ASSET PROTECTION PLANNING LIKE THE AMERICAN EXPRESS CARD COMMERCIAL SAYS "DON'T LEAVE HOME WITHOUT IT"

I. The Problem. ASSET PROTECTION PLANNING LIKE THE AMERICAN EXPRESS CARD COMMERCIAL SAYS "DON'T LEAVE HOME WITHOUT IT" Maurice Offit, Esquire Offit Kurman (301) 575-0308 moffit@offitkurman.com A. We live in a world where there are too many lawyers and too many lawsuits. Years ago, it was uncommon for someone to be sued. This is no longer the case as "if you have a phone, you have a lawyer." B. There is no guarantee that insurance coverage will be available to pay a claim that may be filed against your clients as: 1. All insurance policies have specified exclusions from coverage. 2. All insurance policies have coverage limits. C. If a claim is filed against your clients and insurance coverage is not available to pay the claim in full: 1. Your clients will have to personally pay the legal fees associated with the defense of the claim; and 2. If the defense is unsuccessful, the claimant will obtain a judgment and have the right to seize and sell the assets that your clients own in satisfaction of the claim. II. The Solution. A. Fortunately, through asset protection planning, your clients will be able to develop a plan to protect their hard earned wealth from the lawsuits you may face in the future. But, the planning, to be effective, should to be completed before the claim arises. Therefore, the time to act is now. B. Asset protection pluming should be an integral part of the planning process. Any plan that fails to take asset protection planning into account may be flawed as even the best designed financial and estate plan is of no use if creditors are able to seize all of the assets that your clients own. 1

III. Candidates for Asset Protection Planning. While asset protection planning is appropriate for any client who desires to be protected from claims of creditors, the following groups of clients have enhanced asset protection planning needs: A. Clients who have accumulated significant wealth, as wealth is often a target for unscrupulous litigation. Unfortunately, it's easy for unscrupulous claimants to pursue litigation as: 1. Attorneys can be engaged on a contingent fee basis. Unscrupulous claimants, therefore, don't have to be concerned about the payment of substantial retainers, expensive hourly rates, or the outcome of the suit (in a typical contingency fee arrangement, an attorney is only paid if the litigation is successful and the claim is paid). 2. The losing part in litigation is not generally responsible for the payment of the attorney's fees incurred by the winning party. As a result, there's no penalty for a claimant who files a suit of questionable merit. 3. Punitive damages can be awarded. Unlike compensatory damages, punitive damages bear no relationship to the loss actually sustained by the claimant and consequently provide the claimant with the opportunity to recover an award that is well in excess of the loss than the claimant incurred. B. Clients who are employed in a profession that is likely to produce claims. Professional service providers (such as doctors, accountants and attorneys) have exposure to liability for professional malpractice claims. While almost all professional service providers have malpractice insurance coverage, asset protection planning can provide supplemental protection from claims that exceed policy limits, or claims that are denied because of exclusions from coverage. C. Clients who serve as fiduciaries. Fiduciaries (personal representatives of estates, trustees of trusts, guardians, and persons serving under powers of attorney) are frequently the target of litigation, but they rarely have insurance protection for the claims that are brought against them as fiduciary insurance coverage is difficult to obtain. D. Clients who are serve on a corporate board of directors. Stockholders of a corporation have the right to hold the corporation's board of directors liable for mismanagement. While many corporations provide insurance coverage for their directors, there is an increasing concern that coverage may not be sufficient as stockholder claims (especially Sarbanes Oxley claims) are on the rise. E. Clients who sell their closely held businesses to regional or national buyers. Sellers of closely held businesses are customarily required to sign, in an individual capacity, a sales agreement that contains pages of warranties of representations. Sellers can, therefore, be personally sued after closing by buyers who attribute their failure to achieve projections to a breach of the warranties and representations, rather than their failure to pay closer attention to the special relationships that the sellers maintained with their employees, customers and suppliers. If the buyers are regional or national in scope, the attorney s fees that could be incurred by the 2

