Saving Your Clients Assets: Asset Protection Planning

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1 Saving Your Clients Assets: Asset Protection Planning June 21, 2016 SABA Family Law Section-CLE Presented by: Ivan Ramirez, Esq. Legal Disclaimer - The information provided is designed for general information only and is not intended to be legal advice, nor does it create an attorney client relationship. Consult an attorney before making any legal decisions based on your individual circumstances.

2 Outline 1. Definition of asset protection planning 2. Fraudulent transfers and ethical considerations under Texas and Federal law 3. Why asset protection planning is needed 4. First line of defense: exempt property, insurance, partitioning property 5. Irrevocable (Spendthrift) Trusts: Texas 6. Domestic Asset Protection Trusts: Nevada 7. Offshore Trusts: Cook Islands 8. Series Limited Liability Company: Texas

3 Definition of Asset Protection Planning Asset protection planning is one component of a complete estate plan. It is a strategy that has been used for centuries with the use of corporations and other business entities to shield business owners from personal liability for company debts. Asset protection planning is a process that is done in advance of any creditor claims to protect assets against future risks, by transferring assets to different types of entities. These techniques are designed to deter potential creditors from going after your clients and to frustrate or impede their ability to seize your clients assets or collect judgments.

4 What Asset Protection Planning is Not Asset protection planning is not hiding assets, evading taxes, defrauding current creditors, or fraudulent conveyances of your client s assets.

5 Ethical Considerations Model Rule of Prof l Conduct. R. 8.4(c)(d) (2013) It is professional misconduct for a lawyer to: engage in conduct involving dishonesty, fraud, deceit or misrepresentation; engage in conduct that is prejudicial to the administration of justice; Model Rules of Prof l Conduct. R. 1.2(d) (2013) A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law.

6 Ethical Considerations FRAUDULENT TRANSFERS: A transfer made with intent to hinder, delay, or defraud any creditor of the debtor and/or without receiving a reasonably equivalent value in exchange for the transfer or obligation. Tex. Bus. Comm. Code

7 Ethical Considerations If a person uses non-exempt property to obtain an interest in, make improvements to, or pay a debt on personal property which would be exempt with the intent to defraud, delay, or hinder an interested person from obtaining what they are entitled to receive, the property, improvement to the property, and interest in the property may be seized to satisfy liabilities. Tex. Prop. Code

8 Ethical Considerations Potential civil liabilities Includes claims of malpractice, fraud, conspiracy, aiding and abetting and possibly civil claims under Racketeer influence and Corrupt Organizations Act. Bankruptcy Crimes Includes persons who knowingly or fraudulently conceals property belonging to the estate of the debtor, and persons in contemplation of a bankruptcy case, knowingly and fraudulently transferring or cancelling any of the bankrupt s property The Money Laundering Control Act Applies to transactions involving proceeds form a specific unlawful activity. Broker convicted of Willful blindness for failing to suspect that cash funds were from a specified unlawful activity. Mail and Wire Fraud To use of mail or wire by person in an attempt to defraud others is against federal law.

9 Ethical Considerations Statute Of Limitations : Section years after transfer or obligation incurred or 1 year after the fraud was reasonably discoverable. Section (a)(2) and (a)- 4 years after transfer made or obligation incurred Section (b)- 1 year after transfer On behalf of a spouse, minor, or ward must be brought under Sections (a) or (a)- 2 years after cause of action accrues, or 1 year after fraud was reasonably discoverable. If brought under Section (b)- 1 year after the date of transfer. Tex. Bus. Comm. Code

10 Ethical Considerations A bankruptcy trustee may avoid any transfer within 2 years of the bankruptcy petition being filed if the debtor voluntarily or involuntarily Made the transfer with the intent to hinder, delay, or defraud any debt collector; or Received less than the reasonable equivalent value for the transfer or obligation; and Was insolvent the day of the transfer Was engaged, or about to be engaged, in a business transaction that would yield unreasonably small capital for the rest of the items remaining with the debtor Intended to incur debts that would be beyond the debtor s ability to pay Made the transfer for the benefit of an insider under an employment contract outside the ordinary course of business. Exception A transfer of charitable funds to a qualified organization will be a covered transfer if it does not Exceed 15% of the gross annual income of the debtor The debtor exceeds the 15%, but the transfer is consistent with the practices of the debtor U.S. Bankruptcy Code 548

