introduction to asset protection planning - langdon...

Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 1

Introduction to

Asset Protection Planning

Thomas P. Langdon, Esq.

Objective of Asset Protection

PlanningRemove individual and family wealth from the attacks of :

&

Creditors Predators (IRS)

Asset Protection Involves

Estate, Trust, and Gift Tax Law

Business Law

Family Law

Pension Law

Debtor/Creditor Law

Social Insurance Considerations


The Client comes to you and says,“This is my Castle.”

We are the “Moat Builders.”

Spendthrifts Litigation

Divorce

The Castle Under Attack


Successful Asset Protection Planning

How to Dig the Moat

Insurance

Trusts

Annuities

Family Limited Partnerships

Limited Liability Companies

Premarital Agreements

Medicare Planning

Step 1: Adequate Insurance

Property Coverage

Homeowners Insurance

Auto/Boat

Health Coverages

Medical/Dental

Long-Term Care


Step 1: Adequate Insurance

Income CoverageDisability

Business Continuation

Liability CoverageAppropriate Limits on Property Policies

Umbrella Policy

Professional Liability

Moatbuilding Trusts

Spendthrift

Discretionary

Support Trust

Personal Trust

Children‟s Trusts

Dynasty Trusts

Foreign Trusts

Preparing for the Defensive

Battle

Avoid Fraudulent Conveyances


Fraudulent Conveyance

“A Conveyance or transfer of property, the object of which is to defraud a creditor, or hinder or delay him, or put such property beyond his reach.”

- Black’s Law Dictionary

Sources of Fraudulent

Conveyance LawThe Statute of Elizabeth (1571)

Still in force in most states

Uniform Fraudulent Conveyances Act of 1918 (UFCA)

Uniform Fraudulent Transfer Act of 1984 (UFTA)

Federal Bankruptcy Law

Fraudulent Conveyances Result

from:inaction

a waiver of defenses

termination of a lease

extension of a loan

use of a disclaimer

incurring an obligation


Fraudulent Conveyances Result

from:Actual intent to defraud

facts and circumstances test

can be imputed from one party to another

debtor must be competent to formulate

intent

“Badges of Fraud” show intent

inside deal

debtor retained possession and control

undisclosed/concealed/secret

transfer in anticipation of suit

debtor absconded

removal/concealment of assets

FRAUD

“Badges of Fraud” may show

intentinsolvent, or became so, due to the transaction

transaction shortly before substantial debt was incurred

assets transferred through a straw man

FRAUD


Summary: Fraudulent

Conveyances result fromACTUAL intent to hinder, delay or defraud

When grantor becomes insolvent because of the transfer

transfers for less than fair consideration

secret transactions

Removing the Taint of Fraud

satisfy pre-transfer claims

prove the claim is invalid

invoke the doctrine of laches

wait for the expiration of the Statute of Limitations

Creditor abandons the claim

If a transaction is a Fraudulent

Conveyance, Creditors canrestrain the disposition of property

appoint a receiver to take charge

set aside the conveyance or obligation

Apply to a court, which may impose any order required by the circumstances


Planning Issues

Violation subjects parties, including the planner, to civil and criminal liability.

solvency: use only assets available to creditors

asset protection planning can render a client insolvent

structure the transaction to avoid badges of fraud

Planning Issues

Fraudulent Transfers are determined at the time the transfer is perfected.

Implement the plan ASAP!!!

Exempt Property


Types of Exempt Property

Qualified Retirement Plans

Personal Residences (Homestead Rights)

Corporations


Asset Protection &

Employee Benefits

The “Spendthrift Clause” is

the key to protection from creditors.

