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