sellers in defending a breach of warranty and representation claim could be prohibitive. F. Clients who currently own, or have previously owned, real estate containing hazardous materials (such as lead paint) are sued with regularity. More than 400,000 homes were built in Baltimore City before 1978 (when lead paint was outlawed) and over the last ten years, a staggering number of lead paint claims have been filed. To make things for worse the landlords of property that contain lead paint, the Court of Appeals of Maryland recently declared a law which limited landlord liability to be unconstitutional. G. Clients who are about to get married and don't want to ask their fiancé to sign a prenuptial agreement. Approximately one-half of all marriages end in divorce. Some clients, therefore, insist, that a prenuptial agreement be signed before the marriage occurs. However, other clients prefer to avoid the hostility that often arises in negotiating the terms of a prenuptial and instead look to an asset protection plan for protection. IV. Asset Protection Planning Techniques - the "Stairway to Asset Protection." A. Married People. If your clients are married: 1. They should title their assets in the name of the spouse who is less likely to be sued. A judgment creditor can attach only assets in the name of the person against whom a judgment has been obtained. 2. They should title assets in the name in joint name with the spouses as tenants by the entireties. A judgment creditor (in most circumstances) cannot attach assets that are owned by jointly as tenants by the entireties if a judgment has been obtained against one spouse only. 3. Titling assets in the paragraph 2 noted above is simple to understand and inexpensive to implement. However, the protection provided will be lost if: a. A divorce occurs; or b. The client's spouse predeceases the client. B. Exemption Planning. The following assets are exempt under Maryland law from attachment by judgment creditors. 1. Retirement plan account benefits. 2. Cash value of life insurance policies and the proceeds thereof if the policy is for the benefit of a spouse, child or dependent relative. 3. Proceeds of annuities that are for the benefit of a spouse, child, or dependent relative. 3

C. Limited Liability Companies and Family Limited Partnerships. 1. In a number of states (but not in Maryland), statutes have been passed which limit a creditor's right to seize and sell an interest in a limited liability company or family limited partnership (the "Partnership"). Instead, the creditor is only permitted to obtain a charging order. 2. A charging order is an order that a creditor obtains from a court - it provides that if any LLC or partnership distributions will be made to member of a LLC or a partner of a partnership, the creditor will be paid the member/partner's share of the distribution. 3. The problem, from the creditor's standpoint, is the LLC/partnership is not compelled by the charging order to make distributions. Therefore, if distributions are not made, the creditor will not be paid. To make matters worse for the creditor, Rev. Rul. 77-137, 1977-1 C.B. 178 requires a creditor who has obtained a charging order to report as taxable income, on the creditor's income tax return, debtor's share of LLC/Partnership income (even if the income is not distributed by the LLC/Partnership to the debtor). 4. The creditor, therefore, has a difficult choice to make - either forego the right to obtain a charging order, or face the prospect of paying income tax on phantom income. D. Asset Protection Trusts 1. Asset protection trusts are self-settled trusts (trusts in which the person establishing the trust is also a beneficiary of the trust). 2. Fourteen states and about fifteen countries around the world have recently passed statutes which protect the assets of a self-settled trust from claims of creditors. 3. Your clients don't have to reside in a jurisdiction that has passed an asset protection trust statute to take advantage of the statute's provisions. Therefore, a resident of Maryland can establish a domestic asset protection trust (a trust governed by the laws of one of the fourteen states) or an offshore asset protection trust (a trust governed by the laws of one of the countries around the world that have passed asset protection legislation). rule: counterparts. 4. While none of the asset protection statutes are the same, as a general a. The domestic trust statutes are not as protective as their offshore b. Nonetheless, there is a bias against forming an offshore asset protection trust as the word "offshore" has a negative connotation. Most people think that offshore trusts are formed for the purpose of hiding assets and evading taxes. None of this is true. Rather, offshore trusts are legal, effective and tax neutral (they neither increase nor 4

decrease the amount of tax due from you). 5. Most offshore asset protection trusts are designed, from a tax standpoint, to be domestic "grantor" trusts. As a result: clients. a. The income earned by the trust is reported on the 1040 of your b. The assets transferred by your clients to the trust are not subject to gift taxes as the gift is incomplete (See Treas. Reg Section 25.2511-2(c)). c. The assets held by the trust are includible in the estates of your clients and therefore, potentially subject to estate tax. V. Which Technique to Select A. The factors to consider in deciding upon which technique is appropriate for your clients are: 1. The likelihood of your clients being sued. As a general rule, the greater the chance of suit, the more sophisticated the technique. 2. The net worth of your clients. As a general rule, the higher the net worth, the more sophisticated the technique. 3. Your clients' professional fees budget. While fees vary from firm to firm: a. It's relatively inexpensive for your clients to title assets in the name of their spouses, or as tenants by the entireties. nominal. b. The cost of taking advantage of exemption planning is c. Most firms charge less than $5,000 to establish a limited liability company or family limited partnership with asset protection features. d. Asset protection trusts are expensive. Most law firms charge about $10,000 to $25,000 to prepare the trust documents. In addition, trustee fees amount to approximately $3,000 per year. VI. Design Alternatives A. Control vs. Protection. The concepts of control and protection are on opposite ends of the spectrum. You need to be aware that your clients will receive more protection from the plan if they give up control. 5

