Estate & Asset Estate & Asset Protection Protection PlanningPlanning

Karen Brady & Associates, Karen Brady & Associates, P.C. Attorneys at LawP.C. Attorneys at Law

© Karen Brady, 2005

Definition of Asset ProtectionDefinition of Asset ProtectionDefinition of Asset ProtectionDefinition of Asset Protection

Organizing assets and affairs to minimize Organizing assets and affairs to minimize against risks of future lossagainst risks of future loss

Preventative, not curative (vaccines, not Preventative, not curative (vaccines, not antibiotics)antibiotics)

Organizing assets and affairs to minimize Organizing assets and affairs to minimize against risks of future lossagainst risks of future loss

Preventative, not curative (vaccines, not Preventative, not curative (vaccines, not antibiotics)antibiotics)

Reasons to Protect AssetsReasons to Protect AssetsReasons to Protect AssetsReasons to Protect Assets

Why Build Estate But Why Build Estate But Not Consider Risks?Not Consider Risks?

Potential for LawsuitsPotential for Lawsuits

Why Build Estate But Why Build Estate But Not Consider Risks?Not Consider Risks?

Potential for LawsuitsPotential for Lawsuits

Reduce Insurance Reduce Insurance CoverageCoverage

Peace of MindPeace of Mind Concentrate on Your Concentrate on Your

JobJob

Reduce Insurance Reduce Insurance CoverageCoverage

Peace of MindPeace of Mind Concentrate on Your Concentrate on Your

JobJob

What Asset Protection Is NotWhat Asset Protection Is NotWhat Asset Protection Is NotWhat Asset Protection Is Not

Hiding assets, i.e. Hiding assets, i.e. confidentiality is a plus, but confidentiality is a plus, but secrecy is not the lynchpin of secrecy is not the lynchpin of the planthe plan

Taxation avoidanceTaxation avoidance

Hiding assets, i.e. Hiding assets, i.e. confidentiality is a plus, but confidentiality is a plus, but secrecy is not the lynchpin of secrecy is not the lynchpin of the planthe plan

Taxation avoidanceTaxation avoidance

Title to AssetsTitle to AssetsTitle to AssetsTitle to Assets

The Manner of Holding Title to Property Affects The Manner of Holding Title to Property Affects a Creditor’s Rightsa Creditor’s Rights

The Manner of Holding Title to Property Affects The Manner of Holding Title to Property Affects a Creditor’s Rightsa Creditor’s Rights

Community PropertyCommunity PropertyCommunity PropertyCommunity Property

Community PropertyCommunity Property• Acquired During MarriageAcquired During Marriage• Created by Law or by AgreementCreated by Law or by Agreement• Result of an “Onerous Acquisition”, e.g. workResult of an “Onerous Acquisition”, e.g. work

Community PropertyCommunity Property• Acquired During MarriageAcquired During Marriage• Created by Law or by AgreementCreated by Law or by Agreement• Result of an “Onerous Acquisition”, e.g. workResult of an “Onerous Acquisition”, e.g. work

Separate PropertySeparate PropertySeparate PropertySeparate Property

Separate PropertySeparate Property• Acquired Before MarriageAcquired Before Marriage• Acquired By Gift or InheritanceAcquired By Gift or Inheritance

Separate PropertySeparate Property• Acquired Before MarriageAcquired Before Marriage• Acquired By Gift or InheritanceAcquired By Gift or Inheritance

Joint TenancyJoint TenancyJoint TenancyJoint Tenancy

100% Co-ownership by More Than One Person 100% Co-ownership by More Than One Person 100% Co-ownership by More Than One Person 100% Co-ownership by More Than One Person

““Last One Left Standing Rule”: Last One Left Standing Rule”: Survivor Owns It All!Survivor Owns It All!

Creditor RightsCreditor RightsCreditor RightsCreditor Rights

Can Set Aside Fraudulent TransfersCan Set Aside Fraudulent Transfers Community Creditor/Marital Purpose: All Community Creditor/Marital Purpose: All

Community Property is Exposed to Community Community Property is Exposed to Community CreditorsCreditors

Separate Creditor: Separate Property is Separate Creditor: Separate Property is Exposed to Separate Creditor, 1/2 Community Exposed to Separate Creditor, 1/2 Community Property May Be Exposed to Property May Be Exposed to Separate CreditorSeparate Creditor

Can Set Aside Fraudulent TransfersCan Set Aside Fraudulent Transfers Community Creditor/Marital Purpose: All Community Creditor/Marital Purpose: All

Community Property is Exposed to Community Community Property is Exposed to Community CreditorsCreditors

Separate Creditor: Separate Property is Separate Creditor: Separate Property is Exposed to Separate Creditor, 1/2 Community Exposed to Separate Creditor, 1/2 Community Property May Be Exposed to Property May Be Exposed to Separate CreditorSeparate Creditor

Creditor Rights (cont.)Creditor Rights (cont.)Creditor Rights (cont.)Creditor Rights (cont.)

Divorce Court May Have Jurisdiction Over Divorce Court May Have Jurisdiction Over Both Community and Separate PropertyBoth Community and Separate Property

All Joint Tenancy Property is at Risk of Any All Joint Tenancy Property is at Risk of Any Single Joint Tenant’s Creditors!Single Joint Tenant’s Creditors!

Divorce Court May Have Jurisdiction Over Divorce Court May Have Jurisdiction Over Both Community and Separate PropertyBoth Community and Separate Property

All Joint Tenancy Property is at Risk of Any All Joint Tenancy Property is at Risk of Any Single Joint Tenant’s Creditors!Single Joint Tenant’s Creditors!

