08 Apr

Creative Financing – Designing and Funding A Buy-Sell Agreement for your Business

In Buy-Sell Agreements by admin / April 8, 2013 / 0 Comments

Estate Planner Jan-Feb 2006

If you own a business, it’s probably your most valuable asset. So it’s important to take steps to preserve that value for your family after your death or in case you become disabled or leave the business for some other reason. One of the most powerful tools available to help you achieve that goal is a buy-sell agreement.

A buy-sell agreement creates a market for your interest in the business, providing liquidity to pay estate taxes and other expenses, and smoothing the transition from one generation to the next. Because the agreement provides for the company or the other owners to buy you out, it’s critical to make arrangements to fund the purchase.

Buy-sell benefits

A buy-sell agreement is a contract among the owners of a business that provides for the company or the remaining owners to buy back a deceased, disabled or departing owner’s interest under specified circumstances for a specified price. Typical “trigger events” include:

· Death,
· Disability,
· Divorce,
· Retirement or termination of employment,
· Bankruptcy, and
· Loss of a professional license.

By establishing buyout terms, a buy-sell agreement creates a market for otherwise unmarketable shares, providing a source of liquid funds the owner’s heirs can use to pay estate taxes and other expenses without being forced to sell the business.

A buy-sell agreement also can help keep ownership of the business within a family or another select group by preventing: 1) departing owners from selling their interests to outsiders, and 2) an owner’s spouse from acquiring an interest in a divorce proceeding.

Other potential benefits of a buy-sell agreement include minimizing disputes among owners over price and other buyout terms, and establishing the value of the business for gift and estate tax purposes (if certain requirements are met).

Types of agreements

There are two basic types of buy-sell agreements: redemption and cross-purchase. Under a redemption agreement, the company buys back a departing owner’s interest, and under a cross-purchase agreement, the remaining owners purchase the interest. Each has advantages and disadvantages:

Redemption agreements. An important distinction of a redemption agreement is that the company is responsible for funding the buyout, not the other owners. Redemption agreements have some big drawbacks, especially if the company is a C corporation. For one thing, if a redemption agreement is funded by insurance on the owners’ lives, insurance proceeds received by the company may trigger corporate alternative minimum tax (AMT). The company can avoid AMT by funding the agreement with corporate savings rather than life insurance, but this approach can create accumulated earnings tax (AET) issues.

Another disadvantage of a redemption agreement is that the company’s purchase of an owner’s interest enhances the value of the remaining owners’ shares – because each owner now owns a greater percentage of the company – without a corresponding step-up in tax basis. A lower tax basis potentially increases the tax hit for owners who later sell their interests.

Cross-purchase agreements. These agreements can provide several advantages but can be unwieldy and expensive – especially for larger companies – because each owner must maintain insurance policies on the lives of all of the other owners. On the plus side, however, in addition to avoiding AMT and AET problems, cross-purchase arrangements provide the remaining owners with additional tax basis in any acquired interests, reducing their capital gains – and, therefore, their taxes – if they sell their shares.

Considerations for pass-through entities

The disadvantages of redemption agreements are generally less of a concern for pass-through entities – such as S corporations, partnerships and limited liability companies – because they’re not subject to AMT or AET.

Also, there is less of a basis issue on pass-through entities. Like a C corporation, a pass-through entity’s buyout of a deceased or retiring owner doesn’t produce a basis increase for the surviving owners. But if the buy-sell agreement is funded by life insurance, the basis of all owners is increased by the pass-through entity’s receipt of the insurance proceeds.

For example, Tom, Dick and Harriet each own one-third of the stock of TDH Advisors, an S corporation valued at $3.6 million. Under a cross-purchase agreement, if one of the shareholders dies, the other two are obligated to buy back the shares for $1.2 million. To fund the agreement, Tom, Dick and Harriet each buy $600,000 life insurance policies on the lives of the other two shareholders. When Tom dies, Dick and Harriet each collect $600,000 in life insurance proceeds tax-free and use those funds to buy half of Tom’s shares. Dick’s and Harriet’s interests in TDH Advisors increase in value by $600,000 each, but they also enjoy a basis increase of $600,000.