11 Ethical Considerations Self-Settled Trusts- Statute of Limitations Sect 548.(a)(1)(A)- any conveyance made with actual intent to delay, hinder, or defraud; 2 year lookback Sect (a)(1)(b)- any conveyance that is constructively fraudulent (illiquidity, transfer for less than reasonably equivalent value, etc.); 2 year look back Sect 548- Transfer to self-settled trust made with actual intent to hinder, defraud, or delay; 10 year lookback A trustee may avoid any transfer of interest of the debtor in property that was made on or within 10 years before the petition was filed if: The transfer was made to a self-settled trust or similar devise Transfer was made by debtor The debtor is a beneficiary; and The debtor had intent to hinder, delay, or defraud a creditor. U.S. Bankruptcy Code 548

12 Ethical Considerations Badges of Fraud A term used in the law of fraudulent conveyances made to hinder, delay, or defraud creditors. It is a fact that tends to throw suspicion on a transaction, and calling for an explanation. What are they? Becoming insolvent because of the transfer; Lack or inadequacy of consideration; Family, or insider relationship among parties; The retention of possession, benefits or use of property in question; The existence of the threat of litigation; The financial situation of the debtor at the time of transfer or after transfer; The existence or a cumulative effect of a series of transactions after the onset of debtor s financial difficulties; The general chronology of events; The secrecy of the transaction in question; and Deviation from the usual method or course of business. Soza v. Hill, 542 F.3d 1060 (5 th Cir., September 12, 2008)

13 Why is Asset Protection Planning Needed? Protect Your Family and Business from Lawsuits and Creditors Protect Your Business Assets Gain Safety & Security Have Peace of Mind Discourage Frivolous Lawsuits Major concern for persons of high net worth

14 Types of Claims Officer/Director Liability (Corp.) Employee Suits Business or Professional Liability Divorce Tax Liability Creditor Lawsuits Vicarious Liability for Other People Partnership Liability Malpractice claims Unknown Claims Product Liability Environmental Liability

15 Creditor Rights Can Set Aside Fraudulent Transfers All Community Property is Exposed to Community Creditors Separate Property is Exposed to Separate Creditor, 1/2 Community Property May Be Exposed to Separate Creditor

16 Community Property Community Property (in those states that recognize it, like Texas) All Property Acquired During Marriage, other than Separate Property Separate Property can morph into Community Property Use of Marital Agreement to keep property separate, protects other spouse s property from lawsuits Sole Management Community Property Ex: business under name of one spouse only; control vs. ownership Tex. Fam. Code 3.002

17 Separate Property Acquired Before Marriage Acquired By Gift or Inheritance Can Convert to Community By Agreement (Pre or Post Marital Agreement) Certain Personal Injury Recovery Tex. Fam. Code 3.001

18 COMMUNITY DEBT Texas has a more nuanced way of analyzing who owes what debts by evaluating who incurred the debt, for what purpose, and when. Community liable if the debt was incurred for necessaries like food, clothing, living expenses, etc. Tex. Fam. Code 3.201

19 Insurance First Line of Defense Exempt Assets State and Federal Law Retirement Plans Property Agreements

20 First Line of Defense Insurance

21 Insurance Strengths Covers Loss Cash to Settle Duty to Defend Fund Buy-Sells Disability Death Weaknesses Getting Costly May not Qualify Insolvency of Carrier May get Cancelled Coverage Exemptions Hazardous Waste Intentional Acts Punitive Damages

22 Exempt Property

23 Exempt Property Strengths Homestead protection in Texas Tex. Const., art. 8, sec. 1 Retirement and Pension Plans, IRA, 410K, College Savings Plans (ERISA, Tex. Prop ) Personal Effects and Property ($50,000 per person, $100,000 married) Tex. Prop. Code (a) Life Insurance and Annuities Tex. Ins. Code Exempt Property under Bankruptcy Code Weaknesses Depends on State May not Protect much Most Assets and Investments are not Exempt May not Remain Exempt

24 Property Agreements

25 Partitioning Property Works for Families Where One Spouse has Significant Liability Exposure, Ex: physicians, attorneys, CPA s, etc. Pre and Post Marital Agreements Use With Additional Techniques CAUTION: MARITAL DISSOLUTION (Divorce)

26 First Fortification Example Irrevocable (Spendthrift) Trusts: Texas

27 Irrevocable Trusts Features Created by the Grantor/Settlor/Trustmaker for benefit others (children, grandchildren, spouse, charities). When established, these trusts generally cannot be changed in any substantial way, with certain exceptions (power of appointment, change trustee power, decanting). Often used to hold lifetime gifts from the grantor for the beneficiaries and manage assets following the grantor s death. Such trusts allow the grantor control over beneficiary distributions via the terms in the trust. Tax planning and asset protection are two reasons these trusts may stay in place for multiple generations (estate tax, gift tax, generation skipping tax, income tax). Spendthrift provisions protect the assets in trust against the beneficiaries' creditors. Self-settled trusts ineligible for Spendthrift protection in Texas, i.e. the Trustmaker cant be the beneficiary and enjoy asset protection. Texas Property Code