One ThreatOne ThreatOne ThreatOne Threat

Creditor ClaimsCreditor Claims Creditor ClaimsCreditor Claims

Types of ClaimsTypes of ClaimsTypes of ClaimsTypes of Claims

Officer/Director Officer/Director Liability (Corp.)Liability (Corp.)

Professional LiabilityProfessional Liability DivorceDivorce Creditor LawsuitsCreditor Lawsuits

Officer/Director Officer/Director Liability (Corp.)Liability (Corp.)

Professional LiabilityProfessional Liability DivorceDivorce Creditor LawsuitsCreditor Lawsuits

Liability for Other Liability for Other People’s DebtsPeople’s Debts

Partnership LiabilityPartnership Liability Hard to Control ClaimsHard to Control Claims

• Product LiabilityProduct Liability

• Environmental LiabilityEnvironmental Liability

Liability for Other Liability for Other People’s DebtsPeople’s Debts

Partnership LiabilityPartnership Liability Hard to Control ClaimsHard to Control Claims

• Product LiabilityProduct Liability

• Environmental LiabilityEnvironmental Liability

Attempts to Avoid Creditor ClaimsAttempts to Avoid Creditor ClaimsAttempts to Avoid Creditor ClaimsAttempts to Avoid Creditor Claims

Methods ThatMethods That

Don’t WorkDon’t Work• Fraudulent TransfersFraudulent Transfers• ““Hiding” Assets (2005 Bankruptcy Act Hiding” Assets (2005 Bankruptcy Act

now requires 3 years of tax returns)now requires 3 years of tax returns)• ““Constitutional” Trusts, “Pure Trusts” Constitutional” Trusts, “Pure Trusts”

and the likeand the like

Methods ThatMethods That

Don’t WorkDon’t Work• Fraudulent TransfersFraudulent Transfers• ““Hiding” Assets (2005 Bankruptcy Act Hiding” Assets (2005 Bankruptcy Act

now requires 3 years of tax returns)now requires 3 years of tax returns)• ““Constitutional” Trusts, “Pure Trusts” Constitutional” Trusts, “Pure Trusts”

and the likeand the like

Fraudulent TransfersFraudulent TransfersFraudulent TransfersFraudulent Transfers

Intent to Defraud, Hinder or Delay Known or Intent to Defraud, Hinder or Delay Known or Likely CreditorsLikely Creditors

Intent is Generally PresumedIntent is Generally Presumed Badges of FraudBadges of Fraud

such as insolvency, lack of consideration for a transfer, such as insolvency, lack of consideration for a transfer, close relationship with transferee, pending or close relationship with transferee, pending or threatened litigation, concealment, deviation from usual threatened litigation, concealment, deviation from usual practice, transfer of all assets, retaining possession, practice, transfer of all assets, retaining possession, benefit, or control after transferbenefit, or control after transfer

Intent to Defraud, Hinder or Delay Known or Intent to Defraud, Hinder or Delay Known or Likely CreditorsLikely Creditors

Intent is Generally PresumedIntent is Generally Presumed Badges of FraudBadges of Fraud

such as insolvency, lack of consideration for a transfer, such as insolvency, lack of consideration for a transfer, close relationship with transferee, pending or close relationship with transferee, pending or threatened litigation, concealment, deviation from usual threatened litigation, concealment, deviation from usual practice, transfer of all assets, retaining possession, practice, transfer of all assets, retaining possession, benefit, or control after transferbenefit, or control after transfer

Fraudulent ConveyanceFraudulent ConveyanceFraudulent ConveyanceFraudulent Conveyance

Pending or present creditors will have a greater Pending or present creditors will have a greater presumption of a fraudulent conveyance than future presumption of a fraudulent conveyance than future creditorscreditors

Generally, fraudulent conveyance is NOT our common Generally, fraudulent conveyance is NOT our common understanding of fraud. Fraudulent conveyance is understanding of fraud. Fraudulent conveyance is remedial, i.e. a conveyance which can be undone only remedial, i.e. a conveyance which can be undone only to the point a creditor is hindered. No other damages to the point a creditor is hindered. No other damages are usually allowed. However, some states allow for are usually allowed. However, some states allow for criminal or civil penalties, including for the advisor.criminal or civil penalties, including for the advisor.

Pending or present creditors will have a greater Pending or present creditors will have a greater presumption of a fraudulent conveyance than future presumption of a fraudulent conveyance than future creditorscreditors

Generally, fraudulent conveyance is NOT our common Generally, fraudulent conveyance is NOT our common understanding of fraud. Fraudulent conveyance is understanding of fraud. Fraudulent conveyance is remedial, i.e. a conveyance which can be undone only remedial, i.e. a conveyance which can be undone only to the point a creditor is hindered. No other damages to the point a creditor is hindered. No other damages are usually allowed. However, some states allow for are usually allowed. However, some states allow for criminal or civil penalties, including for the advisor.criminal or civil penalties, including for the advisor.

