estate planning asset protection strategiesmedia.straffordpub.com/products/estate-planning... ·...

Presenting a live 90‐minute webinar with interactive Q&A

Estate Planning Asset Protection StrategiesLeveraging LLCs and Trusts to Protect Assets and Preserve Wealth

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUEDAY, MARCH 15, 2011

Today’s faculty features:

James M. Duggan, Principal, Duggan Bertsch, Chicago

Gregory J. Bertsch, Principal, Duggan Bertsch, Chicago

Attendees seeking CPE credit must listen to the audio over the telephone.

Please refer to the instructions emailed to registrants for dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

Conference Materials

If you have not printed the conference materials for this program, please complete the following steps:

• Click on the + sign next to “Conference Materials” in the middle of the left-hand column on your screen hand column on your screen.

• Click on the tab labeled “Handouts” that appears, and there you will see a PDF of the slides for today's program.

• Double click on the PDF and a separate page will open. Double click on the PDF and a separate page will open.

• Print the slides by clicking on the printer icon.

Continuing Education Credits FOR LIVE EVENT ONLY

For CLE credits, please let us know how many people are listening online by completing each of the following steps:

• Close the notification box

• In the chat box, type (1) your company name and (2) the number of attendees at your location

• Click the blue icon beside the box to send

For CPE credits, attendees must listen to the audio over the telephone. Attendees can still view the presentation slides online.

Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

Tips for Optimal Quality

S d Q litSound QualityIf you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection.

If the sound quality is not satisfactory and you are listening via your computer speakers, you may listen via the phone: dial 1-866-873-1442 and enter your PIN when prompted Otherwise please send us a chat or e mail when prompted. Otherwise, please send us a chat or e-mail [email protected] immediately so we can address the problem.

If you dialed in and have any difficulties during the call, press *0 for assistance.

Viewing QualityTo maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key againpress the F11 key again.

Estate Planning Asset gProtection Strategies

“Leveraging Exempt Assets, LLCs, and Trusts to Protect Assets”

P d f S ff d P bli iPresented for: Strafford Publications March 15, 2011

James M. Duggan, M.B.A., J.D.Gregory J. Bertsch C.P.A., J.D.

DUGGAN BERTSCH, LLC303 West Madison, Suite 1000Chicago Illinois 60606-3321Chicago, Illinois 60606 3321

[email protected]@dugganbertsch.com

website: www.dugganbertsch.com(312) 263-8600

JAMES M. DUGGAN, M.B.A., J.D.

James M. Duggan is a principal of DUGGAN BERTSCH, LLC, a Chicago-based business, tax, estate and wealth planning firm comprised ofattorneys and accountants. Jim’s practice has concentrated principally on business and corporate law, and estate and wealth planning,primarily as they relate to closely-held business interests and high net worth families. Jim’s experience in the structuring and implementationof Family Offices sophisticated tax planning and asset protection planning strategies is nationally recognized as is his role in the firm’sof Family Offices, sophisticated tax planning, and asset protection planning strategies is nationally recognized, as is his role in the firm sdevelopment of a leading multidisciplinary planning protocol. In addition to giving frequent lectures and authoring articles in his areas ofconcentration, Jim also serves as a director on numerous for-profit and not-for-profit organizations.

Jim’s educational background includes attaining a Bachelor of Science in Marketing from the College of Commerce and BusinessAdministration at the University of Illinois at Urbana-Champaign (Magna Cum Laude - 1991), a Masters in Business Administration inFinance from the DePaul University Graduate School of Business (Summa Cum Laude 1994) and a Juris Doctor from the DePaulFinance from the DePaul University Graduate School of Business (Summa Cum Laude - 1994), and a Juris Doctor from the DePaulUniversity College of Law - 1994, where he was awarded positions on both the DePaul Law Review and DePaul Business Law Journal.

6 © 2011 James M. Duggan, of DUGGAN BERTSCH, LLC. All rights reserved.

GREGORY J. BERTSCH, C.P.A., J.D.

Mr. Bertsch’s primary professional focus is on business and corporate planning, Federal taxation, and estate planning for private clients. Hisexperience includes advising clients on sophisticated taxation issues designed to minimize income and estate taxes, protect assets andpreserve wealth. He also has unique experience and expertise with respect to international tax planning concepts for multinational companiesand captive insurance arrangementsand captive insurance arrangements.

Prior to forming Duggan Bertsch, Mr. Bertsch was a partner in a mid-sized Chicago law firm where he used his multi-disciplinarybackground to service the Firm’s Family Office clientele. He was also a Tax Manager in the International Tax Department of KPMG. Duringhis tenure, he focused primarily on establishing and maintaining foreign sales corporations and export subsidy programs, and advising clientsregarding international intellectual property issues.

Mr. Bertsch earned a Bachelor of Sciences in Accounting Degree from Loyola University Chicago and a Juris Doctorate Degree from DePaulUniversity College of Law in Chicago, Illinois. Mr. Bertsch is a Certified Public Accountant and is a member of the Illinois State andChicago Bar Associations, and the Illinois Certified Public Accountants Society.


The Real Threat of LitigationThe Real Threat of LitigationThe Top 10 jury verdicts of the last few years are not onlystaggering in amounts, but also show that private clients areexposed:• 2009 Choi v Marciano (July 28 2009) $370M defamation verdict A Los• 2009 – Choi v. Marciano (July 28, 2009) $370M defamation verdict - A Los

Angeles jury awarded a record defamation verdict of $370 million, including $25million in punitive damages, to five former employees of Guess Jeans mogul GeorgesMarciano.

• 2008 - Cantu v. Flanigan, United States District Court for the Eastern District ofNew York, Case no. CV 05-3580 $188M defamation suit - A New York City juryawarded $188 million to a Mexican contractor who claimed the words of an Americanbusinessman severely damaged his reputation.