Suppose, instead, that TDH Advisors and its shareholders have a redemption agreement that requires the company to buy back Tom’s shares for $1.2 million, funded by a $1.2 million life insurance policy. Even though the company, rather than the shareholders, buys Tom’s shares, Dick and Harriet each become 50% owners, so the value of their shares increases by $600,000 each. The basis of each shareholder (including Tom) is increased pro rata by the $1.2 million in life insurance proceeds collected by the S corporation. Thus, Dick’s and Harriet’s bases both increase by $400,000. Tom’s basis also increases by $400,000, but that increase is wasted because Tom’s estate receives a stepped-up basis equal to the fair market value of his shares.

Setting the price

Your buy-sell agreement’s terms for valuing the company’s shares and setting the purchase price are critical. Generally, the most effective method is to conduct regular, independent appraisals of the business, but a well-designed valuation formula can be an effective low-cost alternative. If you use the formula approach, however, there’s a risk the IRS will find that the business is undervalued, creating unexpected estate tax liabilities, interest and penalties.

Funding options

There are three basic methods of funding a buy-sell agreement:

1. Savings plan. The company or its owners simply save enough money to cover their obligations under the agreement. The problem with this approach is that funds may not be available if an owner dies or leaves the business sooner than expected or if savings are needed for unforeseen expenses. It also can cause AET problems for a C corporation.

2. Bank loans. When an owner dies or leaves the business, the company or the remaining owners borrow the money needed to fund the buyout.

But this approach can fall short if the company or its owners run into financial difficulty and have trouble obtaining a loan.

3. Life insurance. In most cases, life insurance is the most cost-effective method of funding a death buyout under a buy-sell agreement. It ensures that the funds will be available when needed. In addition, the insurance proceeds are generally tax-free (but watch out for AMT issues raised by C corporation redemption agreements).

Complex planning issues

Developing a buy-sell agreement that’s right for your business requires consideration of a number of complex tax and business planning issues. Thus, it’s wise to consult legal, tax and financial advisors to design an agreement and funding mechanism that meets your needs.

Sidebar: FTD delivers cost savings

For many businesses, first-to-die (FTD) life insurance offers a lower-cost alternative to
traditional insurance for funding a buy-sell agreement. In a typical buy-sell arrangement, individual life insurance policies are purchased for each owner. Alternatively, an FTD insures two or more lives simultaneously and pays a death benefit on the death of the first insured to die.

The primary advantage of FTD insurance is lower premiums: An FTD policy covering two people typically costs 25% to 30% less than two individual policies. But even though FTD insurance is an effective alternative for a redemption agreement, it can present some tricky tax and planning issues for cross-purchase agreements.

Joint ownership of an FTD policy used to fund a cross-purchase agreement may cause the insurance proceeds to be included in the deceased owner’s taxable estate and may also have negative income tax consequences. Many experts believe this result can be avoided if the buy-sell agreement requires the proceeds to be used to purchase the deceased owner’s interest or if the FTD policy is owned by a properly designed trust. The problem is that there’s little guidance on this issue and it’s difficult to predict how the IRS or the courts will treat such an arrangement.

08 Apr

Funding a Buy-Sell Agreement with Life Insurance? A Partnership May Make the Best Policy Owner

In Buy-Sell Agreements by admin / April 8, 2013 / 0 Comments

Estate Planner May-June 1997
A buy/sell agreement provides that a deceased shareholder’s shares in a closely held business either will be redeemed by the corporation or purchased by the remaining shareholders. Life insurance is often used to provide the necessary cash to buy or redeem the shares. But who should own the insurance? A partnership is often a good choice for several reasons.

Avoid the AMT

If a C corporation owns insurance on the lives of the shareholders to fund a redemption agreement, the insurance proceeds paid to the corporation may be subject to the alternative minimum tax (AMT). As a result, the net proceeds may be less than what is needed to fund the stock redemption. A partnership can solve this problem. In various private letter rulings, the Internal Revenue Service (IRS) has sanctioned the transfer of life insurance currently owned by the corporation to an affiliated partnership, such as a partnership of shareholders that owns the real estate where the business operates. The partnership can be the designated beneficiary of the policies on the lives of the other partners. Because the proceeds are not payable to the corporation, the AMT is avoided. The transfer out of the corporation may be a dividend.

Avoid the Transfer-for-Value Rule

Although life insurance proceeds generally are excluded from income, if a life insurance policy is transferred for valuable consideration, the proceeds are subject to income tax. Partnerships can avoid this problem, however. If the transfer is to the insured, a partner of the insured, a partnership in which the insured is a partner, or a corporation in which the insured is a shareholder or officer, the proceeds payable are not subject to income taxation.