Another ThreatAnother ThreatAnother ThreatAnother Threat

Estate TaxesEstate Taxes Estate TaxesEstate Taxes

Estate TaxesEstate TaxesEstate TaxesEstate Taxes

Changing ownership of assets often also Changing ownership of assets often also removes them from the estate, offering the removes them from the estate, offering the additional benefit of reduced estate taxes along additional benefit of reduced estate taxes along with asset protectionwith asset protection

Changing ownership of assets often also Changing ownership of assets often also removes them from the estate, offering the removes them from the estate, offering the additional benefit of reduced estate taxes along additional benefit of reduced estate taxes along with asset protectionwith asset protection

Asset Protection TechniquesAsset Protection TechniquesAsset Protection TechniquesAsset Protection Techniques

Methods That WorkMethods That Work• Save Administrative Fees and CostsSave Administrative Fees and Costs• Reduce TaxesReduce Taxes• Provide Multiple Layers of DefenseProvide Multiple Layers of Defense• Allow Opportunity for Early SettlementAllow Opportunity for Early Settlement• Voluntary Bankruptcy Now Less Attractive as Final Voluntary Bankruptcy Now Less Attractive as Final

OptionOption

Methods That WorkMethods That Work• Save Administrative Fees and CostsSave Administrative Fees and Costs• Reduce TaxesReduce Taxes• Provide Multiple Layers of DefenseProvide Multiple Layers of Defense• Allow Opportunity for Early SettlementAllow Opportunity for Early Settlement• Voluntary Bankruptcy Now Less Attractive as Final Voluntary Bankruptcy Now Less Attractive as Final

OptionOption

First DefenderFirst DefenderFirst DefenderFirst Defender

InsuranceInsurance InsuranceInsurance

Strengths and WeaknessesStrengths and WeaknessesStrengths and WeaknessesStrengths and Weaknesses

Covers LossCovers Loss Cash to SettleCash to Settle Duty to DefendDuty to Defend

Covers LossCovers Loss Cash to SettleCash to Settle Duty to DefendDuty to Defend

Getting CostlyGetting Costly May not QualifyMay not Qualify Insolvency of CarrierInsolvency of Carrier May get CancelledMay get Cancelled Coverage ExemptionsCoverage Exemptions

• Hazardous WasteHazardous Waste

• Intentional ActsIntentional Acts

• Punitive DamagesPunitive Damages

Getting CostlyGetting Costly May not QualifyMay not Qualify Insolvency of CarrierInsolvency of Carrier May get CancelledMay get Cancelled Coverage ExemptionsCoverage Exemptions

• Hazardous WasteHazardous Waste

• Intentional ActsIntentional Acts

• Punitive DamagesPunitive Damages

StrengthsStrengths WeaknessesWeaknesses

First BarrierFirst BarrierFirst BarrierFirst Barrier

CorporationsCorporations

Or LLCsOr LLCs

CorporationsCorporations

Or LLCsOr LLCs

Corporate FeaturesCorporate FeaturesCorporate FeaturesCorporate Features

Limited LiabilityLimited Liability Still Liable for Personal Still Liable for Personal

GuaranteesGuarantees May have Income Tax May have Income Tax

BenefitsBenefits• Pension, Profit Sharing Pension, Profit Sharing

PlansPlans

• Fringe Benefits, Etc.Fringe Benefits, Etc.

Limited LiabilityLimited Liability Still Liable for Personal Still Liable for Personal

GuaranteesGuarantees May have Income Tax May have Income Tax

BenefitsBenefits• Pension, Profit Sharing Pension, Profit Sharing

PlansPlans

• Fringe Benefits, Etc.Fringe Benefits, Etc.

Must Keep Status Must Keep Status Current with StateCurrent with State

Must Observe Must Observe FormalitiesFormalities• Adopt BylawsAdopt Bylaws

• Keep Minutes of MeetingsKeep Minutes of Meetings

• Issue StockIssue Stock

Must Keep Status Must Keep Status Current with StateCurrent with State

Must Observe Must Observe FormalitiesFormalities• Adopt BylawsAdopt Bylaws

• Keep Minutes of MeetingsKeep Minutes of Meetings

• Issue StockIssue Stock

LLC FeaturesLLC FeaturesLLC FeaturesLLC Features

Limited Liability Like a CorporationLimited Liability Like a Corporation Control is Flexible; May Choose Fewer Control is Flexible; May Choose Fewer

FormalitiesFormalities Can be Taxable Like a PartnershipCan be Taxable Like a Partnership All States Have ThemAll States Have Them

Limited Liability Like a CorporationLimited Liability Like a Corporation Control is Flexible; May Choose Fewer Control is Flexible; May Choose Fewer

FormalitiesFormalities Can be Taxable Like a PartnershipCan be Taxable Like a Partnership All States Have ThemAll States Have Them

Second DefenderSecond DefenderSecond DefenderSecond Defender

Exempt Exempt PropertyProperty

Exempt Exempt PropertyProperty

HomesteadHomesteadHomesteadHomestead

Colorado allows up to $30,000 Colorado allows up to $30,000 Other states allow unlimited (e.g. Florida) but Other states allow unlimited (e.g. Florida) but

new 2005 bankruptcy act requires purchase new 2005 bankruptcy act requires purchase 1215 days before filing or limit is $125,0001215 days before filing or limit is $125,000

2005 Act also limits protection to $125,000 2005 Act also limits protection to $125,000 where claim arises from RICO, breach of where claim arises from RICO, breach of securities laws, fiduciary fraud, and other securities laws, fiduciary fraud, and other specified crimes or tortsspecified crimes or torts

Colorado allows up to $30,000 Colorado allows up to $30,000 Other states allow unlimited (e.g. Florida) but Other states allow unlimited (e.g. Florida) but

new 2005 bankruptcy act requires purchase new 2005 bankruptcy act requires purchase 1215 days before filing or limit is $125,0001215 days before filing or limit is $125,000

2005 Act also limits protection to $125,000 2005 Act also limits protection to $125,000 where claim arises from RICO, breach of where claim arises from RICO, breach of securities laws, fiduciary fraud, and other securities laws, fiduciary fraud, and other specified crimes or tortsspecified crimes or torts

