Transcript ASSET PROTECTION

Estate & Asset
Protection
Planning
Brislawn & Associates, P.S.
Attorneys at Law
© C. Dennis Brislawn, Jr. 1994 - 1997
Definition of Asset Protection
Target: Organizing assets and affairs in
advance to minimize against risks of loss
 Preventative, not curative (vaccines, not
antibiotics)

Reasons to Protect Assets

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We Focus on Estate
Building, But Fail to
Consider Risks
“Sue Society”: Who Can
I Blame?
Juries Play “Robin
Hood”; Take from the
Rich, Give to the Poor
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Cut Your Losses
(Damage Control)
Peace of Mind
Concentrate on Your Job
Protect Your Family and
Your Business
More Lawsuits Are Filed Each Year*
*Over 20 Million Civil Cases Expected in 1994!
What Asset Protection Is Not


Hiding assets, i.e.
confidentiality is a plus, but
secrecy is not the lynchpin of
the plan
Taxation avoidance
Title to Assets

The Way You Hold Title to Your Property Affects
the Rights a Creditor Will Have!
Community Property

Community Property
• Acquired During Marriage
• Created by Law or by Agreement
• Result of an “Onerous Acquisition” or WORK
!
Separate Property

Separate Property
• Acquired Before Marriage
• Acquired By Gift or Inheritance
• Can Convert to Community By Agreement or
Mistake
• Personal Injury Recovery
Joint Tenancy

100% Co-ownership by More Than One Person
“Last One Left Standing Rule”:
Survivor Owns It All!
Your Defenses
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Insurance
Exempt Assets
• State and Federal Law
• Retirement Plans
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Trusts
Property Agreements
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Limited Liability
Companies
Corporations
Family Limited
Partnerships
Offshore Planning
A Liability Dragon
 Creditor Claims
Types of Claims
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Officer/Director
Liability (Corp.)
Employee Suits
Business or Professional
Liability
Divorce
Tax Liability
Creditor Lawsuits
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Vicarious Liability for
Other People
Partnership Liability
Unknown Claims
• Product Liability
• Environmental Liability
Attempts to Avoid Creditor Claims

Gimmicks are Methods That
Don’t Work
• Fraudulent Transfers
• “Hiding” Assets (2005 Bankruptcy Act
now requires 3 years of tax returns)
• Joint Ownership
• “Constitutional” Trusts
Creditor Rights
Can Set Aside Fraudulent Transfers
 All Community Property is Exposed to
Community Creditors
 Separate Property is Exposed to Separate
Creditor, 1/2 Community Property May Be
Exposed to
Separate Creditor

Creditor Rights (cont.)

Divorce Court May Have Jurisdiction Over
Both Community and Separate Property

All Joint Tenancy Property is at Risk of Any
Single Joint Tenant’s Creditors!
Fraudulent Transfers
Intent to Defraud, Hinder or Delay Known or
Likely Creditors
 Intent is Generally Presumed
 Badges of Fraud

such as insolvency, lack of consideration for a
transfer, close relationship with transferee, pending
or threatened litigation, concealment, deviation
from usual practice, transfer of all assets, retaining
possession, benefit, or control after transfer
Fraudulent Conveyance
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Pending or present creditors will have a greater
presumption of a fraudulent conveyance than future
creditors
Generally, fraudulent conveyance is NOT our common
understanding of fraud. Fraudulent conveyance is
remedial, i.e. a conveyance which can be undone only
to the point a creditor is hindered. No other damages
are usually allowed. However, some states allow for
criminal or civil penalties, including for the advisor.
Another Dragon
 Estate Taxes
Estate Taxes

Changing ownership of assets often also
removes them from the estate, offering the
additional benefit of reduced estate taxes along
with asset protection
Asset Protection Techniques

Methods That Work
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Save Administrative Fees and Costs
Reduce Taxes
Provide Multiple Layers of Defense
Allow Opportunity for Early Settlement
First Line of Defense
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Insurance
Strengths and Weaknesses
Strengths
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Covers Loss
Cash to Settle
Duty to Defend
Fund Buy-Sells
• Disability
• Death
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Pay Estate Taxes With
Discounted $$
Weaknesses
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Getting Costly
May not Qualify
Insolvency of Carrier
May get Cancelled
Coverage Exemptions
• Hazardous Waste
• Intentional Acts
• Punitive Damages
Second Line of Defense

