final-estate planning new asset protection opportunities presentation at green diamond gallery on...
TRANSCRIPT
Calfee, Halter & Griswold LLP,2800 First Financial Center, 255 East Fifth Street, Cincinnati, Ohio 45202 Cincinnati | Cleveland | Columbus | Calfee.com
Asset Protection: Mitigating Risks to Protect You, Your Family and Your Business
Are we living in the midst of a litigation and liability explosion?
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Inflammatory Headlines
• Predatory plaintiffs• Frivolous lawsuits• Jackpot justice• Runaway verdicts
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The Reality: Most of us are at risk for personal liability
• Professionals• Entrepreneurs• Corporate owners, directors and officers• Property owners• Personal guarantees• Others
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The Drawbacks of Traditional Protections
• Catastrophic mistakes/losses happen• Piercing the corporate/LLC veil• Officers and LLC members personally liable for
tortuous conduct• Corporate bankruptcy• Inadequate insurance limits, exclusions, punitive
damages
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Asset Protection Techniques
General Limitations:• No technique is bulletproof• There is always a combination of cost and lost
control
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Asset Protection Techniques
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Fraudulent Transfer Laws:• Prevent using techniques to avoid known creditors• Provide protection for unsecured or undersecured creditors
from transfers designed to avoid collections• Various remedies include the right to avoid the transfer,
undoing the transfer, and others on a case-by-case basis• Actual Fraud - Intent to hinder, delay or defraud• Constructive Fraud - Economic effect is to hinder, delay or
defraud:• Lack of reasonably equivalent value• Insolvency
Asset Protection Techniques
• Invest in Exempt Property:• ERISA “Qualified Plans”: 401(k), pension, profit-sharing• Inherited Accounts: IRAs, Roth IRAs and 529 plans• Homestead Property: Up to $132,900• Life Insurance: Payable to a spouse, child or dependent
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Asset Protection Techniques
• Purchase Liability Insurance• Gifts of property to a spouse or others• Disclaimers:
• What is a disclaimer?• Old Rule: Disclaimer is a fraudulent conveyance • New Rule: Disclaimers are not subject to fraudulent
transfer rules
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Asset Protection Techniques
• Limited Liability Company (LLC):• Charging order is a creditor’s sole remedy• Creditor may be left with taxable income even if
distributions are not made• Creditor is not entitled to vote or participate in
management
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Asset Protection Techniques
• Domestic Asset Protection Trust:• What is Domestic Asset Protection Trust?• Old Rule: May not form a trust to benefit yourself and
have the assets protected • New Rule: Ohio residents are now allowed to use an Ohio
Trustee• Due Diligence is required to avoid a fraudulent
transfer
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Asset Protection Techniques
• Offshore Asset Protection Trust:• Primary advantage over a domestic trust is that foreign
jurisdictions do not have to recognize the judgments of American courts
• Economic burden to the creditor associated with litigation in a foreign jurisdiction is a significant factor in deterring or settling claims
• Expensive and complicated to set-up
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Asset Protection Techniques
• The Ohio Legacy Trust:• What is the Ohio Legacy Trust?• New Rule: Trust creator may be a trust beneficiary and
protect trust assets from their own future creditors• Cannot protect against court-ordered spousal and
child support, or division of marital property• Definition of “spouse” does not include a future
spouse
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The Ohio Legacy Trust
Who Should Consider Forming a Legacy Trust?• Any person seeking protection from future creditors• Owners of closely held businesses• Individuals in high-risk occupations or professions• Others contemplating marriage and looking for added
protection from divorce or claims by their future spouse
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The Ohio Legacy Trust
Key Requirements of the Legacy Trust:• In writing• Irrevocable• Ohio law governs• Assets transferred to a “qualified trustee” cannot be the
“transferor”• Under the statute, the “transferor” is the person who
transfers assets to the trust• The “transferor” is also the person who creates the trust
• Specified creditor protection (“spendthrift”) provisions• Transferor must attest:
• To remain solvent after the transfer and to not attempt to defraud any creditor
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The Ohio Legacy Trust
Who Can Serve as Trustee?• Cannot be the transferor• Statute requires a “qualified trustee”:
• An Ohio resident• An Ohio bank or trust company
• Recommend trustee be an independent individual, a bank or trust company