InsuranceInsuranceInsuranceInsurance

Federal exemption is for death benefits and limited Federal exemption is for death benefits and limited cash value (less than $9,000)cash value (less than $9,000)

Colorado exemption is $50,000 where estate is Colorado exemption is $50,000 where estate is beneficiary and contributions were more than 4 years beneficiary and contributions were more than 4 years before filingbefore filing

State exemptions can be more generous, e.g. Florida, State exemptions can be more generous, e.g. Florida, Hawaii, Louisiana, but new 2005 Act requires Hawaii, Louisiana, but new 2005 Act requires residency in that state for at least 2 yearsresidency in that state for at least 2 years

Federal exemption is for death benefits and limited Federal exemption is for death benefits and limited cash value (less than $9,000)cash value (less than $9,000)

Colorado exemption is $50,000 where estate is Colorado exemption is $50,000 where estate is beneficiary and contributions were more than 4 years beneficiary and contributions were more than 4 years before filingbefore filing

State exemptions can be more generous, e.g. Florida, State exemptions can be more generous, e.g. Florida, Hawaii, Louisiana, but new 2005 Act requires Hawaii, Louisiana, but new 2005 Act requires residency in that state for at least 2 yearsresidency in that state for at least 2 years

Retirement PlansRetirement PlansRetirement PlansRetirement Plans

2005 Act makes clear contributions to ERISA 2005 Act makes clear contributions to ERISA covered plans are exempt, as are entire interest covered plans are exempt, as are entire interest in IRAs (up to $1 million?).in IRAs (up to $1 million?).

2005 Act makes clear contributions to ERISA 2005 Act makes clear contributions to ERISA covered plans are exempt, as are entire interest covered plans are exempt, as are entire interest in IRAs (up to $1 million?).in IRAs (up to $1 million?).

529 Plans529 Plans529 Plans529 Plans

529 Plans are Exempt if:529 Plans are Exempt if:

Funded more than 2 years before filingFunded more than 2 years before filing

Funded by parent, grandparent, stepparent, Funded by parent, grandparent, stepparent, stepgrandparent of beneficiary of plan stepgrandparent of beneficiary of plan

$5,000 limit if funded more than one year $5,000 limit if funded more than one year but less than two years before filing but less than two years before filing

Fraudulent transfer rules still applyFraudulent transfer rules still apply

529 Plans are Exempt if:529 Plans are Exempt if:

Funded more than 2 years before filingFunded more than 2 years before filing

Funded by parent, grandparent, stepparent, Funded by parent, grandparent, stepparent, stepgrandparent of beneficiary of plan stepgrandparent of beneficiary of plan

$5,000 limit if funded more than one year $5,000 limit if funded more than one year but less than two years before filing but less than two years before filing

Fraudulent transfer rules still applyFraudulent transfer rules still apply

Other Exemptions in ColoradoOther Exemptions in ColoradoOther Exemptions in ColoradoOther Exemptions in Colorado

Property of business partnership where held in Property of business partnership where held in name of partnershipname of partnership

Burial plotBurial plot Health AidsHealth Aids Business or professional supplies up to $10,000Business or professional supplies up to $10,000

Property of business partnership where held in Property of business partnership where held in name of partnershipname of partnership

Burial plotBurial plot Health AidsHealth Aids Business or professional supplies up to $10,000Business or professional supplies up to $10,000

Second BarrierSecond BarrierSecond BarrierSecond Barrier

Revocable Revocable Living Trust Living Trust (RLT)(RLT)

Revocable Revocable Living Trust Living Trust (RLT)(RLT)

RLT Asset Protection FeaturesRLT Asset Protection FeaturesRLT Asset Protection FeaturesRLT Asset Protection Features

No Court Involvement on DeathNo Court Involvement on Death• PrivatePrivate

• No Forum Provided for CreditorNo Forum Provided for Creditor

• Can “Cut Off” Creditors through “insolvent” probate or Can “Cut Off” Creditors through “insolvent” probate or other methodsother methods

If Property is Partitioned:If Property is Partitioned:• Two Separate Property Trusts; Each Spouse Shares Two Separate Property Trusts; Each Spouse Shares

ManagementManagement

No Court Involvement on DeathNo Court Involvement on Death• PrivatePrivate

• No Forum Provided for CreditorNo Forum Provided for Creditor

• Can “Cut Off” Creditors through “insolvent” probate or Can “Cut Off” Creditors through “insolvent” probate or other methodsother methods

If Property is Partitioned:If Property is Partitioned:• Two Separate Property Trusts; Each Spouse Shares Two Separate Property Trusts; Each Spouse Shares

ManagementManagement

Asset Protection Features (Cont.)Asset Protection Features (Cont.)Asset Protection Features (Cont.)Asset Protection Features (Cont.)

Can Provide Can Provide “Spendthrift” “Spendthrift” Protection for HeirsProtection for Heirs• Grantor not ProtectedGrantor not Protected• Creditors of Non-Grantor Beneficiaries Cannot Creditors of Non-Grantor Beneficiaries Cannot

Look to Trust for PaymentLook to Trust for Payment• Beneficiary Cannot be Forced to Pledge or Assign Beneficiary Cannot be Forced to Pledge or Assign

Trust AssetsTrust Assets• Protect Children from Divorce, LawsuitsProtect Children from Divorce, Lawsuits

Can Provide Can Provide “Spendthrift” “Spendthrift” Protection for HeirsProtection for Heirs• Grantor not ProtectedGrantor not Protected• Creditors of Non-Grantor Beneficiaries Cannot Creditors of Non-Grantor Beneficiaries Cannot

Look to Trust for PaymentLook to Trust for Payment• Beneficiary Cannot be Forced to Pledge or Assign Beneficiary Cannot be Forced to Pledge or Assign

Trust AssetsTrust Assets• Protect Children from Divorce, LawsuitsProtect Children from Divorce, Lawsuits

Third DefenderThird DefenderThird DefenderThird Defender

Property Property AgreementsAgreements

Property Property AgreementsAgreements

Partitioning PropertyPartitioning PropertyPartitioning PropertyPartitioning Property

Works for Families Where One Spouse has Works for Families Where One Spouse has Significant Liability ExposureSignificant Liability Exposure

Use With Additional TechniquesUse With Additional Techniques

CAUTION: WHAT ABOUT POTENTIAL CAUTION: WHAT ABOUT POTENTIAL FOR DIVORCE?FOR DIVORCE?