Protected Plans

Pension

Profit Sharing

Keogh

403(b)

Contractual Annuity

Government & Church Plans


Other Protected Plans

Sec. 419A(f)(6) Severance Plans

Sec. 501(c)(9) VEBA Plans

Risk of Forfeiture

Trusted Benefits

Rabbi Trusts

Protected Insurance Plans

Group Life

Supplemental Voluntary Life

Dependent Life

Some Split Dollar Plans

Plans Not Protected

Top Heavy Plans

Out of Compliance

Sole Participant

IRA and SEP-IRA

Unless State Law provides protection

Welfare Benefit Plans

Top-Hat Plans


Fiduciary Liability Exposure

ERISA Concerns:

Rules of Plan Operation

Procedural Prudence

Trusteeship:

Non-Qualified Plans

Asset Protection & Life

Insurance

Objective of Asset Protection

PlanningRemove individual and family wealth from the attacks of :

&

Creditors Predators (IRS)


Why is Life Insurance important?

To avoid a potential shortfall in funds necessary to

provide liquidity to the estate

purchase a business interest under a mandatory buy-sell agreement

Create/Replace Wealth

Life Insurance &

Types of CreditorsFederal Government

State Government

General Creditors

Judgment Creditors

Creditors in Bankruptcy

Types of Life Insurance

Group Life

Individual LifeTerm

Whole Life

Universal

Variable

Variable Universal


Life Insurance & Asset Protection

Insured’s CreditorsDepends on state law

Most states protect Life Insurance Policies

Beneficiary’s CreditorsOnce paid, creditors have access

Consider annuity settlement option if beneficiary has creditor issues

Creditors & Life Insurance in

PennsylvaniaCash Value

Death Proceeds

Income Payments

Dividends

Estate Taxation of Life Insurance

Proceeds are payable to the executor of the decedent‟s estate. IRC Sec. 2042(1).

Decedent held, at the time of his death, incidents of ownership in a policy on his life. IRC Sec. 2042(2).

Within 3 years of death, decedent transferred incidents of ownership in a policy by gift. IRC Sec. 2035.


“Incidents of Ownership”

change the beneficiary

surrender/cancel the policy

assign the policy

revoke an assignment

pledge the policy for a loan

obtain loan against CSV of the policy

non de-minimis reversionary interest

“Incidents of Ownership”, Cont.

right to change beneficial ownership of the policy

Attributed incidents of ownership if the decedent was a sole or controlling stockholder.

ILITs & Asset Protection

Existing policy transferred to ILIT is a gift, subject to IRC Sec. 2035

If trust purchases a new policy, and insured never held an incident of ownership, Section 2035 does not apply.


IRC Sec. 2035

The gross estate includes the value of the gratuitous transfers within 3 years of death if the interest would have been includible under:

Sec. 2036 (Transfers with retained life int.)

Sec. 2037 (Transfers effective on death)

Sec. 2038 (Revocable Transfers)

Sec. 2042 (Proceeds of Life Insurance)

Application of Sec. 2035

Applies to Gratuitous transfers.

A bona fide sale for full and adequate consideration in money or money‟s worth will not invoke Sec. 2035.

• Beware the Transfer for Value trap for sales of Life Insurance

ILITs, Sec. 2035, & Asset

ProtectionProper use of an ILIT will avoid estate tax inclusion on insured‟s death, since insured does not own the policy

During the applicable Statute of Limitations, the annual transfers from the insured to the trustee can be considered fraudulent conveyances.


Consequence & Solution

Both the policy loan value and the cash surrender value are available to refund payments deemed to be fraudulent conveyances

A foreign ILIT can provide additional protection by taking advantage of a shorter Statute of Limitations.

Bankruptcy

Cash Value

Income Payments

Dividends

Death Proceeds

Buy-Sell Agreements

Cross Purchase Agreement

policies are owned by associates of the insured

Asset Protection Issues

if a party files for bankruptcy, insurance policies funding buy-sell agreements are included in the bankruptcy estate.

