All posts in Asset Protection

08 Apr

Asset Protection Planning Alive and Well

In Asset Protection by admin / April 8, 2013 / 0 Comments

BAPCPA revises bankruptcy rules for better and worse
Estate Planner Jan-Feb 2006


Estate planning and asset protection planning go hand in hand. After all, strategies for minimizing transfer taxes are meaningless if you have no assets to transfer. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) – which applies to bankruptcy filings on or after Oct. 17, 2005 – contains a number of provisions that affect asset protection.

Spelling out BAPCPA

Contrary to what some pundits would have you believe, BAPCPA doesn’t spell the end of asset protection planning as you know it – but it does change some of the rules. And even though some of these changes make it harder to protect your assets, others – most notably, new protections for IRAs and other retirement benefits – make it easier.

It’s also important to recognize that BAPCPA is a bankruptcy law. Most people don’t file for bankruptcy, and involuntary bankruptcies for individuals are rare. So in most cases, the act has no effect on traditional asset protection planning. But if bankruptcy is inevitable, it’s worthwhile to learn the new rules.

Homesteads less steadfast

State homestead exemptions, which shield your principal residence against creditors’ claims, are less effective under BAPCPA. For example, with prior bankruptcy law you were required to live in a state for only 180 days to use its homestead exemption. BAPCPA increases the residency requirement to 730 days (two years).

BAPCPA also makes it harder to take advantage of the more generous exemptions available in some states. Most states place a dollar limit on their homestead exemptions, but in some states the limits are quite high and a few states offer an unlimited exemption. Under the new law, you’re generally required to live in a state for 1,215 days (three years plus 120 days) before you can exempt more than $125,000 in homestead equity.

Limitation periods less limiting

BAPCPA expands the bankruptcy court’s power to set aside some fraudulent transfers – that is, transfers by a debtor with the intent to defraud creditors and certain transfers for less than “reasonably equivalent value.” Under prior law, the court could recover property transferred fraudulently within one year prior to the bankruptcy filing.
The new law extends this “look-back” period to two years.

The act also creates a special 10-year look-back period for some transactions, including transfers to self-settled asset protection trusts and conversions of nonexempt assets into homestead equity.
These provisions don’t make nonfraudulent asset protection planning any less effective, but they do expose debtors to potential litigation over transactions that previously would have been considered ancient history.

Should you change your plans?

Despite the changes brought by BAPCPA, most traditional asset protection planning strategies remain effective. Nevertheless, it’s a good idea to review your plan and make any necessary revisions. If you’re thinking about relocating to a more homestead-friendly state, for example, consider making your move sooner rather than later to satisfy BAPCPA’s waiting periods. In general, taking action early is preferable, because the sooner BAPCPA’s 10-year limitation periods expire, the better.

In addition, BAPCPA extends the asset protection benefits – up to a $1 million limit – enjoyed by “qualified” retirement plans, such as 401(k)s, and traditional and Roth IRAs.

08 Apr

Offshore Trusts Can Protect Assets

In Asset Protection by admin / April 8, 2013 / 0 Comments

Estate Planner Mar-Apr 2000

Setting up an offshore asset protection trust may not be as exotic as you might think. You may already be familiar with many of the concepts of an offshore trust if you have done some basic estate planning. The primary advantage is creditor protection for trust assets even if you are a beneficiary of the trust. This protection may be important for you if you presently lack malpractice or creditor concerns but your occupation entails potentially significant financial risks.

A Look at the Advantages

The majority of U.S. courts have ruled that your creditors can reach assets you place into a domestic trust for your own benefit. Alaska, Arizona, Delaware, Missouri and South Dakota offer some creditor protection for a self-settled trust. Establishing an offshore trust may provide greater protection than a domestic trust and impede creditors from reaching your assets.

Creditors seeking to recover assets from an offshore trust must overcome many obstacles:

  • US judgments are generally not enforceable in foreign courts of favorable offshore jurisdictions, so the creditor may be required to relitigate the entire case in the offshore jurisdiction.
  • Often local counsel must be retained, which can be difficult, especially when local attorneys have conflicts of interest because they also work for the trust companies.
  • Most offshore jurisdictions do not allow contingent-fee cases, so creditors owe attorney fees even if they lose the case. In addition, creditors risk paying attorney fees for both parties if they lose.
  • Governing law may also provide for a shorter statute of limitations that may bar the creditor’s claim.

