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
The Family Business
The Accident That Changed Their Lives
The Sad Truth... It could happen to any of us and our clients!
Presentation Agenda Part I: Impact of Taxes, Creditors and Lawsuits Part II: Legal Strategies to Protect Your Wealth Part III: Questions & Answers
Estate Planning Accumulating wealth Preserving wealth Distributing wealth
Obstacles of a Business Owner Income taxes Lawsuits Probate Death taxes
Income Tax Half your lifetime earnings go to the government
The Lawsuit Epidemic Litigation costs America up to $300 billion annually
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
Lawsuit Sources Injuries caused by you Injuries caused by others which are attributed to you Breach of contract Divorce
Lawsuit Sources TORTS Professional negligence Injuries to guests in your home Automobile accidents Fraud
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
Lawsuit Sources CONTRACTS Personal guarantees Partnership disputes Loan defaults Investment liability
Lawsuit Sources Division of property Child support Alimony Attorneys fees and court costs DIVORCE
Bill Gets Sued
Anatomy Of A Lawsuit Pleading Discovery Trial Enforcement of Judgment Appeal
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
Asset Exemptions Every state is different Debtor states Creditor states
Bank Accounts Seizes all your accounts and cash You keep nothing!
Automobiles Seizes your vehicles Sells them to satisfy judgment
Jewelry And Household Goods Seizes all jewelry and household goods Sells them to satisfy his judgment
Life Insurance Policies You keep aggregate loan value of all policies
Residence Seizes your home Sells it to satisfy the judgment You keep the following equity: $15,000
Rental Real Property Seizes all investment real estate Sells it to satisfy his judgment
Sole Proprietorship Seizes business assets: Furniture Equipment Bank accounts Accounts receivable Inventory You keep nothing
Corporation Seizes and sells stock If corporation is the debtor: Assets are liquidated You keep nothing
Erisa Pension Plans and IRA s Out of Bankruptcy Totally exempt from execution by creditors
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
Bill Settles The Case Settlement amount $1,200,000 Insurance $ 300,000 Net Cost $ 900,000 to Bill and Mary
There Must Be a Better Alternative!
Summary Of Problems During Life Income taxes Lawsuits Guardianship After Death Death probate Estate tax
Only Two Ways To Protect Assets Remove assets from your estate Shield remaining assets
Tools To Remove Assets From Estate Irrevocable trust for children Irrevocable life insurance trust Charitable Remainder trust
Children s Trust $28,000* per year (*Indexed for inflation)
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
Children s Trust Promotes Family Investment Goals Involves children in family s financial success
Children s Trust Protection Against Lawsuits Outside the reach of creditors
Children s Trust Probate and Estate Tax Advantages Assets transferred out of parent s estate No probate No estate tax
Factors To Consider Can you do without the asset? Remember, you can t change your mind Only transfer assets that you don t need
Life Insurance Trust Removes life insurance proceeds from estate $28,000* of premium per year (*Indexed for inflation)
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
Life Insurance Trust Income Tax Advantages Policy cash value grows income tax free
Life Insurance Trust Promotes Family Financial Goals Less insurance and lower premiums are needed to accomplish the same goals
Life Insurance Trust Guarantees Family Distribution Plan Children get policy proceeds under the terms you direct
Life Insurance Trust Protection Against Lawsuits Cash value out of reach of creditors
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?
Qualifying Assets Types of Assets: Closely held businesses Stocks / Bonds Real Estate Patents, Trademarks & Royalties Collectibles such as art and jewelry Highly Appreciated
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
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
Charitable Remainder Trust Removes appreciated assets from estate Rental Property-$1,000,000-Stocks
Charitable Remainder Trust Trustees Income Beneficiaries Charitable Beneficiary
Charitable Remainder Trust Trustees sell the appreciated assets No capital gains tax Charitable deduction $320,000 Actual tax savings $112,000
Charitable Remainder Trust At death: $1,000,000 to charity Nothing to children
Charitable Remainder Trust Parents use tax savings to buy $1,000,000 life insurance policy $112,000 Tax savings $1,000,000 Life Policy
Tax Free Distribution $1,000,000 tax free to children
Creditor Protection Assets are protected from creditors
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
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
Removing Assets From Your Estate Children s Trust 10% Tax Exempt Trust 20% Life Insurance Trust 20% Unprotected Assets 50%
Protecting Remaining Assets Three Principal Methods Living Trust Family Limited Partnership Asset Protection Trust
Living Trust
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
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
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
Partial Lawsuit Protection No lawsuit protection while you re alive Complete protection for your heirs after your death
Family Limited Partnership Comprehensive Estate Planning Tool to: Reduce Income Taxes Provide Lawsuit Protection Facilitate Family Gifts Reduce Estate Taxes
Partnership Types General Partnerships Limited Partnerships
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
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
Limited Partnerships Limited Partners General Partner Each friend invested $10,000
Partnership Liability Liability for partnership activities
Partner s Liability Liability for partner s personal activities
Partner s Liability Creditors Cannot: Seize partnership assets Interfere in management of partnership Demand a partnership distribution Terminate partnership
Charging Order Creditor takes debtor partner s distributive share
Dangerous Vs. Safe Assets Dangerous Assets Business Assets = Liability Safe Assets Investment Assets = No Liability
Transferring Safe Assets Certificates of Deposit Mutual Funds Bonds Cash Art Stocks Furniture Investment real estate Jewelry Limited partnership interests
Assets Excluded Personal Residence Retirement plans S corporation stock Stock of professional corporations Other dangerous assets
Who Are The Partners? General Partners 1% 1% Limited Partners 48% 48% 2%
Limited Partnership Benefits Reduces Income Taxes Shift income from parents to children s tax bracket Finance children s education with discounted tax dollars
Traditional Family Gifts Problems with direct transfer of asset Lack of cash Reluctance to give up control Appears complicated Legal and accounting headache
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
Limited Partnership Benefits Reduces Probate and Estate Taxes Transfer partnership interests to Children s Trust Avoids Probate Avoids Estate Tax
Limited Partnership Benefits Reduces Estate Taxes Limited partnership discount Lack of marketability Fractionalized ownership Lack of control 20% to 40% discounts allowed
Limited Partnership Benefits Helps Achieve Family Investment Goals Trains family in financial matters Children have equity interest Older children s involvement strengthens family ties
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
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
Lawsuit Protection Planning Prohibited Goals Defrauding creditors Evading tax liabilities Hiding assets
Limited Partnership Benefits Your Best Defense Against Creditor Claims $3,000,000 Personal Judgment
Limited Partnership Benefits Creditor s Only Remedy is a Charging Order
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
Partnership Benefits Partnership makes no distributions to the partners General Partners 1% 1% Limited Partners 48% 48% 2%
Limited Partnership Warnings Lawsuit Protection is Not Guaranteed U.S. courts may find a fraudulent transfer State laws might change charging order rules
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
Foreign Asset Protection Trust Transfer assets to foreign trust
Foreign Trust & Limited Partnership General Partners 1% 1% Limited Partners 96% 2%
Tax Treatment Of Foreign Trust Tax Neutral No special tax benefits or liabilities All income reported on personal tax return
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
Foreign Asset Protection Trust Creditor takes his U.S. judgment to foreign court
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
Favorable Jurisdictions Some of the most popular The Bahamas Bermuda Barbados The Cayman Islands The Cook Islands Isle of Man
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
Any Questions?
Maritess T. Bott Bott & Associates, Ltd. Helping People Preserve Their Wealth