Creditor Protection for High Net Worth Individuals and Business Owners

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1 Creditor Protection for High Net Worth Individuals and Business Owners Presented by Maritess T. Bott of Bott & Associates, Ltd. Attorneys at Law Helping people preserve their wealth

2 The Family Business

3 The Accident That Changed Their Lives

4 The Sad Truth... It could happen to any of us and our clients!

5 Presentation Agenda Part I: Impact of Taxes, Creditors and Lawsuits Part II: Legal Strategies to Protect Your Wealth Part III: Questions & Answers

6 Estate Planning Accumulating wealth Preserving wealth Distributing wealth

7 Obstacles of a Business Owner Income taxes Lawsuits Probate Death taxes

8 Income Tax Half your lifetime earnings go to the government

9 The Lawsuit Epidemic Litigation costs America up to $300 billion annually

10 The U.S. Justice System Criminal justice enforces society s basic values Civil justice compensates for personal injury and enforces contractual agreements Money is the grease that keeps the civil justice system running

11 Lawsuit Sources Injuries caused by you Injuries caused by others which are attributed to you Breach of contract Divorce

12 Lawsuit Sources TORTS Professional negligence Injuries to guests in your home Automobile accidents Fraud

13 Lawsuit Sources ACTIONS OF OTHERS Employees who injure others Partners who injure others Spouse who injures others Liability of corporate officers and directors Liability of volunteers and advisors

14 Lawsuit Sources CONTRACTS Personal guarantees Partnership disputes Loan defaults Investment liability

15 Lawsuit Sources Division of property Child support Alimony Attorneys fees and court costs DIVORCE

16 Bill Gets Sued

17 Anatomy Of A Lawsuit Pleading Discovery Trial Enforcement of Judgment Appeal

18 Remedies Of Judgment Creditor Oral debtor s exam Written interrogatories Subpoena third parties Appoint a receiver File suit against third parties Automatic lien on all real property

19 Asset Exemptions Every state is different Debtor states Creditor states

20 Bank Accounts Seizes all your accounts and cash You keep nothing!

21 Automobiles Seizes your vehicles Sells them to satisfy judgment

22 Jewelry And Household Goods Seizes all jewelry and household goods Sells them to satisfy his judgment

23 Life Insurance Policies You keep aggregate loan value of all policies

24 Residence Seizes your home Sells it to satisfy the judgment You keep the following equity: $15,000

25 Rental Real Property Seizes all investment real estate Sells it to satisfy his judgment

26 Sole Proprietorship Seizes business assets: Furniture Equipment Bank accounts Accounts receivable Inventory You keep nothing

27 Corporation Seizes and sells stock If corporation is the debtor: Assets are liquidated You keep nothing

28 Erisa Pension Plans and IRA s Out of Bankruptcy Totally exempt from execution by creditors

29 Failed Strategies Transfer all assets to your spouse Transfer all assets to friends or family members Transfer all assets to foreign banks Transfer assets to irrevocable trust for your benefit Hide your assets

30 Bill Settles The Case Settlement amount $1,200,000 Insurance $ 300,000 Net Cost $ 900,000 to Bill and Mary

31 There Must Be a Better Alternative!

32 Summary Of Problems During Life Income taxes Lawsuits Guardianship After Death Death probate Estate tax

33 Only Two Ways To Protect Assets Remove assets from your estate Shield remaining assets

34 Tools To Remove Assets From Estate Irrevocable trust for children Irrevocable life insurance trust Charitable Remainder trust

35 Children s Trust $28,000* per year (*Indexed for inflation)

36 Children s Trust Income Tax Advantages Children over 14 in lower tax bracket Pay college tuition with discounted dollars Business assets leased back to business

37 Children s Trust Promotes Family Investment Goals Involves children in family s financial success

38 Children s Trust Protection Against Lawsuits Outside the reach of creditors

39 Children s Trust Probate and Estate Tax Advantages Assets transferred out of parent s estate No probate No estate tax

40 Factors To Consider Can you do without the asset? Remember, you can t change your mind Only transfer assets that you don t need

41 Life Insurance Trust Removes life insurance proceeds from estate $28,000* of premium per year (*Indexed for inflation)