• 2007 – Barrak v. Report Investment Corporation (Nov. 28, 2007) $102.7 millionnegligent security case - A man was shot and paralyzed in the parking lot of a Miami


strip club.

The Real Threat of Litigation (cont )The Real Threat of Litigation (cont.)

• 2006 - Navarro v Carrollwood Emergency Physicians – Florida $216 7• 2006 - Navarro v. Carrollwood Emergency Physicians – Florida $216.7million in medical malpractice - A man suffered severe brain damage afteran unlicensed emergency physician's assistant misdiagnosed his stroke as asinus infection.

• 2005 - McKinney v. Bob’s Barricades $164 Million negligence claim -Plaintiff was critically injured when hit by a car wile walking his bike home.His mother sued the company that barricaded the sidewalk thereby forcingHis mother sued the company that barricaded the sidewalk, thereby forcinghim to walk along the road’s shoulder.

• 2004 - Poliner v. Texas Health Systems - Texas (Aug. 27, 2004) $366y gMillion tortious interference – The plaintiff, a cardiologist, claimed hispractice was ruined when three fellow doctors and a hospital workedtogether to suspend his privileges to perform heart procedures.


Role of Asset Protection in Estate Planning

• Asset Protection Planning is a critical componentof estate planning.

• A new standard of care is emerging – may bel i i f li f imalpractice not to inform clients of asset protection

options.


Asset Protection Planning ProcessAsset Protection Planning Process

Aside from acting in a manner that will avoid lawsuitsAside from acting in a manner that will avoid lawsuits,and carrying sufficient insurance, personal assetprotection optimization has two principal components:p p p p p

1) Maximizing Exempt Assets1) Maximizing Exempt Assets2) Transferring Non-Exempt Assets to Asset

Protection Vehicles


Exempt Asset PlanningExempt Asset Planning

Step #1:pIdentify Exempt Assets in Your State and MaximizeThose Assets

• Homestead Exemption• Tenancy by the Entirety• Qualified/Retirement Plans• Insurance

A i i• Annuities• 529 Plans• Etc


• Etc.

Exempt Assets Planning – State Comparison


Exempt Assets Planning – State Comparison (cont.)


Exempt Assets – State Law vs. Federal Law

Federal - Bankruptcy Code, 11 U.S.C. § 522, provides forp y , § , pthe following exempt assets:

• ERISA Plans – 100% protected (§522(d)(12))• SEP IRA/Simple IRA 100% protected (§522(d)(12))• SEP-IRA/Simple IRA – 100% protected (§522(d)(12))• IRAs/Roth IRAs – protected up to $1,000,000 (§522(d)(12))• Homestead Exemption - $20,200 (§522(d)(1))• Life Insurance Cash Value - $10 775 (§522(d)(8))Life Insurance Cash Value $10,775 (§522(d)(8))• Annuity Cash Value – exempt to the extent reasonably necessary

for support of debtor/dependants (§522(d)(10)(E))

State - State exemptions will apply in a federal bankruptcycase if the state has “opted out” of the federalexemptions


exemptions.

Exempt Assets - InconsistenciesExempt Assets InconsistenciesDue to inconsistencies between federal law and theDue to inconsistencies between federal law and thevarious states laws, forum selection must be considered.Examples include:

a) 529 Plans - Federal (§541(b)) - $5,000 protected if givenwithin 2 years of filing; rest is protected.Ne ada (Ne Re Stat §21 090(a)) f llNevada (Nev.Rev.Stat. §21.090(a)) – fully

protected.Illinois – not protected.

b) IRAs - Federal (Bankruptcy Code §522(n)) - $1,000,000limit.Illinois (735 ILCS 5/12-1006) – fully protected.


( ) y pMaine – not protected.

Planning for Non-Exempt AssetsPlanning for Non Exempt Assets

STEP #2:STEP #2:When exempt asset planning is either a) not available,or b) not desirable, the remaining assets (the non-) , g (exempt assets) must seek protection from assetprotection vehicles:

• Limited Liability Entities – LLCs, LLPs, LPs

• Asset Protection Trusts


The LLC AdvantageThe LLC Advantage

LLCs are preferred over other entity choices forLLCs are preferred over other entity choices forthe following reasons:

1) Greater Flexibilitya) Drafting Options – e.g., limiting fiduciary dutiesb) Tax Treatment – “Check-the-Box”b) Tax Treatment Check the Boxc) Allocations – income, loss, tax, etc.

2) Greater Asset Protection2) Greater Asset Protectiona) Charging Orders – a second level of asset protectionb) Phantom Income Potential – Rev. Rul. 77-137; statutory

i f f ll i i t t


assignee of full economic interest

Asset Protection with LLCsAsset Protection with LLCsCreditor

Suit

Real Estate PrivateInvestments

BusinessInterests

PublicInvestments

PPLI Insurance

Family Limited Liability

Company

Manager

Members

(1) Statutory ProtectionProtects Members from Claims Against LLC Assets

• Preferred Jurisdictions: U.S. – AK, NV, AZ, DEInt’l – Nevis, Anguilla, Cook Islands

Parents Children• Step into Economic Shoes

(2) “Charging Order”Protections LLC Assets from Claims Against Members


• Pay Tax on Phantom Income?• Rev. Rul. 77-137• Statutory assignee• Settlement is AdvisableCreditor

Charging Order StatutesCharging Order Statutes1. Non-Exclusive Remedy Statutes – e.g., MI, COy g

a) A court “may” charge the membership interest of amember

b) Either allows other remedies or is silent on the matterb) Either allows other remedies or is silent on the matter –e.g., judicial dissolution, judicial foreclosures, equitableremedies, etc.

2 E l i R d S AK NV N i C k2. Exclusive Remedy Statutes – e.g., AK, NV, Nevis, CookIslands

a) A court “may” charge the membership interest of amember, plus,

b) This is the “sole remedy” available to creditors of amember


member

Charging Order Statutes - MichiganCharging Order Statutes MichiganMich. Comp. Laws § 450.4507 (2009)

• On application to a court of competent jurisdiction by any judgmentcreditor of a member, the court may charge the membership interest of themember with payment of the unsatisfied amount of judgment with interest.

• To the extent the membership interest is so charged, the judgment creditorhas only the rights of an assignee of the membership interest.

• This act does not deprive any member of the benefit of any exemption lawsapplicable to his or her membership interest.

* No limitation on other remedies.


Charging Order Provisions - ColoradoCharging Order Provisions ColoradoColo. Rev. Stat. § 7-80-703 (2010)

• On application to a court of competent jurisdiction by any judgmentcreditor of a member, the court may charge the membership interest of themember with payment of the unsatisfied amount of the judgment withp y j ginterest thereon and may then or later appoint a receiver of the member’sshare of the profits and of any other money due or to become due to themember in respect of the limited liability company and make all otherorders, directions, accounts, and inquiries that the debtor member mightq ghave made, or that the circumstances of the case may require.

• To the extent so charged, except as provided in this section, the judgmentcreditor has only the rights of an assignee or transferee of the membershipcreditor has only the rights of an assignee or transferee of the membershipinterest.

* No limitation on other remedies.


Charging Order Provisions - NevadaCharging Order Provisions NevadaNev. Rev. Stat. § 86.401 (2010) Rights and remedies of creditor of member1. On application to a court of competent jurisdiction by a judgment

creditor or a member, the court may charge the member’s interest withpayment of the unsatisfied amount of the judgment with interest. To theextent so charged, the judgment creditor has only the rights of an

i f h b iassignee of the member’s interest.

2. This section provides:a) the exclusive remedy by which a judgment creditor of a membera) the exclusive remedy by which a judgment creditor of a memberof an assignee of a member may satisfy a judgment out of themember’s interest of the judgment debtor.b) Does not deprive any member of the benefit of any exemption

li bl hi h iapplicable to his or her interest.

* Charging Order is exclusive remedy.


Charging Order Provisions - DelawareCharging Order Provisions DelawareDel. Code. Ann. Tit. 6, § 18-703 (2010)1 O li ti b j d t dit f b f b ’ i1. On application by a judgment creditor of a member or of a member’s assignee, a

court having jurisdiction may charge the limited liability company interest of thejudgment debtor to satisfy the judgment. To the extent so charged, the judgmentcreditor has only the right to receive any distribution or distributions to whichthe judgment debtor would otherwise have been entitles in respect of suchthe judgment debtor would otherwise have been entitles in respect of suchlimited liability company interest.

2. A charging order constitutes a lien on the judgment debtor’s limited liabilitycompany interest.

3 This chapter does not deprive a member or member’s assignee of a right under3. This chapter does not deprive a member or member s assignee of a right underexemption laws with respect to the judgment debtor’s limited liability companyinterest.

4. The entry of a charging order is the exclusive remedy by which a judgmentcreditor or a member or of a member’s assignee may satisfy a judgment out ofg y y j gthe judgment debtor’s limited liability company interest

5. The Court of Chancery shall have jurisdiction to hear and determine any matterrelating to any such charging order.



Charging Order Provisions - AlaskaCharging Order Provisions AlaskaAlaska Stat. § 10.50.380: Rights of Judgment Creditor

1. If a judgment creditor of a limited liability company member applies to a court ofcompetent jurisdiction, the court may charge the member’s limited liability companyinterest for payment of the unsatisfied amount of the judgment.

2. To the extent a limited liability company interest is charged under (1) of this section, thejudgment creditor has only the rights of an assignee of the member’s interest.

3. This section provides the exclusive remedy that a judgment creditor of a member or ab ’ i t ti f j d t t f th j d t d bt ’ i t t imember’s assignee may use to satisfy a judgment out of the judgment debtor’s interest in

the limited liability company. Other remedies, including foreclosure on the member’slimited liability company interest and a court order for directions, accounts, and inquiriesthat the debtor member might have made, are not available to the judgment creditorattempting to satisfy a judgment out of the judgment debtor’s interest in the limitedli bilit d t b d d b tliability company and may not be ordered by a court.

4. This section does not deprive a member of the benefit of an exemption applicable to themember’s membership interest.


* Charging Order is exclusive remedy plus other remedies are prohibited.

Charging Order Provisions - NevisCharging Order Provisions NevisNevis Limited Liability Company Ordinance, 1995, Part 7, § 43: Rights of

Judgment CreditorJudgment Creditor

1. On application to a court of competent jurisdiction by any judgment creditor of amember of a limited liability company, the court may charge the member’sinterest with payment of the unsatisfied amount of the judgment with interest Tointerest with payment of the unsatisfied amount of the judgment with interest. Tothe extent so charged, the judgment creditor has only the rights of an assignee ofthe member’s interest.

2 Notwithstanding any other law the remedies provided by subsection (1)2. Notwithstanding any other law the remedies provided by subsection (1)shall be the sole remedies available to any creditor of a member’s interest.

3. This Ordinance does not deprive any member of the benefit of any exemptionlaws applicable to his interest in the limited liability companylaws applicable to his interest in the limited liability company.



Charging Order Provisions - AnguillaCharging Order Provisions AnguillaLimited Liability Act, Interim Revised Statutes of Anguilla, Chapter 6,

Part 7 § 47: Right of Judgment CreditorPart 7, § 47: Right of Judgment Creditor

1. On application to the Court by any judgment creditor of a member, theCourt may charge the economic interest of the member with payment ofy g p ythe unsatisfied amount of the judgment.