Avoid Incidence of Ownership

Insurance proceeds generally will be included in the insured’s estate if he or she possesses any right to receive, alter, revoke or affect the economic benefits of the insurance policy. Such rights are referred to as incidence of ownership. Partnerships, however, may avoid this problem. The IRS has ruled that if a general partnership is the owner and beneficiary of life insurance policies on the life of each general partner, the partner does not have incidence of ownership as long as the proceeds are used for the benefit of the partnership. The value of the decedent’s partnership interest may include his or her proportionate share of the death proceeds, but the deceased partner’s estate will not include the balance of the death benefit.

Avoid Multiple Policies

Cross-purchase plans are common in buy/sell agreements. Each shareholder purchases a life insurance policy on each other owner’s life. When an owner dies, each shareholder uses the proceeds from his or her policy on that owner’s life to purchase that owner’s shares. However, this system can become quite complicated when there are more than a few shareholders because so many policies are required. For example, a business with five shareholders would require four policies on each partner’s life — one owned by each other partner — for a total of 20 policies. With a partnership, the partnership can own the policies so only one policy is needed on each life.

How Is Insurance Held?

The life insurance partnership can be a valuable business planning tool. For example, the proceeds can be used to purchase interests in several entities owned by the partners, eliminating the need to have separate agreements and separate policies for each entity. Shareholders often don’t realize until it’s too late that the life insurance they purchased to fund a buy/sell agreement is not being held in the most tax-efficient way possible.

08 Apr

Buy-Sell Agreements: Stability in a Time of Uncertainty

In Business Issues,Buy-Sell Agreements by admin / April 8, 2013 / 0 Comments

Estate Planner May-Jun 2000

Retirement doesn’t have to be right around the corner before you plan for it. Have you considered how your stake in your company will be handled when you retire? What if you were to die before retirement? Will your family be forced to negotiate the sale of your interest? A buy-sell agreement can help circumvent many business transition problems and stabilize what could otherwise be difficult periods of uncertainty.

What Are Triggering Events?

A buy-sell agreement is a popular tool to transfer a stake in a business upon the occurrence of a predefined event called a triggering event. Some triggering events include:

  • Death,
  • Disability,
  • Retirement,
  • Bankruptcy,
  • Divorce,
  • Voluntary or involuntary termination of employment, and
  • An involuntary sale of stock.

After the triggering event occurs, the buy-sell agreement dictates the sale according to the agreement’s terms. The agreement specifies, among other things, who will buy the stock and at what price. (Although we are discussing the sale of stock, a buy-sell arrangement applies equally to interests in partnerships and limited liability companies.)

Both your business and your family benefit from a properly designed buy-sell agreement. For example, at your death, a buy-sell agreement will reduce much of your family’s economic uncertainty. Without the agreement, difficult negotiations could ensue between your family members (who may have an unrealistic view of the company’s value) and surviving shareholders.

Buy-sell agreements also help preserve the surviving shareholders’ control of the company by restricting stock transferability and controlling who may become shareholders. An orderly transition can help prevent the business from being dissolved in a distress sale caused by internal dissent.

Stock in a closely held business is generally an illiquid asset, but the buy-sell agreement can provide your estate with sufficient cash to pay:

  • Death taxes,
  • Debts and administration costs, and
  • Support and living allowances for family members.

Furthermore, during your lifetime, you hold the best bargaining position to maximize the purchase price. Family members generally do not have sufficient knowledge of the business or leverage to exact the best possible offer from the corporation or other shareholders. And obtaining a predetermined value for your stock can offer certain federal estate tax benefits because in some cases your stock may be given a lower valuation for estate tax purposes.

Types of Buy-Sell Agreements

The buy-sell agreement is generally structured as either a stock redemption or a cross purchase. Here’s a closer look at each:

Stock redemption. Stock redemption allows the business to use its funds to buy your stock. Life insurance commonly funds the company’s purchase of the shares when you die. The stock redemption structure assures that the premiums are paid on time, giving you peace of mind. If insurance funds your stock purchase, the stock redemption approach could also alleviate some administrative burdens not covered with a cross-purchase structure. Though the stock redemption structure is easier to administer, the cross-purchase structure can lower the overall tax burden.