42 Life Insurance Trust Estate Tax Advantages (if total estate is greater than $5,340,000) Personally Owned by Life Owned Insurance Trust Policy benefits $1,000,000 $1,000,000 Estate tax 40% $ 400,000 None Net to heirs $ 600,000 $1,000,000

43 Life Insurance Trust Income Tax Advantages Policy cash value grows income tax free

44 Life Insurance Trust Promotes Family Financial Goals Less insurance and lower premiums are needed to accomplish the same goals

45 Life Insurance Trust Guarantees Family Distribution Plan Children get policy proceeds under the terms you direct

46 Life Insurance Trust Protection Against Lawsuits Cash value out of reach of creditors

47 Charitable Remainder Trust Created by 1969 tax law changes Uses special tax breaks for charitable gifts Two simple questions to ask: Do you own an appreciated asset? Do you want to sell it?

48 Qualifying Assets Types of Assets: Closely held businesses Stocks / Bonds Real Estate Patents, Trademarks & Royalties Collectibles such as art and jewelry Highly Appreciated

49 Unnecessary Taxes Selling Appreciated Assets Lifetime Tax Current Value $1,000,000 Original Cost $ 100,000 Net Gain $ 900,000 Capital Gains Tax 20% $ 180,000 Net Proceeds $ 720,000

50 Unnecessary Taxes Selling Appreciated Assets Death Taxes Current Value $1,000,000 Capital Gains Tax 20% $ 180,000 Additional Estate Tax 40% (if total estate is greater than $5.34M) $ 400,000 Net Proceeds from $ 420,000 sale of Appreciated Asset to Heirs 58% Lost

51 Charitable Remainder Trust Removes appreciated assets from estate Rental Property-$1,000,000-Stocks

52 Charitable Remainder Trust Trustees Income Beneficiaries Charitable Beneficiary

53 Charitable Remainder Trust Trustees sell the appreciated assets No capital gains tax Charitable deduction $320,000 Actual tax savings $112,000

54 Charitable Remainder Trust At death: $1,000,000 to charity Nothing to children

55 Charitable Remainder Trust Parents use tax savings to buy $1,000,000 life insurance policy $112,000 Tax savings $1,000,000 Life Policy

56 Tax Free Distribution $1,000,000 tax free to children

57 Creditor Protection Assets are protected from creditors

58 Step By Step Summary Transfer appreciated assets to tax exempt trust No capital gains on transfer Receive immediate charitable deduction Continue to manage assets as Trustee Receive trust income for life

59 Step By Step Summary Create life insurance trust Transfer cash to pay premium on life policy Use tax savings and income from tax exempt trust At death Children receive policy proceeds tax free Charity receives assets from tax exempt trust

60 Removing Assets From Your Estate Children s Trust 10% Tax Exempt Trust 20% Life Insurance Trust 20% Unprotected Assets 50%

61 Protecting Remaining Assets Three Principal Methods Living Trust Family Limited Partnership Asset Protection Trust

62 Living Trust

63 During Your Life, It s Business As Usual You are in control You can do anything you want with the trust assets Amend or revoke the trust at anytime No change in property tax No income tax changes No new tax forms

64 No Death Probate $ No Court fees $ No Publication & bond fees $ No Executor fees $ No Attorney fees No time delays No public record No multiple probates

65 Minimizes Death Taxes Married couples can pass up to $10,680,000 estate tax free in 2014 Single individuals can pass up to $5,340,000 estate tax free in 2014

66 Partial Lawsuit Protection No lawsuit protection while you re alive Complete protection for your heirs after your death

67 Family Limited Partnership Comprehensive Estate Planning Tool to: Reduce Income Taxes Provide Lawsuit Protection Facilitate Family Gifts Reduce Estate Taxes

68 Partnership Types General Partnerships Limited Partnerships

69 General Partnerships Each partner has equal management and control Each partner is 100% liable for business acts of other partners At risk: Partnership assets Each partner s personal assets

70 Limited Partnership Features of general partnerships and corporations General partners Manage the business 100% liable for all partnership acts Limited partners Contribute capital only Only investment at risk