28 Second Fortification Example Domestic Asset Protection Trusts (DAPT): Nevada

29 DAPT Features A domestic asset protection trust (often called DAPTs, or just APTs) allows the Settlor/Trustmaker/Grantor to be a beneficiary of the trust along with other beneficiaries, while at the same time assuring protection of trust assets from claims of the creditors (Spendthrift protection). DAPT s exist in 16 states: Alaska (1997), Delaware (1997), Nevada (1999), Rhode Island (1999), Utah (2003), Missouri (2005), South Dakota (2005), Tennessee (2007), Wyoming (2007), New Hampshire (2008), Hawaii (2010), Virginia (2012), Ohio (2013), Mississippi (2014), Colorado (1994) and Oklahoma (2004)

30 DAPT: Nevada Trust Features Trustmaker can also be a co-trustee as well as beneficiary NV law requires at least one trustee of be a resident of NV, and some assets must be located in NV Shortest statute of limitations: 2 years or 6 months after reasonable discovery to challenge as fraudulent transfer Fraudulent Transfer Standard: Clear and convincing evidence (NRS ) Nevada considered the highest ranked among states with DAP statutes Nev. Rev. Stat. Chapter 166 et seq.

31 Third Fortification Example Offshore Trusts: Cook Islands

32 Offshore Trusts-Popular Jurisdictions *Offer a greater degree of asset protection because most offshore jurisdictions do not recognize USA court judgments. -Cayman Islands -Bahamas -Gibraltar -Belize -Cook Islands -Nevis -Mauritius -St. Lucia

33 Offshore Trusts-Cook Islands * Located in the South Pacific Ocean, east of New Zealand Fraudulent transfer: Burden on creditor to prove beyond a reasonable doubt that transferor specifically intended to defraud creditor; and the transferor was rendered insolvent by transfer Statute of limitations: No transfer made more than two years before cause of action accrued is fraudulent; Creditor must sue within one year after transfer to trust Statutory certainty that Settlor can be a beneficiary, can retain some degree of control Retroactive protection afforded immigrant trusts Do not recognize USA court judgments; Cook Islands Trustee can remove Settlor as beneficiary in times of Duress (like a lawsuit)

34 Fourth Fortification Example Series Limited Liability Companies: Texas

35 SLLC Features A series LLC allows an investor to hold assets and liabilities within separate cells or series which effectively operate as subsidiary. The series are not stand-alone legal entities in their own right (Tex. Bus. & Com. Code ). An individual series is statutorily empowered to "exercise any power or privilege as necessary or appropriate to the conduct, promotion, or attainment of the business, purposes, or activities of the series." Tex. Bus. & Com. Code (5). Each subsidiary can hold property, and insulates the other property if held in separate subsidiaries from each other s liabilities.

36 Offshore MANAGEMENT TRUST Sample, LLC A Texas Parent Series LLC ASSETS CASH, SECURITIES, INTANGIBLE ASSETS ONLY Series A Subsidiary LLC ASSET Series B Subsidiary LLC ASSET The LLC Manager 1% Voting Member 100% LLC interest in (Series A) 100% LLC interest in (Series B) 100% LLC interest in (Series C) 100% LLC interest in (Series D) Series C Subsidiary LLC ASSET Nevada DAPT or Texas Irrevocable Trust 99% Non-Voting Member Series D Subsidiary LLC Asset

37 SLLC Features Charging Order Remedy for LLC s: An order obtained from a court or judge by a judgment creditor A charging order does not give the interest in the business to the judgment creditor, only the value of the distributions the judgment debtor would otherwise be entitled to, until the debt is satisfied. Tex. Bus. Org. Code

38 Piercing the Corporate Veil SLLC-Caveats A situation in which courts put aside limited liability and hold a corporation's shareholders or directors personally liable for the corporation's actions or debts. Tex. Bus. Org. Code Absent a company agreement, member or manager is not liable for debt, obligation, or liability of a LLC including a debt, obligation, judgement decree, or order of a court. Tex. Bus. Org. Code

39 Before Planning Entire Estate is at Risk!

40 After Planning Estate has Defenses!

41 Saving Your Clients Assets: Asset Protection Planning Presented by: Ivan Ramirez, Esq Stone Oak Pkwy, Suite 200 San Antonio, TX Tel: