Business
ReasonsReasons Is not a Violation of U.S. Law (2005 Act seems Is not a Violation of U.S. Law (2005 Act seems
to acknowledge validity after 10 years)to acknowledge validity after 10 years) Is not Tax EvasionIs not Tax Evasion
Eliminates or Reduces Coercion in LawsuitsEliminates or Reduces Coercion in Lawsuits Is Done For Estate Planning and Business Is Done For Estate Planning and Business
ReasonsReasons Is not a Violation of U.S. Law (2005 Act seems Is not a Violation of U.S. Law (2005 Act seems
to acknowledge validity after 10 years)to acknowledge validity after 10 years) Is not Tax EvasionIs not Tax Evasion
Domestic JurisdictionDomestic JurisdictionDomestic JurisdictionDomestic Jurisdiction
A Castle MoatA Castle Moat• Judgments May not Be Judgments May not Be
Enforceable Against TrustEnforceable Against Trust
• U.S. JurisdictionU.S. Jurisdiction
• Perpetual TrustsPerpetual Trusts
• Use With Domestic FLPs and Use With Domestic FLPs and LLCsLLCs
• Power to RelocatePower to Relocate
• States with APT laws include States with APT laws include Alaska, Delaware, NevadaAlaska, Delaware, Nevada
A Castle MoatA Castle Moat• Judgments May not Be Judgments May not Be
Enforceable Against TrustEnforceable Against Trust
• U.S. JurisdictionU.S. Jurisdiction
• Perpetual TrustsPerpetual Trusts
• Use With Domestic FLPs and Use With Domestic FLPs and LLCsLLCs
• Power to RelocatePower to Relocate
• States with APT laws include States with APT laws include Alaska, Delaware, NevadaAlaska, Delaware, Nevada
Offshore JurisdictionsOffshore JurisdictionsOffshore JurisdictionsOffshore Jurisdictions
The UltimateThe Ultimate
Castle MoatCastle Moat• U.S. Judgments not U.S. Judgments not
EnforceableEnforceable
• Actions Must be Actions Must be RelitigatedRelitigated
• Short Statutes of Short Statutes of LimitationLimitation
• Power to RelocatePower to Relocate
The UltimateThe Ultimate
Castle MoatCastle Moat• U.S. Judgments not U.S. Judgments not
EnforceableEnforceable
• Actions Must be Actions Must be RelitigatedRelitigated
• Short Statutes of Short Statutes of LimitationLimitation
• Power to RelocatePower to Relocate
New 2005 Act RestrictionsNew 2005 Act RestrictionsNew 2005 Act RestrictionsNew 2005 Act Restrictions
Can avoid transfers made 10 years before the date of the filing Can avoid transfers made 10 years before the date of the filing of the petition, if--of the petition, if--
(A) such transfer was made to a self-settled trust or similar (A) such transfer was made to a self-settled trust or similar device;device;
(B) such transfer was by the debtor;(B) such transfer was by the debtor; (C) the debtor is a beneficiary of such trust or similar device; (C) the debtor is a beneficiary of such trust or similar device;
andand (D) the debtor made such transfer with actual intent to hinder, (D) the debtor made such transfer with actual intent to hinder,
delay, or defraud any entity to which the debtor was or became, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.on or after the date that such transfer was made, indebted.
Can avoid transfers made 10 years before the date of the filing Can avoid transfers made 10 years before the date of the filing of the petition, if--of the petition, if--
(A) such transfer was made to a self-settled trust or similar (A) such transfer was made to a self-settled trust or similar device;device;
(B) such transfer was by the debtor;(B) such transfer was by the debtor; (C) the debtor is a beneficiary of such trust or similar device; (C) the debtor is a beneficiary of such trust or similar device;
andand (D) the debtor made such transfer with actual intent to hinder, (D) the debtor made such transfer with actual intent to hinder,
delay, or defraud any entity to which the debtor was or became, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.on or after the date that such transfer was made, indebted.
Some debts not dischargeable in Some debts not dischargeable in bankruptcybankruptcySome debts not dischargeable in Some debts not dischargeable in bankruptcybankruptcy
Examples include domestic support (alimony Examples include domestic support (alimony and child support) and liability from operating and child support) and liability from operating motor vehicle while under influence alcohol or motor vehicle while under influence alcohol or drugsdrugs
Examples include domestic support (alimony Examples include domestic support (alimony and child support) and liability from operating and child support) and liability from operating motor vehicle while under influence alcohol or motor vehicle while under influence alcohol or drugsdrugs
Case StudyCase StudyCase StudyCase Study
The SurgeonThe SurgeonThe SurgeonThe Surgeon
Leon Cutter, M.D., F.A.C.S.Leon Cutter, M.D., F.A.C.S.Leon Cutter, M.D., F.A.C.S.Leon Cutter, M.D., F.A.C.S.
Orthopedic SurgeonOrthopedic Surgeon• Six Suits in Ten Years; Six Suits in Ten Years;
All SettledAll Settled
• Large Insurance Large Insurance PremiumsPremiums
Professional Corp.Professional Corp.• Leases BuildingLeases Building
• Owns EquipmentOwns Equipment
Orthopedic SurgeonOrthopedic Surgeon• Six Suits in Ten Years; Six Suits in Ten Years;
All SettledAll Settled
• Large Insurance Large Insurance PremiumsPremiums
Professional Corp.Professional Corp.• Leases BuildingLeases Building
• Owns EquipmentOwns Equipment
Married to JanetMarried to Janet• Former TeacherFormer Teacher
• Expert InvestorExpert Investor Two ChildrenTwo Children
• Mary, TimMary, Tim Family Owns Home, Family Owns Home,
Investments, Retirement Investments, Retirement PlanPlan
Married to JanetMarried to Janet• Former TeacherFormer Teacher
• Expert InvestorExpert Investor Two ChildrenTwo Children
• Mary, TimMary, Tim Family Owns Home, Family Owns Home,
Investments, Retirement Investments, Retirement PlanPlan
Cutter Family GoalsCutter Family GoalsCutter Family GoalsCutter Family Goals
Protect Nonexempt AssetsProtect Nonexempt Assets• Keep Home Absolutely SafeKeep Home Absolutely Safe
Protect Practice AssetsProtect Practice Assets• Building and EquipmentBuilding and Equipment
Lower Malpractice PremiumsLower Malpractice Premiums Maintain Control and PrivacyMaintain Control and Privacy Plan for Federal Estate TaxesPlan for Federal Estate Taxes
Protect Nonexempt AssetsProtect Nonexempt Assets• Keep Home Absolutely SafeKeep Home Absolutely Safe
Protect Practice AssetsProtect Practice Assets• Building and EquipmentBuilding and Equipment
Lower Malpractice PremiumsLower Malpractice Premiums Maintain Control and PrivacyMaintain Control and Privacy Plan for Federal Estate TaxesPlan for Federal Estate Taxes
Before PlanningBefore PlanningBefore PlanningBefore Planning
Your Entire Estate is at Risk!Your Entire Estate is at Risk!Your Entire Estate is at Risk!Your Entire Estate is at Risk!
After PlanningAfter PlanningAfter PlanningAfter Planning
Your Estate has Defenses!Your Estate has Defenses!Your Estate has Defenses!Your Estate has Defenses!
Keys to a Successful PlanKeys to a Successful Plan
Team ApproachTeam Approach
Custom DesignCustom Design
Cutting Edge SolutionsCutting Edge Solutions
Team ApproachTeam Approach
Custom DesignCustom Design
Cutting Edge SolutionsCutting Edge Solutions
Thank You for AttendingThank You for Attending
Questions?Questions?Questions?Questions?
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