Introduction to Asset Protection Planning. Objective of Asset Protection Planning Remove individual and family wealth from the attacks of :

Transcription

1 Introduction to Asset Protection Planning Thomas P. Langdon, Esq. Objective of Asset Protection Planning Remove individual and family wealth from the attacks of : & Creditors Predators (IRS) Asset Protection Involves Estate, Trust, and Gift Tax Law Business Law Family Law Pension Law Debtor/Creditor Law Social Insurance Considerations Copyright 2003, Thomas P. Langdon. All Rights Reserved

2 The Client comes to you and says, This is my Castle. We are the Moat Builders. The Castle Under Attack Divorce Spendthrifts Litigation Copyright 2003, Thomas P. Langdon. All Rights Reserved

3 Successful Asset Protection Planning How to Dig the Moat Insurance Trusts Annuities Family Limited Partnerships Limited Liability Companies Premarital Agreements Medicare Planning Step 1: Adequate Insurance Property Coverage Homeowners Insurance Auto/Boat Health Coverages Medical/Dental Long-Term Care Copyright 2003, Thomas P. Langdon. All Rights Reserved

4 Step 1: Adequate Insurance Income Coverage Disability Business Continuation Liability Coverage Appropriate Limits on Property Policies Umbrella Policy Professional Liability Moatbuilding Trusts Spendthrift Discretionary Support Trust Personal Trust Children s Trusts Dynasty Trusts Foreign Trusts Preparing for the Defensive Battle Avoid Fraudulent Conveyances Copyright 2003, Thomas P. Langdon. All Rights Reserved

5 Fraudulent Conveyance A Conveyance or transfer of property, the object of which is to defraud a creditor, or hinder or delay him, or put such property beyond his reach. - Black s Law Dictionary Sources of Fraudulent Conveyance Law The Statute of Elizabeth (1571) Still in force in most states Uniform Fraudulent Conveyances Act of 1918 (UFCA) Uniform Fraudulent Transfer Act of 1984 (UFTA) Federal Bankruptcy Law Fraudulent Conveyances Result from: inaction a waiver of defenses termination of a lease extension of a loan use of a disclaimer incurring an obligation Copyright 2003, Thomas P. Langdon. All Rights Reserved

6 Fraudulent Conveyances Result from: Actual intent to defraud facts and circumstances test can be imputed from one party to another debtor must be competent to formulate intent Badges of Fraud show intent inside deal debtor retained possession and control undisclosed/concealed/secret transfer in anticipation of suit debtor absconded FRAUD removal/concealment of assets Badges of Fraud may show intent insolvent, or became so, due to the transaction transaction shortly before substantial debt was incurred assets transferred through a straw man FRAUD Copyright 2003, Thomas P. Langdon. All Rights Reserved

7 Summary: Fraudulent Conveyances result from ACTUAL intent to hinder, delay or defraud When grantor becomes insolvent because of the transfer transfers for less than fair consideration secret transactions Removing the Taint of Fraud satisfy pre-transfer claims prove the claim is invalid invoke the doctrine of laches wait for the expiration of the Statute of Limitations Creditor abandons the claim If a transaction is a Fraudulent Conveyance, Creditors can restrain the disposition of property appoint a receiver to take charge set aside the conveyance or obligation Apply to a court, which may impose any order required by the circumstances Copyright 2003, Thomas P. Langdon. All Rights Reserved

8 Planning Issues Violation subjects parties, including the planner, to civil and criminal liability. solvency: use only assets available to creditors asset protection planning can render a client insolvent structure the transaction to avoid badges of fraud Planning Issues Fraudulent Transfers are determined at the time the transfer is perfected. Implement the plan ASAP!!! Exempt Property Copyright 2003, Thomas P. Langdon. All Rights Reserved

9 Types of Exempt Property Qualified Retirement Plans Personal Residences (Homestead Rights) Corporations Limited Liability Companies Asset Protection & Employee Benefits The Spendthrift Clause is the key to protection from creditors. Protected Plans Pension Profit Sharing Keogh 403(b) Contractual Annuity Government & Church Plans Copyright 2003, Thomas P. Langdon. All Rights Reserved