Exempt
Property
Homestead
Colorado allows up to $30,000
 Other states allow unlimited (e.g. Florida) but
new 2005 bankruptcy act requires purchase
1215 days before filing or limit is $125,000
 2005 Act also limits protection to $125,000
where claim arises from RICO, breach of
securities laws, fiduciary fraud, and other
specified crimes or torts
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Insurance
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Federal exemption is for death benefits and limited
cash value (less than $9,000)
Colorado exemption is $50,000 where estate is
beneficiary and contributions were more than 4 years
before filing
State exemptions can be more generous, e.g. Florida,
Hawaii, Louisiana, but new 2005 Act requires
residency in that state for at least 2 years
Retirement Plans

2005 Act makes clear contributions to ERISA
covered plans are exempt, as are entire interest
in IRAs (up to $1 million?).
529 Plans

529 Plans are Exempt if:
Funded more than 2 years before filing
Funded by parent, grandparent, stepparent,
stepgrandparent of beneficiary of plan
$5,000 limit if funded more than one year
but less than two years before filing
Fraudulent transfer rules still apply
Other Exemptions in Colorado
Property of business partnership where held in
name of partnership
 Burial plot
 Health Aids
 Business or professional supplies up to $10,000
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Third Line of Defense

Property
Agreements
Partitioning Property
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Works for Families Where One Spouse has
Significant Liability Exposure
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Use With Additional Techniques
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CAUTION: MARITAL DISSOLUTION
Example
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“At-Risk” Spouse Owns:
Exempt Assets
Risky Asset
“Safe” Spouse
Owns:

Non-Exempt Assets
Family Home
First Fortification

Revocable
Living Trust
(RLT)
RLT Asset Protection Features
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No Court Involvement on Death
• Private
• No Forum Provided for Creditor
• Can “Cut Off” Creditors
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If Property is Partitioned:
• Two Separate Property Trusts; Each Spouse Shares
Management
Asset Protection Features (Cont.)
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Can Provide “Spendthrift” Protection
• Grantor not Protected
• Creditors of Other Beneficiaries Cannot Look to
Trust for Payment
• Beneficiary Cannot be Forced to Pledge or Assign
Trust Assets
• Keep Assets in Trust to Protect Adult Children from
Divorce, Lawsuits
Second Fortification

Irrevocable
Trusts
Irrevocable Trust Features
Grantor is Usually not Trustee
 Not Part of Grantor’s Taxable Estate
 May Own Life Insurance
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• Income and Federal Estate Tax-Free
When Received
Spendthrift Protection
 Controlled Distribution to Beneficiaries
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Special Irrevocable Trusts
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BERT Trusts
• Each spouse is trustee and beneficiary of separate
trust
• Grantor is other spouse
• Assets of trust are separate property providing asset
protection from claims against other spouse
• Assets of trust are outside estate of either spouse
Third Fortification
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Corporations
Corporate Features
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Limited Liability
Liable for Personal
Guarantees
May have Income Tax
Benefits
• Pension, Profit Sharing
Plans
• Fringe Benefits, Etc.
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Must Keep Status
Current with State
Must Observe
Formalities
• Adopt Bylaws
• Keep Minutes of Meetings
• Issue Stock
Fourth Fortification

Family Limited
Partnerships
(FLP)
FLP Features
File Certificate with State
 Partners: General and Limited
 General Partner has 100% Control
 Income Tax Neutral
 Easy to Gift Shares
 May Substantially Lower Federal Estate Tax
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FLP Features (Cont.)
Converts Real Property to Personal Property
 Can Set Up Multiple FLPs to Protect Different
Assets
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• Divide and Conquer
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Charging Order is the Exclusive Remedy for
Claims Against a Partner
Claims vs. Partnership
Take Insurance
 Take Partnership Assets
 Collect Against General Partner
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Use Entity General Partner
 Use Multiple Partnerships
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• Divide and Conquer
Claims vs. Individual Partner
Does Not Become Partner
 No Right to Partnership Assets
 Charging Order Sole Remedy
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• If GP Distributes, Can Get
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Creditor MUST PAY INCOME TAX Even if No
Income Received!
• Phantom Income
Creditor Nightmare
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Does not Become a
Limited Partner
No Right to Demand
Assets
No Transfer of Assets
Without Partner
Approval
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No Fraudulent Transfer
When FLP Established
Can’t Force Termination
of FLP
General Partner
Maintains Income
Control
FLPs Leverage Gifts
Each Person May Gift Up to $10,000 per
Person in Shares
 Value of Gifts is the Fair Market Value of Gift
 Partnership Rules Can Allow Value of Shares to
be Deeply Discounted!
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FLP Discounts
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What is a FLP Share Worth?
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Can’t be Easily Sold or Transferred
Can’t be Pledged
Can’t Demand Distributions
Income Allocated to LP for Income Tax Even if not
Paid
FMV of LP Share May Be Substantially Less
than the Value of the Assets!
FLP Summary
Juicy Red Apple is a Sour Lemon for Creditors
 Family Involved, Parents Control the Assets
 Estate Tax Reduction
 Can Distribute Income to Children or Others at
Lower Tax Rates
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Typical FLP Structure
General Partner
*Entity
*Corp, LLC, Trust
FLP
Limited Partners
Wife RLT
Child Trust
Husband RLT
Charity
Fifth Fortification