Cross purchase. Surviving shareholders buy back your stock at your death under a cross-purchase buy-sell agreement. The arrangement is almost as if your shares are pieces of a pie. When one shareholder experiences a triggering event, the others must buy his or her shares. While it seems simple, it’s not. The cross-purchase agreement places unequal financial burdens on newer or younger shareholders. For example, a 10% shareholder may be required to purchase a 90% shareholder’s interest.

You can create a hybrid agreement if you are not sure which structure best suits your needs. The hybrid agreement gives the corporation the option to buy the stock. If the corporation’s option expires, then the shareholders are either given the option to buy the stock or are required to buy it. This arrangement allows the parties to determine the best structure at the most opportune time.

Which Buy-Sell Agreement Is Best for You?

If you think a buy-sell agreement may be useful to you, please contact us. Our professionals would be happy to discuss your business situation to arrive at the solution that fits your needs.

08 Apr

Placing Your Family Business in a Trust

In Business Issues by admin / April 8, 2013 / 0 Comments

Estate Planner May-Jun 2000

How Your Children Fit Into Your Succession Plan

You’ve spent a lifetime growing a successful business. Now, as you near your retirement, is a good time to consider your company’s future. Ask yourself these questions:

  • What will happen to your business when you retire?
  • How will your children divide their shares if some are active in the business and some are not?
  • What is the best way to prevent the IRS from siphoning off more than its share of estate tax?
  • How will conflicts among shareholders be resolved?
    You can control the outcome of these issues by placing your family business in a trust when the business is part of your estate. Let’s take a closer look at issues to consider.

Choosing a Trustee

Your choice of a trustee is important because the trustee has ultimate control of your share of the business. Generally, selecting one of your children as the sole trustee may lead to problems down the line. Your children may have different ideas about your business than you. They may:

  • Want to sell the company,
  • Continue to aggressively grow it, or
  • Use cash flow from the business to support their lifestyles.

For example, one child may want to retain a major part of the year’s earnings for expansion or reserves, while children outside the business may want to distribute the profits as dividends.

To prevent dissension, consider choosing a professional trustee. But remember he or she ordinarily has a duty to minimize risk, and closely held businesses are risky by nature. Therefore, a professional trustee may be inclined to sell the business to reduce risk. But if you want your family business retained and have chosen a professional trustee, you can provide specific instructions about the circumstances under which you would permit the business to be sold, thus limiting the chances of liquidation.

On the other hand, some circumstances may lead you to choose one of your children as the trustee. If you feel comfortable that your children will be fair to each other after you’re gone, it might be best to choose the child who is most active in your business. This way the trustee is the most qualified to make decisions about the trust as it pertains to the company’s operation.

Allocating Profits

A critical question to consider when determining how the trust should allocate profits is: Should you leave it up to your children or should you address the issue in your estate plan? The children who continue with the family business deserve a salary and additional rewards for continuing to work to make the business successful. But the children outside the business whose inheritance is tied to the company’s success should be rewarded accordingly.

For example, assume that the closely held business is a farm. A measurable reward for return on capital (cash rents) clearly belongs to shareholders. The balance of the profit belongs to the return on labor (which should go to the child in the business) and the return on bearing risk (which belongs to all the children).

Examining Tax Strategy

Don’t overlook the importance of assessing your business structure and choosing the one that works best for your situation. Generally, a C corporation structure reduces after-tax returns because profits are taxed twice. The income is taxed once as corporate income, and again as a dividend to the individual investor. To prevent double taxation, consider another structure, such as S corporation, limited partnership or limited liability corporation (LLC). Profits from partnerships and LLCs have the advantage of being taxed only once, at the ownership level. But be careful! A partnership structure may expose the partners to liability they were protected from as corporate shareholders. A restructuring by your estate (after a step-up in basis) will minimize the tax cost of converting a C corporation to a new structure.

Making an Informed Decision 

After you’ve considered the benefits and caveats, you can make an informed decision on how to best structure the trust to meet your particular needs. And after you consider issues such as who will be your trustee, the extent of the trustee’s control and how to balance tax benefits with liability risk, your next step is to consult a professional. We can help you design your trust and focus your estate planning to best fit your needs.

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

Newly acquired property isn’t titled to your living trust

In Asset Allocation,Living Trusts by admin / April 8, 2013 / 0 Comments

Estate Planner May-June 2006

A living trust is one of the most flexible, effective estate planning tools available. It contains instructions for managing and distributing your assets in the event you become incapacitated and when you die. It also avoids probate – an expensive, time-consuming and very public court proceeding.