Works for Families Where One Spouse has Works for Families Where One Spouse has Significant Liability ExposureSignificant Liability Exposure

Use With Additional TechniquesUse With Additional Techniques

CAUTION: WHAT ABOUT POTENTIAL CAUTION: WHAT ABOUT POTENTIAL FOR DIVORCE?FOR DIVORCE?

ExampleExampleExampleExample

““At-Risk” Spouse Owns:At-Risk” Spouse Owns:

Exempt AssetsExempt Assets

Risky AssetRisky Asset

““At-Risk” Spouse Owns:At-Risk” Spouse Owns:

Exempt AssetsExempt Assets

Risky AssetRisky Asset

““Safe” SpouseSafe” Spouse

Owns:Owns:

Non-Exempt AssetsNon-Exempt Assets

Family HomeFamily Home

““Safe” SpouseSafe” Spouse

Owns:Owns:

Non-Exempt AssetsNon-Exempt Assets

Family HomeFamily Home

Third BarrierThird BarrierThird BarrierThird Barrier

Family Limited Family Limited PartnershipsPartnerships(FLP) or FLLC(FLP) or FLLC

Family Limited Family Limited PartnershipsPartnerships(FLP) or FLLC(FLP) or FLLC

FLP FeaturesFLP FeaturesFLP FeaturesFLP Features

Partners: General and LimitedPartners: General and Limited General Partner has 100% ControlGeneral Partner has 100% Control Usually Income Tax NeutralUsually Income Tax Neutral Easy to Gift SharesEasy to Gift Shares Use of Discounts May Substantially Lower Use of Discounts May Substantially Lower

Federal Estate TaxFederal Estate Tax

Partners: General and LimitedPartners: General and Limited General Partner has 100% ControlGeneral Partner has 100% Control Usually Income Tax NeutralUsually Income Tax Neutral Easy to Gift SharesEasy to Gift Shares Use of Discounts May Substantially Lower Use of Discounts May Substantially Lower

Federal Estate TaxFederal Estate Tax

FLP Features (Cont.)FLP Features (Cont.)FLP Features (Cont.)FLP Features (Cont.)

Converts Real Property to Personal PropertyConverts Real Property to Personal Property Can Set Up Multiple FLPs to Protect Different Can Set Up Multiple FLPs to Protect Different

AssetsAssets• Divide and ConquerDivide and Conquer

Charging Order May Be the Exclusive Remedy Charging Order May Be the Exclusive Remedy for Claims Against a Partnerfor Claims Against a Partner

Converts Real Property to Personal PropertyConverts Real Property to Personal Property Can Set Up Multiple FLPs to Protect Different Can Set Up Multiple FLPs to Protect Different

AssetsAssets• Divide and ConquerDivide and Conquer

Charging Order May Be the Exclusive Remedy Charging Order May Be the Exclusive Remedy for Claims Against a Partnerfor Claims Against a Partner

Claims vs. PartnershipClaims vs. PartnershipClaims vs. PartnershipClaims vs. Partnership

Take InsuranceTake Insurance Take Partnership AssetsTake Partnership Assets Collect Against General PartnerCollect Against General Partner

Use Entity General PartnerUse Entity General Partner Use Multiple PartnershipsUse Multiple Partnerships

• Divide and ConquerDivide and Conquer

Take InsuranceTake Insurance Take Partnership AssetsTake Partnership Assets Collect Against General PartnerCollect Against General Partner

Use Entity General PartnerUse Entity General Partner Use Multiple PartnershipsUse Multiple Partnerships

• Divide and ConquerDivide and Conquer

Claims vs. Individual PartnerClaims vs. Individual PartnerClaims vs. Individual PartnerClaims vs. Individual Partner

Does Not Become PartnerDoes Not Become Partner No Right to Partnership AssetsNo Right to Partnership Assets Charging Order Sole RemedyCharging Order Sole Remedy

• If GP Distributes, Can GetIf GP Distributes, Can Get Creditor MUST PAY INCOME TAX Even if Creditor MUST PAY INCOME TAX Even if

No Income Received!No Income Received!• Phantom IncomePhantom Income

Does Not Become PartnerDoes Not Become Partner No Right to Partnership AssetsNo Right to Partnership Assets Charging Order Sole RemedyCharging Order Sole Remedy

• If GP Distributes, Can GetIf GP Distributes, Can Get Creditor MUST PAY INCOME TAX Even if Creditor MUST PAY INCOME TAX Even if

No Income Received!No Income Received!• Phantom IncomePhantom Income

Creditor NightmareCreditor NightmareCreditor NightmareCreditor Nightmare

Does not Become a Does not Become a Limited PartnerLimited Partner

No Right to Demand No Right to Demand AssetsAssets

No Transfer of Assets No Transfer of Assets Without Partner Without Partner ApprovalApproval

