Asset Protection Advance Planning is Key

Transcription

1 Partners Office for Women s Careers at MGH Presents Asset Protection Advance Planning is Key Barbara Freedman Wand, Esq. Estate Planning Group Bingham McCutchen LLP Boston

2 Asset Protection Planning is the Process of Structuring your assets In advance of creditor problems Before insolvency For purpose of reducing your vulnerability to judgments

3 Estate Planning is the First Step in Asset Protection Planning Estate planning helps you to: Understand the nature and extent of your wealth Structure the ownership of your wealth to accomplish your goals Minimize exposure to one omnipresent creditor the IRS Establish a baseline to measure changes in your financial status Facilitate financial planning, including asset protection planning

4 Asset Protection Planning Cannot Take Place in a Vacuum Part of your larger financial plan Can have an impact on income taxes, estate taxes and gift taxes Can have an impact on spousal rights on divorce, retirement

5 Asset Protection Planning - Timing Must occur in advance of specific creditor problems to be effective Fraudulent Transfers prohibited Actual or Constructive Fraud Transfers with intent to hinder, delay, or defraud creditors Transfers for less than reasonably equivalent value while insolvent or having the effect of making you insolvent or leaving your business with unreasonably small capital Transfers to pay debts owed to insiders while you are insolvent

6 Asset Protection Planning Strategies Identify risks to be planned against Malpractice Business reverses Environmental hazards Personal injury Divorce Taxes Different strategies are appropriate for different risks

7 Asset Protection Planning Strategies Not all debts are equal: Taxes Alimony Child support Necessaries

8 Asset Protection Strategies Business Reverses Corporate structure / limited liability Professional Corporation Doesn t protect you from own acts May provide protection from acts of others May provide protection from debts of business Important to follow corporate/llc formalities!

9 Asset Protection Strategies Environmental Hazards Limited liability entities to hold title Separate entities for each asset

10 Asset Protection Strategies Malpractice / Personal Injury Malpractice insurance Umbrella coverage

11 Asset Protection Strategies - Divorce Prenuptial Agreements Segregation of assets during marriage

12 Asset Protection Planning Titling of Assets Consider titling of assets in name of spouse less likely to be sued If either spouse is not a U.S. citizen, there may be gift tax issues to transfers Transfers between spouses may interfere with other income or estate planning goals Transfers may have implications on divorce Fraudulent transfers may be avoided

13 Asset Protection Planning Strategies for the Personal Residence Tenancy by the Entirety special form of joint tenancy of residential real estate for husbands and wives

14 Asset Protection Planning Strategies for the Personal Residence Protection of Tenancy by the Entirety: Creditor can attach debtor s interest, but can generally not force sale while non-debtor spouse resides there

15 Asset Protection Planning Strategies for the Personal Residence Tenancy by the Entirety Pre-1980 not as beneficial Post-1980 more beneficial Can convert pre-1980 tenancy by deed to post 1980 tenancy

16 Asset Protection Planning Strategies for the Personal Residence Limitations on Tenancy by the Entirety Does not protect against joint debts Cloud on title if debtor attempts to sell property Under certain circumstances, may not protect against sale upon bankruptcy of co-owner

17 Asset Protection Planning Strategies for the Personal Residence Homestead Exemption For Primary Residence $300,000 of equity is protected; $300,000 for those aged 62 and older and disabled Probably no stacking of homestead exemptions Can be filed after purchase Doesn t protect against purchase money mortgage or voluntary liens Outside of bankruptcy proceeding protects only against debts which arise after declaration of homestead Essential to claim prior to filing a bankruptcy proceeding

18 Asset Protection Planning Retirement Benefits Qualified plans under federal law are exempt In Massachusetts, IRA s and non-qualified retirement plans are generally exempt (some exposure to recent excess contributions) Consider maximizing all retirement plan/ira contributions

19 Asset Protection Planning Protecting Your Inheritance Have wealth left to you in trust with spendthrift clause and discretionary terms Rights of withdrawal may not affect creditor protection in Massachusetts This strategy applies to structuring estate plan between spouses as well Joint tenancy of property should be avoided

20 At Mary s Death in 2003 Tangibles and joint property Mary s assets $3 Million By will and beneficiary designation Mary s Mary s Revocable Revocable Trust Trust Marital Marital Trust Trust discretionary principal $2,300,000 all income $700,000 Discretionary income and principal FRED Family Family Trust Trust CHILDREN

21 Asset Protection Planning Self-Settled Trusts for Your Own Benefit Certain self-settled trusts provide no creditor protection: Revocable trusts Nominee trusts

22 Asset Protection Planning Self-Settled Trusts for Your Own Benefit In most states, no creditor protection for irrevocable self-settled trusts where donor is beneficiary Assets of trusts are reachable by creditors to extent they can be used for donor s benefit

23 Asset Protection Planning Self-Settled Trusts Domestic self-settled trusts may provide protection Alaska Nevada Delaware Rhode Island Off-shore self-settled trusts may provide protection

24 Asset Protection Planning Self-Settled Trusts How they work: Often assets and trustees must be in state or country offering protection Donor cannot have ultimate control, but may be a beneficiary Laws or jurisdiction favor debtors

25 Do they work? Asset Protection Planning Self-Settled Trusts Virtually untested in courts May increase debtor s bargaining power in settlement negotiations May subject debtor to contempt

26 Asset Protection Planning The Big Picture Array of strategies from simple to complicated Must be integrated with your total financial plan Should be supervised by knowledgeable counsel don t try this at home! Advance planning is key