2. To the extent so charged, the judgment creditor has only the rights of anassignee of the economic interestassignee of the economic interest.

3. This Act does not deprive any member of the benefit of any exemptionlaws applicable to his member’s interest.pp

* Charging Order not exclusive, but limited expressly to “economicinterest.”


LLCs – Charging Order Case LawLLCs Charging Order Case Law

For a comprehensive survey of case lawFor a comprehensive survey of case lawapplying charging orders in each of the 50 states,see:see:

Fifty State Series: LLC Charging Order Case Table (Dec. 2010)Carter G. BishopProfessor of Law, Suffolk University Law Schoolhttp://papers.ssrn.com/sol3/papers.cfm?abstract id=1565595p p p p p _


Single-Member LLCs – Case LawSingle Member LLCs Case Law• In re: Ashley Albright, 291 B.R. 538 (Bankr. D. Colo.y g , (

2003) – In the first SMLLC case, the BankruptcyCourt held that “in a single-member LLC, there areno non debtor members to protect ”no non-debtor members to protect.”

• In re: A Z Electronics LLC 350 B R 886 (Bankr D• In re: A-Z Electronics, LLC, 350 B.R. 886 (Bankr. D.Idaho 2006) – “Debtor’s bankruptcy filing effectivelyassigned her entire membership interest to thebankruptcy estate, and the Trustee obtained all herrights, including the right to control…includingdecisions regarding liquidation of the entity’s assets ”


decisions regarding liquidation of the entity s assets.

Single-Member LLCs – Case LawSingle Member LLCs Case Law• Cognex Corp. v. VCode Holdings, Inc. 2006 WL 3043129

(D Mi O 24 2006) h ld h LLC l f(D.Minn., Oct 24, 2006) – court held that LLC was alter ego ofparent and allowed suit against parents’ assets.

• Dismissed application of traditional corporate alter egoDismissed application of traditional corporate alter egoanalysis (e.g., corporate formalities, record keeping,commingling, etc.), stating, “Unlike a corporation, an IllinoisLLC does not issue stock, does not appoint officers, and is not

i d i lrequired to issues annual reports.”

• It further noted that there was “no reasonable way” todistinguish between actions by officer/managers for the benefitdistinguish between actions by officer/managers for the benefitof the single-member LLC or its parent.

* Note: statements regarding Illinois law are actually incorrect.


Single-Member LLCs – Case LawSingle Member LLCs Case Law

• Shaun Olmstead vs federal Trade Commission No• Shaun Olmstead vs. federal Trade Commission, No.SC08-1009, June 24, 2010 –In deciding not to issue a charging order the courtIn deciding not to issue a charging order, the courtnoted that:

“[Florida’s] charging order provision established a- [Florida s] charging order provision established anonexclusive remedial mechanism,” and,

“there is no express provision in the statutory text- there is no express provision in the statutory textproviding that the charging order is the only remedy thatcan be utilized.


Lessons from SMLLC CasesLessons from SMLLC Cases

With much more case law to come, early lessons of SMLLCcases are:

1) Bankruptcy Courts will not issue charging orders with1) Bankruptcy Courts will not issue charging orders withSMLLCs – a transfer to a BK trustee is a transfer of allrights;

2) Beware of a new and different application of the “alter ego”theory in each state; and,

3) Statutory language matters and not just for SMLLCs3) Statutory language matters – and not just for SMLLCs(Olmstead is a call for legislatures to respond with expressSMLLC exclusivity language).


SMLLC Statutes - WyomingSMLLC Statutes Wyoming

Wyo. Stat. Amn. § 17-209-503 (2010)

1. This section provides the exclusive remedy by which a person seeking to enforcea judgment against a judgment debtor, including any judgment debtor who maybe the sole member, dissociated member or transferee, may, in the capacity of thejudgment creditor, satisfy the judgment from the judgment debtor’s transferableinterest or from the assets of the limited liability company.

2. Other remedies, including foreclosure on the judgment debtor’s limited liabilityinterest and a court order for directions, accounts and inquiries that the judgmentdebtor might have made are not available to the judgment creditor attempting tosatisfy a judgment out of the judgment debtor’s interest in the limited liabilitycompany and may not be ordered by the courtcompany and may not be ordered by the court.

* Exclusive remedy; specifically prohibits other remedies; specifically includesSMLLCs.


SMLLC Legislation – Cook IslandsSMLLC Legislation Cook Islands

Cook Islands Limited Liability Companies Act 2008, § 45: Rights ofCook Islands Limited Liability Companies Act 2008, § 45: Rights ofCreditor against a member

6 The charging order remedy given by this section shall be the sole and6. The charging order remedy given by this section shall be the sole andexclusive remedy available to a Creditor in respect of a member’smembership rights.

7. For the avoidance of doubt and without limiting the generality of subsection (6):…(d) subsection (6) shall apply whether the limited liability company hasa single member or multiple members.

* Sole and Exclusive remedy; specifically includes SMLLCs.


SMLLCs – Dead or Alive?SMLLCs Dead or Alive?

d• Not Dead, developing;• Still appropriate as a substitute for a sole proprietorship

(has nothing to do with charging orders);(has nothing to do with charging orders);• Use SMLLC exclusive remedy statutes only;• Consider legitimate grantor trust as second legal member,Consider legitimate grantor trust as second legal member,

but only one tax member;• Consider MMLLC owning multiple SMLLCs; and,• New Proposed Regulations re: Series LLCs make Holdco

with SMLLC subsidiaries more likely.


Sample LLC Planning StructuresSample LLC Planning Structures“The Investment Holdco” …without Holdco

CreditorCreditorClient CreditorCreditor

* Creditor will receive profits.

* Charging Order Exists – and helpful sinceno forced distributions.