Does not Become a Does not Become a Limited PartnerLimited Partner

No Right to Demand No Right to Demand AssetsAssets

No Transfer of Assets No Transfer of Assets Without Partner Without Partner ApprovalApproval

No Fraudulent Transfer No Fraudulent Transfer When FLP EstablishedWhen FLP Established

Can’t Force Termination Can’t Force Termination of FLPof FLP

General Partner General Partner Maintains Income Maintains Income ControlControl

No Fraudulent Transfer No Fraudulent Transfer When FLP EstablishedWhen FLP Established

Can’t Force Termination Can’t Force Termination of FLPof FLP

General Partner General Partner Maintains Income Maintains Income ControlControl

FLPs Leverage GiftsFLPs Leverage GiftsFLPs Leverage GiftsFLPs Leverage Gifts

Each Person May Gift Up to $10,000 per Each Person May Gift Up to $10,000 per Person in SharesPerson in Shares

Value of Gifts is the Fair Market Value of GiftValue of Gifts is the Fair Market Value of Gift Partnership Rules Can Allow Value of Shares Partnership Rules Can Allow Value of Shares

to be Deeply Discounted!to be Deeply Discounted!

Each Person May Gift Up to $10,000 per Each Person May Gift Up to $10,000 per Person in SharesPerson in Shares

Value of Gifts is the Fair Market Value of GiftValue of Gifts is the Fair Market Value of Gift Partnership Rules Can Allow Value of Shares Partnership Rules Can Allow Value of Shares

to be Deeply Discounted!to be Deeply Discounted!

FLP DiscountsFLP DiscountsFLP DiscountsFLP Discounts

What is a FLP Share Worth?What is a FLP Share Worth?• Can’t be Easily Sold or TransferredCan’t be Easily Sold or Transferred• Can’t be PledgedCan’t be Pledged• Can’t Demand DistributionsCan’t Demand Distributions• Income Allocated to LP for Income Tax Even if not Income Allocated to LP for Income Tax Even if not

PaidPaid FMV of LP Share May Be Substantially Less FMV of LP Share May Be Substantially Less

than the Value of the Assets! than the Value of the Assets!

What is a FLP Share Worth?What is a FLP Share Worth?• Can’t be Easily Sold or TransferredCan’t be Easily Sold or Transferred• Can’t be PledgedCan’t be Pledged• Can’t Demand DistributionsCan’t Demand Distributions• Income Allocated to LP for Income Tax Even if not Income Allocated to LP for Income Tax Even if not

PaidPaid FMV of LP Share May Be Substantially Less FMV of LP Share May Be Substantially Less

than the Value of the Assets! than the Value of the Assets!

FLP SummaryFLP SummaryFLP SummaryFLP Summary

Juicy Red Apple is a Sour Lemon for CreditorsJuicy Red Apple is a Sour Lemon for Creditors Family Involved, Parents Control the AssetsFamily Involved, Parents Control the Assets Estate Tax ReductionEstate Tax Reduction Can Distribute Income to Children or Others at Can Distribute Income to Children or Others at

Lower Tax RatesLower Tax Rates

Juicy Red Apple is a Sour Lemon for CreditorsJuicy Red Apple is a Sour Lemon for Creditors Family Involved, Parents Control the AssetsFamily Involved, Parents Control the Assets Estate Tax ReductionEstate Tax Reduction Can Distribute Income to Children or Others at Can Distribute Income to Children or Others at

Lower Tax RatesLower Tax Rates

Common FLP StructureCommon FLP Structure

FLPFLP*EntityEntity*Corp, LLC, Corp, LLC,

TrustTrust

Husband RLTHusband RLT

Child TrustChild TrustWife RLTWife RLT

General PartnerGeneral Partner

Limited PartnersLimited Partners

LLC vs. FLPLLC vs. FLPLLC vs. FLPLLC vs. FLP

May be comparable. Some states, like May be comparable. Some states, like Wyoming, allow for “Close Limited Liability Wyoming, allow for “Close Limited Liability Companies”, which specify the only remedy for Companies”, which specify the only remedy for creditors of a member is a charging ordercreditors of a member is a charging order

May be comparable. Some states, like May be comparable. Some states, like Wyoming, allow for “Close Limited Liability Wyoming, allow for “Close Limited Liability Companies”, which specify the only remedy for Companies”, which specify the only remedy for creditors of a member is a charging ordercreditors of a member is a charging order

Third BarrierThird BarrierThird BarrierThird Barrier

Irrevocable Irrevocable TrustsTrusts

Irrevocable Irrevocable TrustsTrusts

Irrevocable Trust FeaturesIrrevocable Trust FeaturesIrrevocable Trust FeaturesIrrevocable Trust Features

Grantor is Usually not TrusteeGrantor is Usually not Trustee Not Part of Grantor’s Taxable EstateNot Part of Grantor’s Taxable Estate May Own Life InsuranceMay Own Life Insurance

• Income and Federal Estate Tax-Free Income and Federal Estate Tax-Free When ReceivedWhen Received

Spendthrift ProtectionSpendthrift Protection Controlled Distribution to BeneficiariesControlled Distribution to Beneficiaries

Grantor is Usually not TrusteeGrantor is Usually not Trustee Not Part of Grantor’s Taxable EstateNot Part of Grantor’s Taxable Estate May Own Life InsuranceMay Own Life Insurance

• Income and Federal Estate Tax-Free Income and Federal Estate Tax-Free When ReceivedWhen Received

Spendthrift ProtectionSpendthrift Protection Controlled Distribution to BeneficiariesControlled Distribution to Beneficiaries

Special Irrevocable TrustsSpecial Irrevocable TrustsSpecial Irrevocable TrustsSpecial Irrevocable Trusts

