A W E A L T H C O U N S E L C O M P A N Y A W E A L T H C O U N S E L C O M P A N Y

Planning for Advanced Asset Protection

Carl R. Waldman

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Asset Protection• Build on Client’s existing estate planning to create

additional asset protection planning• Discuss advanced asset protection strategies– How they work– Levels of protection

• Provide an example of how these strategies work together

• Discuss the advisor team approach to asset protection

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Asset Protection• Timing and other potential complications with asset

protection strategies• When should the advisor team just say NO?

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The Three-Meeting Strategy• Initial Meeting – Gathering Financial and Objective

Information and Building Relationship with Clients– Attorney/Client Privilege Issues

• Advisors’ Meeting – Meeting with Client’s Advisors (CPA, Financial Advisors, Insurance Advisors) to review Client’s objectives and discuss consensus “solution”

• Client Solution Meeting – Present unified solution plan to client

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Talking Points for Asset Protection Initial Meeting

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What Asset Protection Is:What Asset Protection Is:• Not about hiding or concealing– Using the existing laws

• Objectives– High degree of certainty– Maintain control– Discourage lawsuits from the outset

• Avoiding liability “traps”– Partnerships– Joint ownership

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Types of Risks• Professional liability– Cannot limit your own professional liability– Note: state statutes generally do not permit non-

professionals to own a portion of a professional practice• Professional liability of a partner• Non-practice personal liabilities– Business deals– Tort claims (auto accidents, etc)

• Estate planning risks (income and estate taxes, partner’s next spouse, children’s spouses, etc.)

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When to Plan• Before the claim arises works best• Even with an existing claim, some options may

still be available such as use of ERISA plan• Beware of “fraudulent transfers”– Solvency Certificate– Seek permission to independently investigate

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Levels of Asset Protection• Level 1: Exemptions - certain assets automatically

protected by state or federal exemptions• Level 2: Transmutation Agreements (in

community property states) to convert into separate property• Level 3: Professional Entity Formation

(PA/PC/PLLC)• Level 4: Leasing LLC’s to own specialized or

valuable equipment and/or real estate + accounts receivable strategies

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Levels of Asset Protection• Level 5: FLP/FLLC to own non-practice assets• Level 6: Domestic asset protection trusts• Level 7: Offshore asset protection trusts

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Level 1 Protection:Exemptions

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State Statutory Exemptions• Personal Property Exemption (State and

Federal Bankruptcy)• Life Insurance• Annuities• IRAs• Homestead• Joint Tenancy or Tenancy by the Entirety

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Fed Statutory Exemption• ERISA– 401(k), Pension, Profit Sharing, Etc.

• Pension Protection Act– IRAs in Bankruptcy

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The Planning Opportunity• Sometimes it is possible to convert non-

exempt assets into exempt assets:–Cash into home equity– IRA into ERISA plan• Some states (i.e., California provide only limited state

law protection for IRAs) whereas a properly structured ERISA plan is absolutely protected from creditors…remember the O.J. Simpson case

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Level 2 Protection:Transmutation Agreements (in community property states) to convert into separate property

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The Planning Opportunity• Separate property assets of the “safe spouse”

generally not reachable to pay creditors of the “at risk spouse”• Once property is transmuted, it may have

unintended consequences for other purposes– Loss of basis step up on death of nonowner spouse–What happens in the event of divorce?

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Level 3 Protection: Professional Entity Formation (PA/PC/PLLC)

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Level 3 Protection• Business Entity Planning– Professional Corporation versus PLLC– Power of the “charging order” and the advantage

of using a “sole remedy” jurisdiction– Limit Liability from Partner’s Malpractice– PA/PC/PLLC

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Level 4 Protection:Create LEASING LLCS

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Level 4 Protection• Create LLCs to own specialized or valuable

equipment and/or real estate• Remove equipment and real estate from

professional practice• Create “lease back” agreement between

practice and leasing LLCsSegregate real estate, equipment, and securities

accounts from malpractice exposure

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Level 4 Protection• Protect accounts receivable by pledging them

to a friendly creditor• Consider creating ILIT with high cash value

policy and having ILIT Trustee grant a credit line to business owner/professional• There are turnkey A/R protection plans or you

can create one

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Level 5 Protection: FLP/FLLC to own non-practice assets

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Level 5 Protection• Ownership of Non-Practice Assets– Personal Use Real Estate– Investment Accounts– Cash or Bank Accounts– Non-exempt Personal Property

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Level 5 Protection• Personal Residence Options– Maximize Equity Stripping• Borrow the maximum on the mortgage and transfer to

Domestic Asset Protection Trust (DAPT)• DAPT becomes member of the LLC/FLP

– Better to have DAPT established first for interim protection

• Retain personal right to reside or retain life estate in residence

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Level 5 Protection• Personal Residence Options– Sell to IDIGT– Establish a QPRT?

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Level 6 Protection:Domestic Asset Protection Trust

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Level 6 Protection• Domestic (U.S. based) Asset Protection Trust– Non-practice or leasing LLC assets transferred to the trust

before any claim arises– Increases charging order protection

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Level 6 Protection• Domestic Asset Protection Trust– Non Self-Settled State - Trust with flight provision

and trust protector - spouse and children are initial beneficiaries

– Self-Settled States – Settlor can be added as “discretionary” beneficiary(Alaska, Delaware, Nevada and Wyoming are the most popular)

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Level 7 Protection:Offshore Trusts

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Warning: Proceed with Caution!

When Should You Say NO?

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Fraudulent Transfer and Related Issues

• Are there known creditors?• Relying on a solvency certificate• Performing due diligence• Does the client understand the issues?• Are there client-friendly resources available?• What can go wrong?

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Thank you for attending!