Building in Flexibility

When you establish an offshore trust, you give control of trust assets to the trustee. The offshore trust is irrevocable — you cannot change it. It is typically structured so that it is not a completed gift for gift tax purposes.

Although you lack the power to revoke or amend the trust, you may achieve significant flexibility by giving a trusted person a limited power to appoint the assets. You, your spouse, parent or close friend may hold a limited power of appointment. A limited power does not allow the holder to appoint to themselves, their estate, their creditors or the creditors of their estate. You may wish to limit the scope of the power so that it will be exercised only in favor of your spouse or your descendants. But the exercise of the power may have gift tax consequences.

Many offshore trusts authorize a third party, such as the trustee, to amend the trust. You may want to limit the power to amend to complying with a change in applicable law, for example. You probably won’t want to allow a change in the dispositive provisions.

Unique Provisions

Offshore trusts also contain some provisions not typically found in domestic trusts. One example is having a trust protector in addition to a trustee. The trust protector is often a person or a committee that has the power to veto the trustee’s actions and possibly to remove and replace the trustee. A trust protector who is not a US citizen and who is generally not subject to US court jurisdiction offers even greater protection.

Another provision often found in offshore trusts is the concept of “force majeur.” This allows the trustee to take emergency action to remove and protect the trust assets in the event of economic or civil unrest in the offshore jurisdiction. An offshore trust typically also contains a duress provision preventing the trustee from acting in response to the settlor or a beneficiary being coerced by court order.

Right for You?

Offshore trusts are advantageous only in certain situations. Our professionals can help you determine if this is the right solution for you. Please contact us with any questions you may have about how offshore trusts can protect your assets from creditors.

08 Apr

Protecting Assets Through a Single Member LLC

In Asset Protection,LLC by admin / April 8, 2013 / 0 Comments

Estate Planner May-Jun 2001

Trusts are traditionally used to protect assets. Lately, family limited partnerships and limited liability companies (LLCs) have become more popular. With the allowance of the
single-member LLC, if you have been operating as a sole proprietorship or have formed a corporation, you now have an alternative. This can be an outstanding way to limit liability and protect personal assets.

LLCs and the Law

On Jan. 1, 1997, the federal government issued tax classification rules commonly referred to as the “check-the-box regulations.” Under these regulations, the following rules apply to LLCs:

LLCs are disregarded for federal tax purposes. Their income, losses and other tax items are attributed to the LLC owners unless the owners opt out by election.

  • Tax items of a single-member LLC owned by an individual are generally taxable to the owner as if the LLC were a sole proprietorship.
  • Unlike a single-member LLC, a sole shareholder corporation owned by an individual can only be taxed as a C or S corporation and cannot opt to be taxed as a sole proprietorship.

For people who own a business, several factors favor single-member LLCs over sole shareholder corporations, while other factors favor single shareholder corporations.

Factors Favoring Single-Member LLCs

Taxation. Under the check-the-box regulations, the income, losses and deductions of a single-member LLC will be taxed to the owner as if the owner operated a sole proprietorship – unless the single member elects otherwise. If, in the future, the single-member LLC takes on additional members, it will be taxed as a partnership. This is generally more desirable because C corporation income is subjected to two levels of tax.

Simplicity. In general, LLC statutory rules are easier to understand and apply than corporate rules. Also, limitations and restrictions on planning don’t exist with an LLC membership interest. By contrast, the types of S corporation shareholders and the interests they can hold are limited.

Liability. The single-member LLC offers its owner limited liability. In other words, the owner can lose the capital that he or she contributed to the company, but will not be personally liable beyond those contributions. The liability protection should not be less than that offered by a corporate structure. In fact, if the “corporate veil” is “pierced,” the corporate structure can suffer greater liability.

Charging orders. Generally, LLC statutes allow judgment creditors of LLC members to obtain charging orders against only the members. Under a charging order, if the LLC distributes profits, the debtor members’ allocable shares must go to the creditor. Thus, the creditor is not actually a member in the LLC but merely receives the distributive share. If no distributions are made, the creditor receives nothing.

Factors Favoring Sole Shareholder Corporations

Limited liability of owner a certainty. As long as the corporate veil isn’t pierced, the limited liability of a corporation’s owners is unquestionable in all U.S. jurisdictions. By contrast, in some jurisdictions, the member’s limited liability in a single-member LLC may be questioned.

Thus, the sole shareholder corporation might be preferable if the business owner:

  • Wants absolute certainty of limited liability for business debts in all
  • Does business in a jurisdiction where the liability of the single member in the
    single-member LLC is unclear, and
  • Has significant concerns about being sued in one or more of these questionable jurisdictions.

Corporate shield. While adherence to corporate formalities is necessary to defend against piercing of the corporate veil, complying with these formalities can shield defendants against creditors.

Going public. Going public is easier through a corporation. If the business will go public, the business owner should consider forming a corporation.

Explore Your Alternatives 

The single-member LLC presents a useful alternative to the sole shareholder corporation. Its unique combination of legal and tax advantages often outweighs the advantages of operating in the corporate form.

Let us know if you have any questions about this or other ways to protect your assets and achieve your financial goals. We would be pleased to assist you in determining which entity is best for you.

08 Apr

Protect Assets Before It’s Too Late

In Asset Protection by admin / April 8, 2013 / 0 Comments

Estate Planner Sept-Oct 1997

You may think of estate planning as a way to pass on assets to your beneficiaries at the least possible tax cost. But you can’t pass on assets to your heirs that have gone to creditors, so asset protection planning during your lifetime is critical, especially if you are a general partner or face some other high risk of potential liability. Whatever asset protection method you choose, you must implement it before the claim exists. Otherwise, the assets may not be protected by a court.

Give Assets Away

One of the easiest ways to protect assets from future creditors is to make outright gifts. If you don’t own it, creditors can’t take it from you. By making $10,000 annual exclusion gifts, you can pass on assets gift and estate tax free. Making outright gifts has drawbacks, however, including loss of income and gains from the property, loss of control over the property and potential gift tax consequences.

Create an Asset Protection Trust

Another option is to make gifts to an irrevocable trust, sometimes called an “asset protection trust” (APT). Generally you cannot be a beneficiary of the APT, you will be required to forgo income from the asset and, without special planning, the gifts may incur gift taxes. You can, however, retain indirect control by carefully choosing the trustee.

Create a Foreign Trust

Foreign trusts, sometimes called “offshore trusts,” can offer creditor protection and, in some circumstances, tax advantages. A foreign trust is situated in, and has at least one trustee who is a resident of, a country other than the United States or its territories. The laws of the foreign jurisdiction will control the trust, which may deter litigation and provide more favorable creditor protection or trust legislation. You may even be able to remain a beneficiary of the trust as well. Foreign trusts, however, may be more expensive to create and administer.

Create an Asset Protection Plan Today

These are only a few of the planning techniques that you can use to protect assets. Weigh the advantages and disadvantages of each to choose the best strategy for your situation. Most important, create your plan before any creditor problems exist. Waiting until after liability has arisen increases the risk that the plan will be set aside.

An APT Can Also Protect Assets From the Beneficiaries’ Creditors

An asset protection trust (APT) not only protects assets from the donor’s creditors, but from the beneficiary’s creditors as well. For an APT to provide the greatest protection, the trust agreement should provide that the trust income or principal will only be distributed at the trustee’s discretion. A beneficiary’s creditor generally cannot compel the trustee to make a distribution. The trust agreement should also include a spendthrift provision that forbids a beneficiary from assigning, transferring or otherwise disposing of his or her interest in the trust and that prevents a creditor from seizing, attaching or garnishing the trust.

Including a beneficiary’s spouse as a permissible recipient of trust income or principal may make an APT more flexible, provided that the spouse is not subject to creditor claims. If the beneficiary has creditor problems at the time a distribution of trust funds is needed, the trustee can distribute to the spouse instead. This allows the married couple access to the trust funds but keeps the funds out of the hands of the beneficiary’s creditors.
Another approach is to give the trustee authority to use trust funds to make purchases for the beneficiary’s use. For example, rather than distributing funds to a beneficiary for the purchase of a home, the trustee can purchase a home with trust assets and then make the home available for the beneficiary’s use. This way, the beneficiary does not receive a distribution that can be reached by creditors, and the home will be retained by the trust for future beneficiaries.