$ Judgment

3rd PartiesLLC Client OthersProfit

Distributions$ $

ProfitDistributions

* Charging Order Exists – but not helpful due toothers’ desire for distributions. LLC

LLC

$ $* Since others

want profits, Charging order, not likely to

Distributions


not likely to be effective.

LLC Planning StructuresLLC Planning Structures“The Wholly International LLC”

CreditorCreditorClientJudgment

International “Charging Order”

Avoid:International

LLC

* Isolate International assets, activities and profits offshore.

Avoid:

a) International LLC owning U S attached assets

International I t t

U.S. attached assets

b) U.S. LLC owning International assets


Investments orBusiness

LLC Planning StructuresLLC Planning Structures“The Multi-Member/Single-Member LLC”

ClientInternationally

Defective BeneficiariesJudgment

g

Creditor ClientGrantor Trust

“Charging Order”

Sale/Gift of Interest

“Single”- Member

* IDGT creates 2nd

Member for asset protection purposes

LLCp p p

* Since IDGT is grantor trust and treated as “the client” for tax purposes


client for tax purposes, LLC is taxed as SMLLC

LLC Planning StructuresLLC Planning StructuresCorporate Conversions – Convert Corporation into LLCA) p p)

* No Charging Order Protection * Charging Order Protections

Existing LLC (taxed as

Conversion

S/C Corporation (taxed as S/C Corporation)Tax-free

reorganization if maintain same tax status.


LLC Planning StructuresLLC Planning StructuresB) Corporate Conversions – Layer in LLC over Corporation

ChildrenClientDiscounted

if / l

) p y p

Gift/Sale

LLC Holdco

* Charging Order Protection

Operating* No ChargingO d i


OperatingC Corporation

Order Protection

Asset Protection TrustsAsset Protection TrustsAsset Protection Trusts come in many varieties:Asset Protection Trusts come in many varieties:

a) Domesticb) Offshoreb) Offshorec) Self-Settledd) S ttl d f Othd) Settled for Others

* At their core, they all rely on the fundamentalSpendthrift Clause.


Spendthrift ClauseSpendthrift Clause

Sample Clause- No interest under thisSample Clause- No interest under thisinstrument shall be assignable by anybeneficiary or be subject to the claims of his orbeneficiary or be subject to the claims of his orher creditors, including claims for alimony orseparate maintenance The preceding sentenceseparate maintenance. The preceding sentenceshall not be construed as restricting in any waythe exercise of any right of withdrawal orthe exercise of any right of withdrawal orpower of appointment or the ability of anybeneficiary to release his or her interest


beneficiary to release his or her interest.

Asset Protection Trust StructureAsset Protection Trust StructureDomestic APTs•Permit Self-Settled Spendthrift Trust

International APTs•Permit Self-Settlement

Professional/Family

p•Available in 13 states (and growing)•Concerns: Full Faith and Credit; Conflict of Laws

•Don’t recognize U.S. judgments•Don’t recognize U.S. lawyers•Don’t allow contingency fees•Require significant bond•Loser pays victor’s fees

Domestic/

BeneficiariesTransfer Assets•Trustee has flight provisions•More lenient fraudulent conveyance laws (1-2 years)•Trust Protector•Higher standard burden of proof

International AssetProtection Trust

Trustee Protector

•Power to Remove Trustee•Power to Invoke Flight Provisions

•International Person/Entity•Fiduciary Duties to BeneficiariesPo er to In oke Flight Pro isions

•Irrevocable Trust•Self-Settled Spendthrift Trust•Avoid Probate•Can be structured Inside or Outside of Estate

•Power to Add/Remove Beneficiaries•Power to Invoke Flight Provisions•Power to Disregard Court-Ordered Removal•May have Administrative and Managerial Trustee Roles


Domestic APTs – Jurisdiction Comparison


International APTs – Jurisdiction Comparison


APT Case LawAPT Case LawWhile the assets of International APTs remainprotected, some settlors have been held in contempt ofcourt and incarcerated:

• In re Lawrence, 279 F.3d 1294,2002 U.S. App. 15 Fla. L. Weekly Fed. C243.

Stephan Jay Lawrence created and funded an offshore asset protectionStephan Jay Lawrence created and funded an offshore asset protectiontrust with $7 million dollars after receiving a $20.4 million judgmentagainst him. Lawrence then filed for bankruptcy. The court found thatLawrence had control over the trust (power to repatriate the trust assets),and the court ordered him to turn over the assets held in the offshoretrust. The bankruptcy court imprisoned Lawrence for contempt of courtwhen he did not comply with the bankruptcy court order to repatriate.• Trust structure was faulty; nonetheless the assets remained in the trust


• Trust structure was faulty; nonetheless, the assets remained in the trust.

APT Case Law (cont )APT Case Law (cont.)• Morris v. Morris, Case No. 4D04-3812, 4D04-4621, 4D04-4763, aff'd,

Appeal No SC05 1166 (Fla S Ct April 13 2006);Appeal No. SC05-1166 (Fla. S. Ct. April 13, 2006);Morris v. Wroble, Case No. CIV-O6-80479 (S.D.Fla.) aff'd, Appeal No. 06-80452-CV-DTKH (11thCir. 2006).

When Leland and Merry Morris were divorced, their settlement agreementprovided that if Mrs. Morris challenged any part of the agreement, shewould have to pay her husband $1 million plus other assets. After

bli hi d f di C k l d i fil d iestablishing and funding a Cook Islands trust, Mrs. Morris filed an actionto modify the child visitation arrangement, was sued by her husband andlost. Mrs. Morris was found in contempt of court when she refused to paythe court order for $1 million and defied several orders to appear. Afterb fi h i j il M M i l d h h dabout five months in jail, Mrs. Morris was released when she agreed to

pay $1 million into a trust for the couple’s children. This was onlypossible because the children were also express beneficiaries of the CookIslands trust, allowing the trustee to comply.