Alternative:

use a trust to hold the policies


Asset Protection Using

Annuities

Annuities & Asset Protection

State Law Specific

Generally, if the contract is annuitized, a creditor can only get to the payments

Principal is protected

Asset Protection & Choice of

Business Entity


Family Limited Partnerships

Mom & Pop

Family Limited Partnership

Mom & Pop Children

General PartnershipInterest

Limited PartnershipInterests

Family Limited PartnershipsBusiness Interest

Advantages of FLPs

Control

Simplified Annual Giving

Transform Real Property into Personal Property

Transfer Restrictions -- Valuation Discounts

Creditor Protection

Facilitate Family Communications



Corporate Characteristics

Continuity of Life

Centralized Management

Limited Liability

Free transferability of Interest

Advantages of LLCs

Limited Liability for all members

Any member may materially participate in management

Valuation Discounts Available

Transform Real Property into Personal Property


Advantages of LLCs, cont.

No gain recognized upon contribution of appreciated property

Facilitates Family Gifting Programs

Foreign Organized Business Entities can be Classified as LLCs for US Fed. Tax Purposes

Disadvantages of LLCs

Tough Passive Activity rules

Subject to Franchise Tax

Limited Liability not absolute

Some Fringe Benefits excluded from income of “Partners”

Taxable distribution upon conversion from Corporation to LLC

Dynasty Trusts


Dynasty Trusts

Long-Term, preferably perpetual trusts

Objective

avoid transfer taxation by restricting ownership of trust assets

ownership does not vest in any individual beneficiary

Taxation of Dynasty Trusts

Income Tax - treated as a complex trust under Subchapter J

To be effective, must have a zero inclusion ratio for GST purposes.

The Generation Skipping

Transfer TaxApplies to

Direct Skips

Taxable Distributions from Trusts

Taxable Terminations of Trusts

Tax is a flat 55% of the Transfer


Minimizing the impact of the

GSTTThe Lifetime Exemption

$1 Million, indexed in $10,000 increments

In 2001, the exemption is $1,060,000

Direct gifts subject to the Gift Tax Annual Exclusion

Currently $10,000 per donee per year

Educational and Medical Expenses paid to the service provider

The Rule Against Perpetuities

(RAP)“No interest [in real or

personal property] is good unless it must vest, if at all, not

later than 21 years after some life in being at the creation of the interest.”

Lord Chancellor Nottingham

Why the „RAP‟?

“Arrangements for the distant future are likely to result in an inefficient use of resources brought about by unforseen

contingencies.”

• R. Ponsor, Economic Analysis of the Law, p. 486, (3rd Edition, 1986)


Some States have outlawed

„RAP‟South Dakota

but has anti-alienation statute

Delaware only applies to personal (not real) property

Alaska

Wisconsin

Idaho, Illinois, Maryland, Rhode Island, New Jersey, & Others

Dynasty Trust Provisions

Usually grant discretion to the trustee

Name the Trustee

Change of Situs Provisions

Trustee may purchase assets for beneficiary use

Allow Trustee to refuse contributions

Dynasty Trust Provisions

Spendthrift Clause

Definition of terms

“Issue”

“Spouse”


Offshore Trusts

Offshore Trusts Offer

Favorable Standards of Proof & Judgments

Favorable Statute of Limitations

Avoidance of Forced Heirship Rules

Avoidance of the „RAP‟ (Rule Against Perpetuities)

“Flight” Provisions

Potential Consequences of

Offshore TrustsUS Judgments may be enforceable

US Courts may not recognize the foreign trust

Presence of an Offshore Trust may result in denial of discharge in bankruptcy

DO NOT save Income Taxes.


Premarital Agreements

Premarital Agreements Defined

“A legal contract entered into by prospective spouses prior to marriage but in contemplation and in consideration thereof; by it, the property or other financial rights of one or both of the prospective spouses are determined or are secured to one or both of them or their children.”


The Uniform Premarital

Agreement ActAdopted in 1983

Currently in force in several states

limited in scope

Permissible Content

ANYTHING, not in violation of public policy

Generally, courts will only enforce financial provisions.

A Premarital Agreement is

Enforceable if:threshold tests of offer, acceptance, and consideration are met

it is a WRITTEN agreement

it does not violate public policyencourage divorce

forces one spouse to become a public charge

adversely affects a child‟s rights


Successful Asset Protection Planning

Break Time.....

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