asset protection planning
DESCRIPTION
For Sean's WebsiteTRANSCRIPT
1
Asset Protection Planning Does NOT Include
• Hiding Assets
• Committing Fraud
• Committing Perjury
• Engaging in Fraudulent Transfers
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What is Asset Protection Planning?
• Adoption of advanced planning techniques which tend to place assets beyond the reach of future potential creditors
• Process of advance arrangement of a person’s financial affairs to guard against risk of loss
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Don’t Put the CartBefore the Horse
• Institute an estate plan prior to or as part of Asset Protection Plan
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When to Begin Asset Protection Planning – Before Trouble Starts
• Good - Before a claim is made
• Better - Before claim is reasonably anticipated
• Best - Before engaging in activity that may give rise to a claim
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Fraudulent Conveyance ActFraudulent Transfer Act
• Transfer made to hinder, delay or defraud a creditor
• Transfer made without fair consideration by a person who is insolvent or who will be rendered insolvent by reason of the transfer
Focus on:
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Insolvency
• The point at which a person’s debts exceed the fair value of the person’s assets
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Creditor - Definition
• Any person who has a claim
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Claim - Definition
• Reduced to judgment• Liquidated or unliquidated• Fixed or contingent or absolute• Matured or unmatured• Disputed or undisputed• Legal or equitable• Secured or unsecured
A right to payment whether or not the right is:
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3 Classes of Creditors
• Present Creditors / Existing Creditors with matured claim
• Creditors with unmatured claim
• Potential Future Creditors /
Uncontemplated Creditors
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Basic Principle
• The more remote the future Creditor, the less likely the debtor can be found to have the necessary bad intent
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Bankruptcy isFederal Equivalent of State
Fraudulent Transfer Act
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Pre-Bankruptcy Planning
• Taking Advantage of Exclusions under 541(c)(2) Bankruptcy Code – Qualified Retirement Plans (ERISA)
• Exemption Maximization – Requires Debtor Affirmative Act 522 Bankruptcy Code – Homestead Declaration, IRAs
• Both Protections available in Kansas and Missouri without filing for Bankruptcy– K.S.A. § 60-2308– R.S.Mo. § 513.430 and § 520.030
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Exemptions
• Homestead• Wages• Annuity• Life Insurance• Motor Vehicle• Household Goods• Retirement Accounts
– Qualified Plans – Federal Preemption
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Intent / Badges of Fraud(“as varied as fish in the sea”)
• Transfer to an insider
• Control retained after transfer
• Transfer concealed
• Transferor sued prior to transfer
• Transferor threatened with suit
• Transfer of substantially all assets
• Assets concealed
• Assets removed
• Inadequate consideration received
• Insolvency of transferor prior to transfer
• Insolvency of transferor caused by transfer
• Transfer after claim incurred
• Transfer shortly before claim is incurred
• Transfer of essential assets of business
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Asset Protection Techniques
• Liability Insurance
• Outright Gifts
• Gifts in Trust
• Co-Tenancies– Tenancy by entirety (T/E)– Joint Tenancy with Right of
Survivorship (JTWROS)– Tenancy in Common (T/C)– Community Property (CP)
• Corporations (But not PC)
• Limited Liability Companies
• Limited Liability Partnerships
• Limited Partnerships
• Foreign Limited Liability Entities
• Trusts– Domestic Asset Protection
Trusts – choice of jurisdiction– Offshore (Foreign) Asset
Protection Trusts
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Outright Gifts - Problems
• Loss of Income / Gain
• Loss of Control
• Gift Tax Issues
• Donee’s Creditors
• Divorce
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Gifts in Trust - Problems
• Must be Irrevocable
• Loss of Income / Gain
• Loss of Control
• Gift Tax Issues
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Tenancy by Entirety - Problems
• Not available in Kansas
• Protection Eroding
• Protection lost at death or divorce
• Joint creditor
• Estate Tax Issues
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JTWROS - Problems
• Severable Interests (judicial partition)
• Gift Tax Issues
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Tenancy in Common - Problems
• Severable Interests
• Donee’s Creditors
• Gift Tax Issues
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Community Property - Problems
• Exposed to debts and Creditors of both spouses
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Liability Insurance - Problems
• Intentional acts not covered– (e.g. Slander / Libel / Sexual Harassment /
Age Discrimination)
• Policy limits
• Solvency of Insurer
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Corporations - Problems
• No outside protection for shareholders – creditors can become shareholders
• Officer and director liability
• Income tax issues
• Look through Professional Corporations
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Limited Liability Company - Problems
• Single member LLC might be ignored
• Income tax investment company issues
• Equivalent value fraudulent transfer issue
• Franchise / Other Registration Taxes
• Annual Meeting Minutes Preferable
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Limited Partnership - Concerns
• No inside protection – Individual General Partners liability adds complexity
• Outside protection “charging order” rules v. foreclosure (assignee v. liquidation)
• Income tax investment company issues• Equivalent value fraudulent transfer issue• Partner’s access to limited partnership assets• Phantom income chargeable to creditor?
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Charging order jurisdictions – Does not Entitle Creditor to:
• Become a Partner
• Management, administration, governance rights
• Vote
• Inspect records
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Limited Partnership Planning
• Asset Protection:– Lawsuit Protection– Creditor Protection
• Valuation Strategies– Minority & Marketability Discounts
• Ownership Strategies– Leveraging gifts
• Importance of LP Agreements
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Limited Partnership Profile
• Two types of partners:– General partners:
» Manage partnership» Personally liable for partnership debts
– Limited partners:» No right to manage» No personal liability for partnership debts
• Limited Liability Companies (LLC)– Same as LP for federal tax issues– State rules may differ
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Goals of theLimited Partnership
• Control and Management:– Business and investment assets– Prevent younger generations from direct control
over LP assets– Consolidate assets to simplify tax reporting
requirements– Management experience for younger generations
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Goals of theLimited Partnership
• Asset Protection:– Protect assets from creditors– Protect members from business liability
• Estate and gift tax benefits:– Create minority and marketability discounts– Ease of transfer– Allow small gifts without necessity of dividing up
the property:» No need for real estate deeds for small parcels
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LP Agreement Is the Key to Benefits
• Benefits dependent on well drafted agreement:– As road map of parents’ goals for their assets,
contract must:» Include rights and duties parents’ want» Anticipate events after parents’ deaths» Include rights to amend and terminate» Include ability to expand business activities» Provide for admission of new partners and removal of
existing partners
• Collaborative effort of attorney and client
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Coordinating Living Trust and LP/LLC
LP
LLCH’sRevocable
Trust
W’sRevocable
Trust
ASSETS
ASSETS
1% General Partner Interest
49% Limited Partner Interest
1% General Partner Interest
49% Limited Partner Interest
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Asset Protection Planning
• Inside Claims Protection
• Outside Claims Protection
• Litigious Circumstance Protection
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Asset Protection Benefitsof LP
PartnershipLimited Partner 1
Limited Partner 2General Partner
$10,000
$10,000
$10,000
Each Partner Contributes Assets/Cash to LP
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Liability for Non-Partnership Acts
• Outside Creditor/Claims protection:– Protection of partnership assets from
personal claims against a partner» Partner creates a debt or liability outside of
partnership activities
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Creditors’/Claimants’ Rights in Partnership
• Personal Creditors/Claimants of Partner cannot:– Seize partnership assets– Interfere in management of partnership– Demand a partnership distribution– Terminate partnership
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Partnership Charging Order
PartnershipLimited Partner 1
Charging orderPay to creditor ofLimited Partner 2
General Partner
$100
$100
$100
Claimant Takes Limited Partner 2’s Distributive Share
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Liability for PartnershipActs
• Inside Creditor/Claims Protection– Limited Partner’s Personal Assets Cannot
Be Attached » Partnership Employee Action Causes Damage
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Partnership Liability for Partnership Acts
• Claimant Can Attach Only Partnership Assets
• Claimant Cannot Successfully:– Commence Suit Against Limited Partner– Attach Partner’s Personal Assets
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Litigious Circumstances
• Litigious Circumstance:– Gifts are of partnership interests, not the
actual assets– Partners’ spouses are unable to attach the
partnership assets– Limited partnership interests are of little
value to an adversary
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LP Agreement Restrictions on Partners
• Important terms of LP Agreement:– Cash flow restrictions– Sale of property restrictions– Term restrictions– Transfer restrictions– Substitute owner restrictions
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Cash Flow Restriction
Before the LP
After the LP
Annual Income$6,000
Interest Rate6%
Asset Value$100,000
Annual Income$3,000 (50%)
Interest Rate6%
Asset Value$ 50,000
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Sale of Property Restriction
• Consent of Partners Required– Majority– Supermajority (75%)– Unanimity
• Partnership Right of First Refusal
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Term Restriction
• Partnership Agreement:– Execution date - 1999– Dissolution Date - 2049
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Transfer and Substitute Owner Restrictions
Full Partner Rights:
- Distribution rights
- Voting rights
New Buyer Rights:
- Distribution rights as “Assignee” only
Jones Limited Partnership
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Valuation Strategies and the LP
Jones Limited
Partnership
Trustee of Revocable
Living Trust
Factors
•Absolute Control Over the Asset•Ability to Sell the Asset•Right to the Income
Original Asset
YesYesYes
Partnership Interest
NoNoNo
Marketability/Minority Interest Discount - Reflecting the difficulty in selling the partnership interest and assets because of the terms of the partnership agreement.
Assets Contributed
1% General Partnership Interest
98% limited Partnership Interest
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Trusts - Problems
• Self settled trusts offer no protection to settlor (Note: AK, DE, NV, RI)
• UTC eroding spendthrift and discretionary protection aspects
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Domestic Asset Protection Trusts (DAPT)
• Alaska
• Delaware
• Nevada
• Rhode Island
• Utah
• Colorado
• Missouri
Favorable Jurisdictions:
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DAPT – Typical Requirements
• Trust must be irrevocable• Trust must be established in favored jurisdiction• Settlor may only be discretionary beneficiary• No Settlor or Related Party may be a Trustee• Assets must be located in jurisdiction where trust
established• A Trustee must be domiciled in the jurisdiction• Trust must be administered within the jurisdiction
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DAPT Constitutional Issues
• Full faith and credit clause
• Supremacy clause
• Contract clause
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DAPT – Non-Constitutional Issues
• Gift and Estate Tax
• Compressed Income Tax Brackets
• Choice of Law / Conflict of Laws – Which State Law Applies
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Foreign Asset Protection Trusts (FAPT)
• Cook Islands• Nevis• Cayman Islands• Gibraltar• Bahamas
• Cyprus• Caricos and Turks
Islands• Liechtenstein• Channel Islands
Favorable Jurisdictions:
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FAPT - Issues
• Gift & Estate Tax• Compressed Income
tax brackets• Additional IRS reporting• Greater Scrutiny –
Increased chance of Audit
• Patriot Act• Increased Penalties
• Geographic Accessibility
• Political Stability• English Common Law• Language• Communication
Facilities• Administrative Costs• Be Prepared to flee the
US to join your assets