APT Case Law (cont )APT Case Law (cont.)

• Securities and Exchange Commission v. Jamie Solow, ___F. Supp. 2d___, 2010 WL 303959 (S.D. FL., Jan 22, 2010).

Jamie Solow, the settlor, tried to move his assets beyond the reach ofthe courts and his creditors. After millions of dollars in claims were filedagainst him, Jamie transferred his assets to his wife and, in turn, to a CookI l d J i l b bj d di iIslands trust. Jamie consequently became subject to a court order directinghim to produce the transferred funds. When he refused, he was held incontempt of court and incarcerated.


International APT Planning StructureInternational APT Planning Structure

CliProtector

M i

Client

* ManagementibiliRemoval Managing

TrusteeInternational Asset

Protection Trust

ResponsibilityRemovalPower

* Trust domiciled in best asset protectionjurisdiction.

AdministrativeAdministrativeTrustee * Trustee in

APT jurisdiction tol l t

Assetsserve as local agent * Assets domiciled

in best financial jurisdiction for client (U.S. or International)


International APT/LLC StructureInternational APT/LLC Structure

CliProtector

M i

Client

Removal ManagingTrustee

International AssetProtection Trust

* Management

RemovalPower

* Trust domiciled in best asset protectionjurisdiction.

AdministrativeAdministrativeTrustee

* Trustee in APT * International Charging Order

* Managed by client can bejurisdiction to serve as local agent

“Single”- MemberLLC

Managed by client – can be removed by TTEE upon duressto avoid control


Assets* Assets domiciled in best

financial jurisdiction for client (U.S. or International)

Current International Compliance Issues

• Final FBAR Regulations

2011 IRS Amnest Program• 2011 IRS Amnesty Program

• FATCAFATCA

• Other Foreign Disclosure and ReportingRequirements


Final Foreign Bank Account Reporting (FBAR) Regulations

• On February 24, 2011, FinCEN (“Financial CrimesOn February 24, 2011, FinCEN ( Financial CrimesEnforcement Network”) issued final regulations regardingFBARs, which become effective for all FBARs relating to20102010.

• US Persons with a financial interest in, or signatory authorityg y yover, foreign financial accounts have to file Form TD F 90-22.1 if the account exceeded $10,000 at any point in the year.


Final FBAR Regulations (cont )Final FBAR Regulations (cont.)

• Failure to timely file an FBAR can result in severe civil andycriminal penalties.

• For a non-willful violation, a penalty not exceeding $10,000may be imposed for each failure.may be imposed for each failure.

• For each willful violation, the max penalty is the greater of$100,000 or 50% of the value of the account at the time ofviolationviolation.

• A willful violation can also have criminal consequences.Such person can be subject to up to five years in prison and/or

fi f $250 000 If h i l i i f fa max fine of $250,000. If the violation is part of a pattern ofillegal activity, the max fine is increased to $500,000 and/or amax sentence of 10 years.


Who is Required to File?Who is Required to File?• A “U.S. Person” is defined to include citizens andA U.S. Person is defined to include citizens and

residents of the U.S. as well as any domestic entity.

LLC i l d d ithi th d fi iti f• LLCs are included within the definition of adomestic entity even if its classified as a disregardedentity for tax purposesentity for tax purposes.

- Consequently, a non-resident owner of a disregardedi h fil h FBARentity may have to file the FBAR.


Who is Required to File? (cont )Who is Required to File? (cont.)• Signature or other authority means the authority of ang y y

individual to control the disposition of money, funds, or otherassets held in a financial account by direct communication(whether in writing or otherwise) to the person with whom(whether in writing or otherwise) to the person with whomthe account is maintained.

– This clearly includes an employee who maintains signatureh i b ld i l d l h h d iauthority, but would not include an employee who had supervisory

authority over someone with signature authority.– The signature authority definition contained in the final rule applies

l i di id lonly to individuals.– Individuals with signature authority are not required to observe the

recordkeeping requirements that apply to other FBAR filers.


What Accounts are Reportable?What Accounts are Reportable?• FinCEN clarified that only accounts at institutionsFinCEN clarified that only accounts at institutionswhere taxpayers have a formal relationship need tobe reported.

– A formal relationship entails “regular services, dealingsand other financial transactions.”R i f i f i i i h ld b– Receipt of a wire from an institution should not besufficient to require an FBAR filing provided theindividual does not otherwise have a relationship withthe institution.

– A short-term account (like an escrow account) isreportable


reportable.

What Accounts are Reportable? (cont )What Accounts are Reportable? (cont.)

• The Regulations outline definitions for: (i) bank account, (ii)g ( ) , ( )securities account, and (iii) other financial accounts.

• Bank Account is defined “as a savings deposit, demandBank Account is defined as a savings deposit, demanddeposit, checking, or any other account maintained with aperson engaged in the business of banking.”

• Securities Account is defined as “an account maintained witha person in the business of buying, selling, holding, or trading

k h i i ”stock or other securities.”



• “Other financial accounts” are defined to include,Other financial accounts are defined to include,amongst other items, any life insurance or annuitypolicies with a cash value.

– FinCEN also included mutual funds available to thegeneral public, but elected not to include hedge funds,g p , g ,private equity funds, and similar types of pooledinvestments in this definition; although, it reserved theright to add them at a later dateright to add them at a later date.



• Exceptions for certain accounts include:Exceptions for certain accounts include:

– Participants and beneficiaries in a qualified retirementplan in accordance with Sections 401(a) 403(a) orplan in accordance with Sections 401(a), 403(a), or403(b);

– Owners and beneficiaries of IRA and Roth IRAaccounts created in accordance with Sections 408 and408A;Certain trust beneficiaries are exempt provided an– Certain trust beneficiaries are exempt provided anFBAR is filed by the trustee.