71 Limited Partnerships Limited Partners General Partner Each friend invested $10,000

72 Partnership Liability Liability for partnership activities

73 Partner s Liability Liability for partner s personal activities

74 Partner s Liability Creditors Cannot: Seize partnership assets Interfere in management of partnership Demand a partnership distribution Terminate partnership

75 Charging Order Creditor takes debtor partner s distributive share

76 Dangerous Vs. Safe Assets Dangerous Assets Business Assets = Liability Safe Assets Investment Assets = No Liability

77 Transferring Safe Assets Certificates of Deposit Mutual Funds Bonds Cash Art Stocks Furniture Investment real estate Jewelry Limited partnership interests

78 Assets Excluded Personal Residence Retirement plans S corporation stock Stock of professional corporations Other dangerous assets

79 Who Are The Partners? General Partners 1% 1% Limited Partners 48% 48% 2%

80 Limited Partnership Benefits Reduces Income Taxes Shift income from parents to children s tax bracket Finance children s education with discounted tax dollars

81 Traditional Family Gifts Problems with direct transfer of asset Lack of cash Reluctance to give up control Appears complicated Legal and accounting headache

82 Limited Partnership Benefits Transfer of limited partnership interest No need for cash No loss of control Simplified legal & accounting More convenient management Facilitates Family Gifting

83 Limited Partnership Benefits Reduces Probate and Estate Taxes Transfer partnership interests to Children s Trust Avoids Probate Avoids Estate Tax

84 Limited Partnership Benefits Reduces Estate Taxes Limited partnership discount Lack of marketability Fractionalized ownership Lack of control 20% to 40% discounts allowed

85 Limited Partnership Benefits Helps Achieve Family Investment Goals Trains family in financial matters Children have equity interest Older children s involvement strengthens family ties

86 Lawsuit Protection Planning Points to Consider Legal and ethical planning Key part of estate & business plan No need to hide assets You continue to control assets

87 Lawsuit Protection Planning Desired Goals Create effective and understandable plan Deter claimants from filing lawsuits Provide incentive to settle claims early and for less Enhance your bargaining position Level the playing field

88 Lawsuit Protection Planning Prohibited Goals Defrauding creditors Evading tax liabilities Hiding assets

89 Limited Partnership Benefits Your Best Defense Against Creditor Claims $3,000,000 Personal Judgment

90 Limited Partnership Benefits Creditor s Only Remedy is a Charging Order

91 Limited Partnership Benefits Partnership Activities Not Affected by Judgment No right to seize partnership assets No right to demand distributions No right to act as partner No right to manage partnership affairs

92 Partnership Benefits Partnership makes no distributions to the partners General Partners 1% 1% Limited Partners 48% 48% 2%

93 Limited Partnership Warnings Lawsuit Protection is Not Guaranteed U.S. courts may find a fraudulent transfer State laws might change charging order rules

94 Foreign Asset Protection Trust What is it? Much like irrevocable U.S. trust Transfer assets to Trustee in foreign country Country does not recognize US judgments Trust Protector oversees Trustee activities

95 Foreign Asset Protection Trust Transfer assets to foreign trust

96 Foreign Trust & Limited Partnership General Partners 1% 1% Limited Partners 96% 2%

97 Tax Treatment Of Foreign Trust Tax Neutral No special tax benefits or liabilities All income reported on personal tax return

98 Liquidation Of Limited Partnership When there is threatened litigation The partnership is liquidated Each partner receives his or her share Foreign Trustee takes its share off-shore

99 Foreign Asset Protection Trust Creditor takes his U.S. judgment to foreign court

100 Selecting The Best Jurisdiction Factors to consider Ease of communication Responsible Trustees No local taxation on trust income Strict bank secrecy laws Favorable trust & asset protection laws No currency controls Stable government

101 Favorable Jurisdictions Some of the most popular The Bahamas Bermuda Barbados The Cayman Islands The Cook Islands Isle of Man

102 Presentation Summary Simple Strategies: Gifting Exempt Assets Life Insurance Children s Gift Trusts Complex Strategies: Charitable Remainder Trusts Family Limited Partnerships Domestic Asset Protection Trusts Foreign Protection Trusts

103 Any Questions?

104 Maritess T. Bott Bott & Associates, Ltd. Helping People Preserve Their Wealth