BERT TrustsBERT Trusts• Each spouse is trustee and beneficiary of separate Each spouse is trustee and beneficiary of separate

trusttrust• Grantor is other spouseGrantor is other spouse• Assets of trust are separate property providing asset Assets of trust are separate property providing asset

protection from claims against other spouseprotection from claims against other spouse• Assets of trust are outside estate of either spouseAssets of trust are outside estate of either spouse

BERT TrustsBERT Trusts• Each spouse is trustee and beneficiary of separate Each spouse is trustee and beneficiary of separate

trusttrust• Grantor is other spouseGrantor is other spouse• Assets of trust are separate property providing asset Assets of trust are separate property providing asset

protection from claims against other spouseprotection from claims against other spouse• Assets of trust are outside estate of either spouseAssets of trust are outside estate of either spouse

Fifth BarrierFifth BarrierFifth BarrierFifth Barrier

PersonalPersonalAssetAssetProtectionProtectionTrustsTrusts

PersonalPersonalAssetAssetProtectionProtectionTrustsTrusts

ConceptConceptConceptConcept

Set Up a Trust that Limits or Eliminates Set Up a Trust that Limits or Eliminates Creditor Rights to Seize AssetsCreditor Rights to Seize Assets

Integrated With Your Estate PlanIntegrated With Your Estate Plan• You can be a BeneficiaryYou can be a Beneficiary• You can Remove Assets from Your EstateYou can Remove Assets from Your Estate• You can Sleep SoundlyYou can Sleep Soundly

Set Up a Trust that Limits or Eliminates Set Up a Trust that Limits or Eliminates Creditor Rights to Seize AssetsCreditor Rights to Seize Assets

Integrated With Your Estate PlanIntegrated With Your Estate Plan• You can be a BeneficiaryYou can be a Beneficiary• You can Remove Assets from Your EstateYou can Remove Assets from Your Estate• You can Sleep SoundlyYou can Sleep Soundly

APT PlanningAPT PlanningAPT PlanningAPT Planning

Choose Your Jurisdiction (e.g. Alaska or Offshore)Choose Your Jurisdiction (e.g. Alaska or Offshore)• Generally Unfriendly to CreditorsGenerally Unfriendly to Creditors

• Offshore has Similar Legal ConceptsOffshore has Similar Legal Concepts

• English LanguageEnglish Language Tax Neutral for U.S. Tax PurposesTax Neutral for U.S. Tax Purposes Domestic is Convenient and FamiliarDomestic is Convenient and Familiar Offshore is Disclosable, but not Answerable to Offshore is Disclosable, but not Answerable to

U.S. Courts U.S. Courts

Choose Your Jurisdiction (e.g. Alaska or Offshore)Choose Your Jurisdiction (e.g. Alaska or Offshore)• Generally Unfriendly to CreditorsGenerally Unfriendly to Creditors

• Offshore has Similar Legal ConceptsOffshore has Similar Legal Concepts

• English LanguageEnglish Language Tax Neutral for U.S. Tax PurposesTax Neutral for U.S. Tax Purposes Domestic is Convenient and FamiliarDomestic is Convenient and Familiar Offshore is Disclosable, but not Answerable to Offshore is Disclosable, but not Answerable to

U.S. Courts U.S. Courts

APT Planning (cont.)APT Planning (cont.)APT Planning (cont.)APT Planning (cont.)

Eliminates or Reduces Coercion in LawsuitsEliminates or Reduces Coercion in Lawsuits Is Done For Estate Planning and Business Is Done For Estate Planning and Business

ReasonsReasons Is not a Violation of U.S. Law (2005 Act seems Is not a Violation of U.S. Law (2005 Act seems

to acknowledge validity after 10 years)to acknowledge validity after 10 years) Is not Tax EvasionIs not Tax Evasion

Eliminates or Reduces Coercion in LawsuitsEliminates or Reduces Coercion in Lawsuits Is Done For Estate Planning and Business Is Done For Estate Planning and Business

ReasonsReasons Is not a Violation of U.S. Law (2005 Act seems Is not a Violation of U.S. Law (2005 Act seems

to acknowledge validity after 10 years)to acknowledge validity after 10 years) Is not Tax EvasionIs not Tax Evasion

Domestic JurisdictionDomestic JurisdictionDomestic JurisdictionDomestic Jurisdiction

A Castle MoatA Castle Moat• Judgments May not Be Judgments May not Be

Enforceable Against TrustEnforceable Against Trust

• U.S. JurisdictionU.S. Jurisdiction

• Perpetual TrustsPerpetual Trusts

• Use With Domestic FLPs and Use With Domestic FLPs and LLCsLLCs

• Power to RelocatePower to Relocate

• States with APT laws include States with APT laws include Alaska, Delaware, NevadaAlaska, Delaware, Nevada

A Castle MoatA Castle Moat• Judgments May not Be Judgments May not Be

Enforceable Against TrustEnforceable Against Trust

• U.S. JurisdictionU.S. Jurisdiction

• Perpetual TrustsPerpetual Trusts

• Use With Domestic FLPs and Use With Domestic FLPs and LLCsLLCs

• Power to RelocatePower to Relocate

• States with APT laws include States with APT laws include Alaska, Delaware, NevadaAlaska, Delaware, Nevada

Offshore JurisdictionsOffshore JurisdictionsOffshore JurisdictionsOffshore Jurisdictions