General FBAR CommentsGeneral FBAR Comments• Reasonable cause continues to be available to persons whop

have reported the income from any unreported accounts andwho file the FBAR on a delinquent basis.

• Consolidated filings are available for individuals with afinancial interest in 25 or more accounts or those withsignature authority over 25 or more accountssignature authority over 25 or more accounts.

- Further, individuals who own more than 50% of anentity that is required to file an FBAR can file aentity that is required to file an FBAR can file aconsolidated FBAR to report the interest held by theentity as well as their individual interest.


New Amnesty Program for Non-Compliant Foreign Accounts for 2011

• The 2010 Amnesty program netted over 15,000 non-filers.y p g ,

• This program offers higher penalties than the 2010 voluntarydisclosure program, but still offers certainty about avoidingcriminal prosecution.

• This program is set to expire on August 31, 2011.

• Taxpayer cannot be under IRS investigation or audit toparticipate in this program.


New Amnesty Program for Non-Compliant Foreign Accounts for 2011 (cont.)

• For taxpayers seeking to participate in the initiative, the IRSp y g p pwill require the participant to agree with the following terms:

• Payment of a 25% penalty on the highest aggregate balance for thet d f i t d i l d 2003 th hunreported foreign account during calendar years 2003 through

2010 (reduced to 12.5% if all unreported accounts do not exceed$75,000 during these years, and reduced to 5% for certain inheritedaccounts););

• Payment of any US income tax due on unreported income for theunreported account from 2003 through 2010; and,

• Payment of a 20% penalty on any US income tax due under theprevious requirement.


Foreign Account Tax Compliance Act (FATCA)

• This was passed as part of the HIRE Act in March ofThis was passed as part of the HIRE Act in March of2010.

• It serves as an attack on foreign tax evasion to helpg ppay for the cost of HIRE.

• FATCA greatly increases disclosure requirementsg y qand penalties on taxpayers with foreign accounts andassets.


FATCA Reporting HighlightsFATCA Reporting Highlights• Expanded reporting obligations for U.S. individuals with respect to any

“Specified Foreign Financial Assets” with aggregate value exceeding$50,000.

• Specified Foreign Financial Assets include:(i) Any financial account maintained by a foreign financial

institution;(ii) Any stock or security issued by a non-U.S. person;( ) y y y p ;(iii) Any financial interest or contract held for investment that has a

non-U.S. issuer or counter party; and,(iv) Any interest in a foreign entity(iv) Any interest in a foreign entity.

• This is much broader than the FBAR requirements and includes investmentsin foreign hedge funds, private equities, or real estate owned by an entity.


FATCA Reporting HighlightsFATCA Reporting Highlights

• These assets must be reported on a Taxpayers tax return on ap p ynew form (8938) for taxable years beginning on or afterJanuary 1, 2011.

• Failure to file penalties:• $10,000 minimum, increasing by $10,000 for each 30

day period following notification from Treasury up to$50,000 maximum.

• Section 6662 penalties for substantial understatement ofSection 6662 penalties for substantial understatement ofincome are increased for these assets from 20% to 40%.

• There is a reasonable cause exception for penalties.



• 6-Year Statute – extends the 3-year statute to 6 years if ity yinvolves > $5,000 of income

• Does not require substantial understatement!

• It is an investigation and audit statute

• After all information is received then regular 3 year statute• After all information is received, then regular 3-year statutewill kick in (or 6-year if substantial understatement)

• Effect is a combined 9 year or potentially 12 year statute of• Effect is a combined 9-year, or potentially 12-year, statute oflimitations!


FATCA Reporting HighlightsFATCA Reporting Highlights• FATCA also imposes significant burdens on foreign financial

institutions (FFI).• It requires that they enter into a reporting agreement with the U.S. Treasury or else

be subject to a 30% withholding tax on all withholdable payments (ie, interest,dividends, and sales of U.S. stock, bonds, or debt instruments).

• The reporting agreement for FFIs is extensive and burdensome. The FFImust agree to:

• Obtain information to determine which holders are U.S. accounts;• Comply with verification and due diligence procedures on such accounts as• Comply with verification and due diligence procedures on such accounts as

required by Treasury;• Report annually (name, address, account balance, gross receipts and payments

from the account);• Deduct and withhold 30% tax on payments to recalcitrant account holders;• Deduct and withhold 30% tax on payments to recalcitrant account holders;• Comply with Treasury requests for additional information;• Where foreign law would prevent such reporting, to close the account if a valid

waiver of the law cannot be obtained from account holder.



Payments to non-financial foreign entitiesPayments to non-financial foreign entities• There is a similar mandate on reporting for non-financial

foreign entities.• Withholding agents will be required to withhold 30% on

withholdable payments to non-financial foreign entities(NFFEs) unless the NFFE:(NFFEs) unless the NFFE:– Certifies to the withholding agent that they have no substantial U.S.

owners, or– They provide the names, addresses, and U.S. taxpayer identification

numbers of the substantial U.S. owners to the withholding agent toreport the information to the IRS



• This goes into effect for payments made after December 31,g p y ,2012 and are in addition to the rules under IRC 1441 dealingwith withholding on certain U.S. payments to foreign persons.

• Any FFI seeking treaty benefits will need to file a refund claimor claim a credit against other taxes due in the US.

• The obligation to withhold is imposed on the U.S. payor andthere are penalties for failure to comply.

• FFIs have one year to determine if “existing” accounts haveU.S. owners.