10 Other Protected Plans Sec. 419A(f)(6) Severance Plans Sec. 501(c)(9) VEBA Plans Risk of Forfeiture Trusted Benefits Rabbi Trusts Protected Insurance Plans Group Life Supplemental Voluntary Life Dependent Life Some Split Dollar Plans Plans Not Protected Top Heavy Plans Out of Compliance Sole Participant IRA and SEP-IRA Unless State Law provides protection Welfare Benefit Plans Top-Hat Plans Copyright 2003, Thomas P. Langdon. All Rights Reserved

11 Fiduciary Liability Exposure ERISA Concerns: Rules of Plan Operation Procedural Prudence Trusteeship: Non-Qualified Plans Asset Protection & Life Insurance Objective of Asset Protection Planning Remove individual and family wealth from the attacks of : & Creditors Predators (IRS) Copyright 2003, Thomas P. Langdon. All Rights Reserved

12 Why is Life Insurance important? To avoid a potential shortfall in funds necessary to provide liquidity to the estate purchase a business interest under a mandatory buy-sell agreement Create/Replace Wealth Life Insurance & Types of Creditors Federal Government State Government General Creditors Judgment Creditors Creditors in Bankruptcy Types of Life Insurance Group Life Individual Life Term Whole Life Universal Variable Variable Universal Copyright 2003, Thomas P. Langdon. All Rights Reserved

13 Life Insurance & Asset Protection Insured s Creditors Depends on state law Most states protect Life Insurance Policies Beneficiary s Creditors Once paid, creditors have access Consider annuity settlement option if beneficiary has creditor issues Creditors & Life Insurance in Pennsylvania Cash Value Death Proceeds Income Payments Dividends Estate Taxation of Life Insurance Proceeds are payable to the executor of the decedent s estate. IRC Sec. 2042(1). Decedent held, at the time of his death, incidents of ownership in a policy on his life. IRC Sec. 2042(2). Within 3 years of death, decedent transferred incidents of ownership in a policy by gift. IRC Sec Copyright 2003, Thomas P. Langdon. All Rights Reserved

14 Incidents of Ownership change the beneficiary surrender/cancel the policy assign the policy revoke an assignment pledge the policy for a loan obtain loan against CSV of the policy non de-minimis reversionary interest Incidents of Ownership, Cont. right to change beneficial ownership of the policy Attributed incidents of ownership if the decedent was a sole or controlling stockholder. ILITs & Asset Protection Existing policy transferred to ILIT is a gift, subject to IRC Sec If trust purchases a new policy, and insured never held an incident of ownership, Section 2035 does not apply. Copyright 2003, Thomas P. Langdon. All Rights Reserved

15 IRC Sec The gross estate includes the value of the gratuitous transfers within 3 years of death if the interest would have been includible under: Sec (Transfers with retained life int.) Sec (Transfers effective on death) Sec (Revocable Transfers) Sec (Proceeds of Life Insurance) Application of Sec Applies to Gratuitous transfers. A bona fide sale for full and adequate consideration in money or money s worth will not invoke Sec Beware the Transfer for Value trap for sales of Life Insurance ILITs, Sec. 2035, & Asset Protection Proper use of an ILIT will avoid estate tax inclusion on insured s death, since insured does not own the policy During the applicable Statute of Limitations, the annual transfers from the insured to the trustee can be considered fraudulent conveyances. Copyright 2003, Thomas P. Langdon. All Rights Reserved

16 Consequence & Solution Both the policy loan value and the cash surrender value are available to refund payments deemed to be fraudulent conveyances A foreign ILIT can provide additional protection by taking advantage of a shorter Statute of Limitations. Bankruptcy Cash Value Income Payments Dividends Death Proceeds Buy-Sell Agreements Cross Purchase Agreement policies are owned by associates of the insured Asset Protection Issues if a party files for bankruptcy, insurance policies funding buy-sell agreements are included in the bankruptcy estate. Alternative: use a trust to hold the policies Copyright 2003, Thomas P. Langdon. All Rights Reserved

17 Asset Protection Using Annuities Annuities & Asset Protection State Law Specific Generally, if the contract is annuitized, a creditor can only get to the payments Principal is protected Asset Protection & Choice of Business Entity Copyright 2003, Thomas P. Langdon. All Rights Reserved

18 Family Limited Partnerships Family Limited Partnerships Mom & Pop Business Interest Family Limited Partnership Mom & Pop General Partnership Interest Children Limited Partnership Interests Advantages of FLPs Control Simplified Annual Giving Transform Real Property into Personal Property Transfer Restrictions -- Valuation Discounts Creditor Protection Facilitate Family Communications Copyright 2003, Thomas P. Langdon. All Rights Reserved