The UltimateThe Ultimate

Castle MoatCastle Moat• U.S. Judgments not U.S. Judgments not

EnforceableEnforceable

• Actions Must be Actions Must be RelitigatedRelitigated

• Short Statutes of Short Statutes of LimitationLimitation

• Power to RelocatePower to Relocate

The UltimateThe Ultimate

Castle MoatCastle Moat• U.S. Judgments not U.S. Judgments not

EnforceableEnforceable

• Actions Must be Actions Must be RelitigatedRelitigated

• Short Statutes of Short Statutes of LimitationLimitation

• Power to RelocatePower to Relocate

New 2005 Act RestrictionsNew 2005 Act RestrictionsNew 2005 Act RestrictionsNew 2005 Act Restrictions

Can avoid transfers made 10 years before the date of the filing Can avoid transfers made 10 years before the date of the filing of the petition, if--of the petition, if--

(A) such transfer was made to a self-settled trust or similar (A) such transfer was made to a self-settled trust or similar device;device;

(B) such transfer was by the debtor;(B) such transfer was by the debtor; (C) the debtor is a beneficiary of such trust or similar device; (C) the debtor is a beneficiary of such trust or similar device;

andand (D) the debtor made such transfer with actual intent to hinder, (D) the debtor made such transfer with actual intent to hinder,

delay, or defraud any entity to which the debtor was or became, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.on or after the date that such transfer was made, indebted.

Can avoid transfers made 10 years before the date of the filing Can avoid transfers made 10 years before the date of the filing of the petition, if--of the petition, if--

(A) such transfer was made to a self-settled trust or similar (A) such transfer was made to a self-settled trust or similar device;device;

(B) such transfer was by the debtor;(B) such transfer was by the debtor; (C) the debtor is a beneficiary of such trust or similar device; (C) the debtor is a beneficiary of such trust or similar device;

andand (D) the debtor made such transfer with actual intent to hinder, (D) the debtor made such transfer with actual intent to hinder,

delay, or defraud any entity to which the debtor was or became, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.on or after the date that such transfer was made, indebted.

Some debts not dischargeable in Some debts not dischargeable in bankruptcybankruptcySome debts not dischargeable in Some debts not dischargeable in bankruptcybankruptcy

Examples include domestic support (alimony Examples include domestic support (alimony and child support) and liability from operating and child support) and liability from operating motor vehicle while under influence alcohol or motor vehicle while under influence alcohol or drugsdrugs

Examples include domestic support (alimony Examples include domestic support (alimony and child support) and liability from operating and child support) and liability from operating motor vehicle while under influence alcohol or motor vehicle while under influence alcohol or drugsdrugs

Case StudyCase StudyCase StudyCase Study

The SurgeonThe SurgeonThe SurgeonThe Surgeon

Leon Cutter, M.D., F.A.C.S.Leon Cutter, M.D., F.A.C.S.Leon Cutter, M.D., F.A.C.S.Leon Cutter, M.D., F.A.C.S.

Orthopedic SurgeonOrthopedic Surgeon• Six Suits in Ten Years; Six Suits in Ten Years;

All SettledAll Settled

• Large Insurance Large Insurance PremiumsPremiums

Professional Corp.Professional Corp.• Leases BuildingLeases Building

• Owns EquipmentOwns Equipment

Orthopedic SurgeonOrthopedic Surgeon• Six Suits in Ten Years; Six Suits in Ten Years;

All SettledAll Settled

• Large Insurance Large Insurance PremiumsPremiums

Professional Corp.Professional Corp.• Leases BuildingLeases Building

• Owns EquipmentOwns Equipment

Married to JanetMarried to Janet• Former TeacherFormer Teacher

• Expert InvestorExpert Investor Two ChildrenTwo Children

• Mary, TimMary, Tim Family Owns Home, Family Owns Home,

Investments, Retirement Investments, Retirement PlanPlan

Married to JanetMarried to Janet• Former TeacherFormer Teacher

• Expert InvestorExpert Investor Two ChildrenTwo Children

• Mary, TimMary, Tim Family Owns Home, Family Owns Home,

Investments, Retirement Investments, Retirement PlanPlan

Cutter Family GoalsCutter Family GoalsCutter Family GoalsCutter Family Goals

Protect Nonexempt AssetsProtect Nonexempt Assets• Keep Home Absolutely SafeKeep Home Absolutely Safe

Protect Practice AssetsProtect Practice Assets• Building and EquipmentBuilding and Equipment

Lower Malpractice PremiumsLower Malpractice Premiums Maintain Control and PrivacyMaintain Control and Privacy Plan for Federal Estate TaxesPlan for Federal Estate Taxes

Protect Nonexempt AssetsProtect Nonexempt Assets• Keep Home Absolutely SafeKeep Home Absolutely Safe

Protect Practice AssetsProtect Practice Assets• Building and EquipmentBuilding and Equipment

Lower Malpractice PremiumsLower Malpractice Premiums Maintain Control and PrivacyMaintain Control and Privacy Plan for Federal Estate TaxesPlan for Federal Estate Taxes

Before PlanningBefore PlanningBefore PlanningBefore Planning

Your Entire Estate is at Risk!Your Entire Estate is at Risk!Your Entire Estate is at Risk!Your Entire Estate is at Risk!

After PlanningAfter PlanningAfter PlanningAfter Planning

Your Estate has Defenses!Your Estate has Defenses!Your Estate has Defenses!Your Estate has Defenses!

Keys to a Successful PlanKeys to a Successful Plan

Team ApproachTeam Approach

Custom DesignCustom Design

Cutting Edge SolutionsCutting Edge Solutions

Team ApproachTeam Approach

Custom DesignCustom Design

Cutting Edge SolutionsCutting Edge Solutions

Thank You for AttendingThank You for Attending

Questions?Questions?Questions?Questions?