Limited
Liability
Companies
(LLC)
LLC Features
Limited Liability Like a Corporation
 Control is Flexible; Few Formalities
 Taxable Like a Partnership
 All States Have Them
 Professionals May Require Insurance
 Entity of Choice for Most Small Business
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LLC vs. FLP

May be comparable. Some states, like
Wyoming, allow for “Close Limited Liability
Companies”, which specify the only remedy for
creditors of a member is a charging order
Sixth Fortification

Personal
Asset
Protection
Trusts
Concept

Set Up a Trust that Limits or Eliminates
Creditor Rights to Seize Assets

Integrated With Your Estate Plan
• You can be a Beneficiary
• You can Remove Assets from Your Estate
• You can Sleep Soundly
APT Planning

Choose Your Jurisdiction (e.g. Alaska or
Offshore)
• Generally Unfriendly to Creditors
• Offshore has Similar Legal Concepts
• English Language
Tax Neutral for U.S. Tax Purposes
 Alaska is Convenient and Familiar
 Offshore is Disclosable, but not Answerable to
U.S. Courts
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APT Planning (cont.)
Eliminates or Reduces Coercion in Lawsuits
 Is Done For Estate Planning and Business
Reasons
 Is not a Suitcase of Money on a Midnight Flight
 Is not a Violation of U.S. Law
 Is not Tax Evasion
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Domestic Jurisdiction
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A Castle Moat
• Judgments May not Be
Enforceable Against Trust
• U.S. Jurisdiction
• Perpetual Trusts
• Use With Domestic FLPs and
LLCs
• Power to Relocate
• States with APT laws include
Alaska, Delaware, Nevada
Offshore Jurisdictions
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The Ultimate
Castle Moat
• U.S. Judgments not
Enforceable
• Actions Must be
Relitigated
• Short Statutes of
Limitation
• Power to Relocate
New 2005 Act Restrictions
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Can avoid transfers made 10 years before the date of the filing
of the petition, if-(A) such transfer was made to a self-settled trust or similar
device;
(B) such transfer was by the debtor;
(C) the debtor is a beneficiary of such trust or similar device;
and
(D) the debtor made such transfer with actual intent to hinder,
delay, or defraud any entity to which the debtor was or became,
on or after the date that such transfer was made, indebted.
Some debts not dischargeable in
bankruptcy
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Examples include domestic support (alimony
and child support) and liability from operating
motor vehicle while under influence alcohol or
drugs
Case Study
The Surgeon
Leon Cutter, M.D., F.A.C.S.

Orthopedic Surgeon
• Six Suits in Ten Years; All
Settled
• Large Insurance
Premiums

Professional Corp.
• Leases Building
• Owns Equipment
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Married to Janet
• Former Teacher
• Expert Investor
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Two Children
• Mary, Tim
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Family Owns Home,
Investments, Retirement
Plan
Cutter Family Goals

Protect Nonexempt Assets
• Keep Home Absolutely Safe
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Protect Practice Assets
• Building and Equipment
Lower Malpractice Premiums
 Maintain Control and Privacy
 Plan for Federal Estate Taxes
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Cutter Family Plan
General Partner
FLP
FLP
Practice
Assets
Non-Exempt
Assets
1% Husband RLT
2% Wife RLT
Limited Partners
With Voting Agmt.
Wife RLT
Child Trusts
Husband RLT
Charity
Insurance Trust
Estate Example
1% LP Shares Gifted to Each Child’s Trust and
a Charity in 1994 and 1995
 Parents are General Partners
 At Death, Parents Own 93% LP Shares
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Plan Highlights
Cuts Malpractice Coverage to a More
Reasonable Level ($1,000,000)
 No Probate
 Privacy Maintained
 Creditor Protection for Entire Family

• Spendthrift Trusts for Children
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Spreads Income at Lower Brackets
Plan Highlights
Federal Estate Tax is Substantially Reduced!
 Pay Estate Tax With Discounted Dollars
 CREATES PEACE OF MIND!

Before Planning
Your Entire Estate is at Risk!
After Planning
Your Estate has Defenses!
Keys to a Successful Plan
 Team Approach
 Custom Design
 Cutting Edge Solutions
Thank You for Attending
Questions?