19 Limited Liability Companies Corporate Characteristics Continuity of Life Centralized Management Limited Liability Free transferability of Interest Advantages of LLCs Limited Liability for all members Any member may materially participate in management Valuation Discounts Available Transform Real Property into Personal Property Copyright 2003, Thomas P. Langdon. All Rights Reserved

20 Advantages of LLCs, cont. No gain recognized upon contribution of appreciated property Facilitates Family Gifting Programs Foreign Organized Business Entities can be Classified as LLCs for US Fed. Tax Purposes Disadvantages of LLCs Tough Passive Activity rules Subject to Franchise Tax Limited Liability not absolute Some Fringe Benefits excluded from income of Partners Taxable distribution upon conversion from Corporation to LLC Dynasty Trusts Copyright 2003, Thomas P. Langdon. All Rights Reserved

21 Dynasty Trusts Long-Term, preferably perpetual trusts Objective avoid transfer taxation by restricting ownership of trust assets ownership does not vest in any individual beneficiary Taxation of Dynasty Trusts Income Tax - treated as a complex trust under Subchapter J To be effective, must have a zero inclusion ratio for GST purposes. The Generation Skipping Transfer Tax Applies to Direct Skips Taxable Distributions from Trusts Taxable Terminations of Trusts Tax is a flat 55% of the Transfer Copyright 2003, Thomas P. Langdon. All Rights Reserved

22 Minimizing the impact of the GSTT The Lifetime Exemption $1 Million, indexed in $10,000 increments In 2001, the exemption is $1,060,000 Direct gifts subject to the Gift Tax Annual Exclusion Currently $10,000 per donee per year Educational and Medical Expenses paid to the service provider The Rule Against Perpetuities (RAP) No interest [in real or personal property] is good unless it must vest, if at all, not later than 21 years after some life in being at the creation of the interest. Lord Chancellor Nottingham Why the RAP? Arrangements for the distant future are likely to result in an inefficient use of resources brought about by unforseen contingencies. R. Ponsor, Economic Analysis of the Law, p. 486, (3rd Edition, 1986) Copyright 2003, Thomas P. Langdon. All Rights Reserved

23 Some States have outlawed RAP South Dakota but has anti-alienation statute Delaware only applies to personal (not real) property Alaska Wisconsin Idaho, Illinois, Maryland, Rhode Island, New Jersey, & Others Dynasty Trust Provisions Usually grant discretion to the trustee Name the Trustee Change of Situs Provisions Trustee may purchase assets for beneficiary use Allow Trustee to refuse contributions Dynasty Trust Provisions Spendthrift Clause Definition of terms Issue Spouse Copyright 2003, Thomas P. Langdon. All Rights Reserved

24 Offshore Trusts Offshore Trusts Offer Favorable Standards of Proof & Judgments Favorable Statute of Limitations Avoidance of Forced Heirship Rules Avoidance of the RAP (Rule Against Perpetuities) Flight Provisions Potential Consequences of Offshore Trusts US Judgments may be enforceable US Courts may not recognize the foreign trust Presence of an Offshore Trust may result in denial of discharge in bankruptcy DO NOT save Income Taxes. Copyright 2003, Thomas P. Langdon. All Rights Reserved

25 Premarital Agreements Premarital Agreements Defined A legal contract entered into by prospective spouses prior to marriage but in contemplation and in consideration thereof; by it, the property or other financial rights of one or both of the prospective spouses are determined or are secured to one or both of them or their children. Copyright 2003, Thomas P. Langdon. All Rights Reserved

26 The Uniform Premarital Agreement Act Adopted in 1983 Currently in force in several states limited in scope Permissible Content ANYTHING, not in violation of public policy Generally, courts will only enforce financial provisions. A Premarital Agreement is Enforceable if: threshold tests of offer, acceptance, and consideration are met it is a WRITTEN agreement it does not violate public policy encourage divorce forces one spouse to become a public charge adversely affects a child s rights Copyright 2003, Thomas P. Langdon. All Rights Reserved

27 Successful Asset Protection Planning Break Time... Copyright 2003, Thomas P. Langdon. All Rights Reserved