• Not a spouse• Preferably not a child
• Guiding principle: The more independent, the better
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The Ohio Legacy Trust
Benefits and Rights the Transferor Retains:• Can receive income and principal distributions at the trustee’s
discretion• Right to direct the trustee to distribute trust assets to another
person• Use property held by the trustee• Right to veto distributions• Can remove the trustee and select a permissible successor
• Same right extended to spouses, children or descendants• Ability to remove the Investment Advisor and/or Distributions
Advisor and select permissible successors• Ability to direct investments
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The Ohio Legacy Trust
Common Tax Consequences:• Incomplete (nontaxable) gift when the trust is funded• Grantor trust for income tax purposes, transferor liable for tax
on trust income• On death, trust assets included as part of transferor’s taxable
estate
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The Ohio Legacy Trust
Statutory Protections for Trustee:• Creditor has no cause of action against the trustee of a Legacy
Trust• Even if a transfer is avoided, a trustee who has not acted in bad
faith• Is entitled to its fees and costs• Has a first lien for the entire cost of defending the action to
avoid the transfer
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The Ohio Legacy Trust
Creditor Challenges:• Statute gives creditors the ability to challenge a transfer to a
Legacy Trust only if it was made with the specific intent to defraud the creditor bringing the action
• Time limitations (“statute of limitations”) for creditor challenges:
• Existing creditors have within 18 months of transfer• Creditors with underlying claims within 3 years of the
transfer have 6 months after the transfer is discovered• Future creditors have 18 months from the date of transfer
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The Ohio Legacy Trust
Creditor Challenges: • Burden is on the creditor to prove the matter by clear and
convincing evidence• Standard of proof is a substantive rule, not procedural
• Transfer avoided only to the extent necessary to satisfy the transferor’s debt to the creditor bringing the action
• Other creditor remedies include: • Fraudulent transfer rules• Lien follows the collateral• Transferor lacked good title to the assets placed in trust• Sham trust
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The Ohio Legacy Trust
Solvency Analysis:• Comparison of all assets and liabilities, fairly valued• Exempt assets do not count as assets, such as:
• Retirement assets • Home equity exemption
• Assets subject to a lien (up to the lien amount) do not count• Independent appraisals may be required for significant assets
without ascertainable value
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The Ohio Legacy Trust
Solvency Analysis:• Supports determination of amount of assets which can be
transferred, and those which are needed as a “reserve” for current or foreseeable liabilities
• Future transfers will require additional Affidavits of Solvency• Solvency tests:
• Cash flow• Balance sheet• Thin capital
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The Ohio Legacy Trust
Qualified Affidavit:• Required if transferor is a beneficiary• Signed before or when making a transfer to the Legacy Trust
(“qualified disposition”)• Transferor must attest that:
• S/he will not be rendered insolvent• Does not intend to defraud any creditor by making the
transfer• Has no pending or threatened actions other than those
identified• S/he is not contemplating bankruptcy
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The Ohio Legacy Trust
Additional Due Diligence:• Search for relevant disclosures• Review public records for judgments, bankruptcies pending
actions• Contact the client’s accountant for a review of the Affidavit of
Solvency
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Calfee has been providing meaningful legal counsel in matters that are critical to the success of our client since 1903. Our focus is primarily on business services, business transactions, government relations, intellectual property and commercial litigation. Our lawyers routinely represent a wide spectrum of private and public organizations, entrepreneurs, Fortune 500 companies, governments and individuals.
James A. [email protected]
John A. Mongelluzzo [email protected]
Matthew S. [email protected]
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This presentation is provided by Calfee, Halter & Griswold LLP for education and information purposes only. This presentation is not intended to provide legal advice on specific subjects. The resolution of legal issues depends upon the specific facts of a particular situation and the laws involved. This presentation may be considered advertising under applicable laws. Nothing contained herein or in any attachment hereto is intended to be used, or can be used, to avoid penalties imposed under the Internal Revenue Code.
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