A will also is an essential estate planning document, but a will by itself won’t avoid probate and functions only after your death; it won’t provide for the management of your assets if you become incapacitated. Assuming no incapacity, a living trust gives you complete control over your assets during your lifetime. You can revoke the trust or dispose of the assets in any manner you wish.

For an asset to be covered by your living trust, it’s important to change the asset’s title from your name to the name of the trust. Any assets titled in your name (unless governed by a beneficiary designation) will be subject to court-appointed guardianship if you become incapacitated and to probate at your death.

Ordinarily, this doesn’t present a problem when you first set up your living trust – your attorney will remind you to change the title of your home, life insurance policies, retirement plans and other assets. But once your living trust is signed, it’s easy to forget to change the title of property you acquire later.

If you don’t know whether all of your assets are properly titled in your living trust’s name, consult your estate planning advisors to discuss. If all your assets aren’t properly titled, the living trust may not serve its purpose.


08 Apr

Avoid the Funding Trap for Trusts — Control Taxes by Monitoring When and Where Assets Go

In Asset Allocation,Funding Trusts by admin / April 8, 2013 / 0 Comments

Estate Planner Nov-Dec 1997

Estate planning focuses on transferring your assets as you desire while minimizing estate taxes. Although you may set up several trusts to achieve these goals, you might not consider the tax impact of how and when assets pass to each trust. The actual funding of these trusts, however, can greatly affect the amount of taxes due and how much goes to each beneficiary. The following example illustrates the potential impact.

The Estate Plan

John and Georgia were married, and each had significant assets. They structured John’s estate plan so that their two children would receive something on his death even if he died before Georgia. The will allocated:

  • John’s $1 million generation-skipping transfer (GST) tax exemption to two trusts — $500,000 for each child.
  • 50% of his gross estate, after debts and expenses, to a marital trust.
  • The remaining estate, after distributions and estate taxes, to the children.

Execution of the Plan

On John’s date of death, June 1, 1997, his estate was valued at $10 million. Debts and expenses were $100,000. The estate would be divided as follows:

  • GST tax exempt trusts: $1,000,000
  • Marital trust: $4,950,000
  • Federal and state estate taxes: $2,170,500
  • Children’s share (residue): $1,879,500

How John’s will was drafted, the timing of funding the distributions under the will, and the change in the value of assets from the date of death to the date of funding all could affect the plan and result in unexpected or unintended consequences.

Unexpected Capital Gains

For example, assume that John had the assets listed in the box below and the distributions were not funded until Dec. 1, 1998. If the will specifically stated that the distribution to the GST trust was to be a pecuniary $1 million, and the executor used the X Corp stock to satisfy this distribution, the simple act of funding the distribution would produce a capital gain to the estate of $500,000. This would result in a capital gains tax of approximately $100,000, leaving less remaining in the estate for the children.

If John had the same assets, but funding occurred closer to the date of death with the Y Corp stock and one-half the X Corp stock, no gain would occur, and significant appreciation would enure to the benefit of the GST trusts.

Unintended Valuation Effects

Valuation issues also can play a role. If, under the prior example, the executor was required to fund the marital trust using date of death values, waiting to fund might result in serious overfunding of the marital share. This would leave little, if anything, for the residuary beneficiaries after all taxes and expenses had been paid.

Thus, if the Business Z asset was used to fund the marital share, Georgia would receive $6.5 million in current assets and the children would be left with $829,000, less any tax that may result from having to sell assets to pay estate tax. This not only might be undesirable, but it also might cause a rift between the surviving spouse and the residuary beneficiaries.

Monitor Funding To Avoid the Unexpected

While you can’t always control the post-death appreciation or depreciation of assets, closely monitoring the funding situation can avoid the unexpected. If you would like more ideas on funding your trusts effectively, we’d be glad to help.


John’s Assets Date of Death Value Date of Distribution Value

Publicly traded X Corp stock $ 500,000 $ 1,000,000
Publicly traded Y Corp stock $ 750,000 $ 1,000,000
Interest in closely held Business Z $ 5,000,000 $ 6,500,000
Investment real estate $ 3,750,000 $ 2,000,000

TOTAL $ 10,000,000 $ 10,500,000