08 Apr

Alaska and Delaware Now Offer Domestic Asset Protection Trusts

In Alaska Trusts,Asset Protection by admin / April 8, 2013 / 0 Comments

Estate Planner Mar-Apr 1998

When you think about an asset protection trust, an offshore trust probably comes to mind. With the recently enacted Alaska and Delaware statutes, however, you may not need to leave the country for an asset protection trust. The Alaska and Delaware Trust Acts offer additional domestic asset protection and estate planning opportunities.
Generally, when you retain an interest in a trust you create, the trust is subject to your creditors’ claims to the extent of the interest you have retained, and perhaps to the full extent of trust assets. Also, because creditors have access to the trust assets, transfers you make to a trust in which you retain an interest — even if the trust is irrevocable — are not completed gifts for estate tax purposes and will be included in your estate at death.

The most reliable way to protect assets from future creditors and keep them out of your estate at death is to not retain any rights to the trust assets or income, including any right to control who receives trust assets. You may not, however, be inclined to give it all away with no strings attached or interests retained. Thus, you may have considered establishing trusts in certain foreign jurisdictions that provide for creditor protection even if the grantor holds a retained interest.

The New Domestic Alternative

Recognizing that trust asset protection is a sound and legitimate financial planning tool, some state legislatures have begun enacting statues that provide similar protection onshore. The Alaska Trust Act and the Delaware Trust Act were changed in 1997 to allow a grantor to create a trust that is protected from his or her future creditors even though the grantor has retained the right to receive discretionary distributions of income or principal.

This is because Alaska and Delaware trusts may prohibit a grantor who holds a beneficial interest in the trust from assigning, either voluntarily or involuntarily, his or her interest in the trust prior to the distribution of the interest to the grantor. This prohibition may also apply to the grantor’s current creditors as long as the transfer into the trust is not a fraudulent conveyance.

How the Trusts Work

Joe transfers $500,000 to a trust he has created outside of Alaska or Delaware. The trustee has the discretion to make distributions of income from the trust to Joe during his life. On Joe’s death, the trust assets will be distributed to Joe’s daughter.

If Joe then incurs a debt he is obligated to pay, the creditor can reach trust assets to the extent of Joe’s income interest. On Joe’s death, the entire value of the trust will be includable in his estate for estate tax purposes.

This would not be the result if the trust were now formed in Alaska or Delaware. Under these states’ statutes, the trust assets would not be available to Joe’s creditors, even though he has retained the right to receive trust income.

In addition, some would say that the trust assets should not be included in Joe’s estate at his death. Why? Because, they would argue, if the trust was formed in a state where the trust assets could not be reached by a grantor’s creditors, the transfers into the trust should be deemed completed gifts and, therefore, not includable in Joe’s estate.

Can Creditors Reach the Assets?

Although Alaska and Delaware offer greater creditor protection than most states, creditors may still be able to reach these trusts. The U.S. Constitution requires any state to enforce the judgments of any other state. Thus, a creditor can obtain judgment against the grantor outside Alaska or Delaware. Enforcement of the judgment, however, would also have to involve an Alaska or Delaware court, making it a lengthy process. Additionally, U.S. bankruptcy law extends to virtually all persons in the United States, so if bankruptcy law could void the transfer to the trust, Alaska or Delaware laws would not protect the assets.

Also, keep in mind that these new laws will not protect the trust assets if any transfer into the trust was intended to defraud creditors or avoid a judgment order for child support.

Weigh the Advantages of Domestic vs. Foreign Trusts

A trust in a foreign country with debtor-friendly laws offers the greatest possible creditor protection. Remember, however, that U.S. reporting requirements relating to creating a foreign trust tend to be onerous and, therefore, make a foreign trust less appealing. Alaska and Delaware offer an attractive alternative for those who want additional creditor protection while keeping assets in the United States. Please contact us if you would like additional information on using asset protection trusts. We’d be pleased to help.