Other Foreign Disclosure and Reporting Requirements

• Form 3520Form 3520• Form 3520A

1040 S h d l• Form 1040, Schedule B• Form 5471• Form 5472• Form 8865Form 8865• Form 8858


IRS Form 3520IRS Form 3520• What causes you to file:

– creation of or transfer of property to a foreign trust by U.S. person;– death of a U.S. resident or citizen if such person was treated as owner

of any portion of a foreign trust under grantor trust rules or any portiony p g g y pof a foreign trust was included in his/her gross estate;

– a trust that was not a foreign trust becoming a foreign trust;– U S person with an ownership interest in a foreign trust under theU.S. person with an ownership interest in a foreign trust under the

grantor trust rules;– U.S. person who received a distribution from a foreign trust;

U S person who received more than $100 000 from a nonresident alien– U.S. person who received more than $100,000 from a nonresident alienindividual or a foreign estate;


IRS Form 3520 (cont )IRS Form 3520 (cont.)• Filed annually with grantor’s income tax return andy g

separately filed with an IRS Service Center

Fail re to File Penalt 35% gross al e of the• Failure to File Penalty = 35% gross value of theproperty transferred to and from a foreign trust.Criminal penalties may also be imposed for failure tofil fili f d l t tfile or filing a fraudulent return.

• FATCA imposes $10 000 minimum for failure to file• FATCA imposes $10,000 minimum for failure to fileform.


IRS Form 3520AIRS Form 3520A• Foreign trust with at least one U.S. owner must reportg p

information about the foreign trust, its U.S. beneficiaries andany U.S. person who is treated as the owner of any portion ofthe foreign trustthe foreign trust.

• Filed with the Philadelphia Service Center by the trust return’sdue date with extensions if applicable.

• Failure to file penalty = 5% of the gross value of the trustassets plus criminal penalties. Additional penalties may alsobe imposed for continued noncompliancebe imposed for continued noncompliance.


U S IRS Form 3520-AU.S. IRS Form 3520 A

• Many offshore trust companies refuse to filethese formsthese forms

• Only work with trust companies that file thisO y wo w t t ust co pa es t at e t sform and provide it to you or your clients.


IRS Form 926IRS Form 926• Required when cash that results in at least 10% of the votingq g

power of the Foreign Corporation after the transfer of cashduring the 12 month period exceeds $100,000.

• Required when property other than stock or securities not partof a reorganization by a U.S. Citizen to a foreign corporation.

• Filing required with tax return that include date of transfer.

• Failure to File Penalty = 10% of FMV of property at the time oftransfer, limited to $100,000.


IRS Form 1040 – Schedule BIRS Form 1040 Schedule B• Schedule B is form for Interest and Dividend

reporting; AND• Part III – Foreign Accounts and Trusts• Check “yes” if: you have an interest or signature

authority over a financial account in a foreigncountrycountry.

• If “yes” then file TD F 90-22.1• Also, if you receive a distribution from, were a

grantor of, or transferor to, a foreign trust then FILEForm 3520.


IRS Form 5471IRS Form 5471• File this form if you have ownership of 10% or more of they p

stock of a foreign corporation by a U.S. person, controlled aforeign corporation, or owns any stock of a CFC that is also acaptive insurance companycaptive insurance company.

• This form is filed with the owner’s tax return and a copy isdelivered separately to the IRSdelivered separately to the IRS.

• Penalties for failure to file may include a $10,000 fine for eachannual accounting period for each foreign corporation andannual accounting period for each foreign corporation andreductions in foreign taxes available for credit. Criminalpenalties may also be imposed.


IRS Form 5472IRS Form 5472• U.S. corporation must file if foreign person owns 25% or more, when a

reportable transaction occurs (note that an offshore trust qualifies as aforeign person in most instances). Examples of reportable transactionscould include: purchase/sale of stock in trade; purchase/sale of tangible

/ i f l i h / l lproperty; payment/receipt of rents or royalties; purchases/sales, leases,licenses, of intangible property; commissions paid/received; amountsborrowed/loaned; interest paid/received; premiums paid/received forinsurance or reinsurance; etc ; Not required if controlling shareholder is ainsurance or reinsurance; etc.; Not required if controlling shareholder is aU.S. person and has filed Form 5471.

• This return is due by the due date of Corporate Income Tax Return andaccompanying each related party’s income tax returnaccompanying each related party s income tax return.

• Penalties of $10,000 may be assessed for failure to file or failure tomaintain records. Criminal penalties may also be imposed.


IRS Form 8865IRS Form 8865• The following triggers the filing of Form 8865:

– Greater than 50% ownership by U.S. person;– 10% or greater ownership interest by a U.S. person, while the partnership is controlled

by U.S. persons owning at least 10% interests;– Contribution of property to a partnership by a U S person in exchange for at least 10%Contribution of property to a partnership, by a U.S. person in exchange for at least 10%

of the ownership interests, or if such property exceeded $100,000;– An increase in an existing U.S. person’s partnership interest to equal or exceed 10%;– A U.S. person disposes of a percentage interest that reduces ownership below 10%;– Any disposition that results in the reduction of a U.S. person’s interest in a partnership

by 10% or more.• This return is due by the due date of the Individual’s income tax return and is attached to the

return.• Penalties for failure to file may include a $10,000 fine for each annual accounting period for

each foreign partnership and reductions in foreign taxes available for credit. Criminalpenalties may also be imposed.


IRS Form 8858IRS Form 8858• Information Return of U.S. Persons with Respect to Foreignp g

Disregarded Entities• Required to be filed by U.S. Persons that own a foreign disregarded

entity directly or in certain circumstances indirectly orentity directly or, in certain circumstances, indirectly orconstructively.

• This is a new form required to be filed for entities on or after 1/1/04d ill b d ith th t t f f th di d dand will be due with the tax return of owner of the disregarded

entity.• Penalties for failure to file may include a $10,000 fine for each

foreign corporation or partnership for each annual accounting periodand reductions in foreign taxes available for credit. Criminalpenalties may also be imposed.


estate planning asset protection strategiesmedia.straffordpub.com/products/estate-planning... ·...

Documents