B. Nest Egg v. In Toto. An asset protection plan can be designed to protect the "nest eggs" of your clients (cash, bonds, and marketable securities). Or the plan can be designed to protect all of your assets (the "in toto" approach) VII. Appendices A. Comparison of Asset Protection Statutes. B. Charts 1. Control v. Protection 2. Typical Design of an Asset Protection Trust. I:\MAURICE\SPEAKING ENGAGEMENTS\AP - Dont Leave Home Without It.doc 6

Rank 3rd Annual Domestic Asset Protection Trust State Rankings Chart 2010 Forbes Letter Grade State State Income Tax (10% weight) Statute of Limitations (Future Creditor) (10% weight) 1 A+ Nevada No 2 Yrs. 2 A- South Dakota No 2 Yrs. (as of 7/1/12) Statute of Limitations (Preexisting Creditor) (10% weight) 2 Yrs. or 0.5 Yr. Discovery 2 Yrs. or 0.5 Yr. Discovery (as of 7/1/12) Spouse/ Exception Creditors (30% weight) Preexisting Torts Exception Creditors/Other Exception Creditors (30% weight) Reputation/ Fraudulent Transfer Standard/Other Adjustments (10% weight) Total Score No No Significant 100 No Significant 92 3 A Alaska No Divorcing Spouse No Significant 90 4 A- Delaware 5 B Tennessee 6 B 7 B- Rhode Island New Hampshire 8 N/A Hawaii residents) dividends/ interest on residents) No dividends/ interest on residents) residents) 2 Yrs. 9 C Wyoming No 10 C- Missouri 11 C Utah 12 N/A Virginia (as of 7/1/12) Missouri source income) Utah source income) 3 Yrs. 13 C- Oklahoma Yes 2 Yrs. Pers. Injury; 6 Yrs. Contract 3 Yrs. or Divorcing Souse; Yes None 5 Yrs. Preexisting Torts Significant 82 No High/Missing clear and convincing evidence standard 79 Preexisting Torts Medium 73 Preexisting Torts Preexisting Torts, Certain Lenders, Hawaii Tax Property listed on app. to obtain credit (makes difficult to use) State/U.S. to extent state/federal law provides Preexisting Torts/Numerous Creditor who has provided services to protect trust; U.S., city, etc. Protection limited to $1,000,000 High/ Limited clear and convincing evidence standard Low/Limited clear and convincing evidence standard High/ Missing clear and convincing evidence standard 71 65 61 Low 58 Low 55 Low 53 Low 37 14 D Colorado Yes Not clear if protection from any creditor Not clear if protection from any creditor Low 32 3rd Annual Domestic Asset Protection Trust State Rankings Chart created in April 2012. Original State Rankings Chart created in April 2010. Copyright 2010-2012 by Steve Oshins (soshins@oshins.com / www.oshins.com / (702) 341-6000, ext. 2. All rights reserved. Steve Oshins is a member of the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada. He is rated AV by the Martindale-Hubbell Law Directory and is listed in The Best Lawyers in America. He was inducted into the NAEPC Estate Planning Hall of Fame in 2011 and has been named one of the Top 100 Attorneys in Worth. He can be reached at 702-341- 6000, ext. 2 or soshins@oshins.com. His law firm s website is www.oshins.com. 7

Provisions (6 most important integrated estate planning trust law provisions appear first) (1) regarding nonrecognition of foreign judgments (2) "Beyond Reasonable Doubt" standard of proof required in establishing fraudulent intent (3) Statute of limitations on challenging an APT Integrated Estate Planning Trust Law Comparative Grid - Select Jurisdictions (As of January 1, 2010) (4) that Settlor can be a beneficiary (5) that Settlor can retain some degree of control (6) Burden of proving fraudulent intent is always on creditor (7) Statutory recognition of different classes of creditors (8) Specific Statute of Elizabeth override provisions (9) Posting of Bond Required Before Litigation Can Commence Jurisdiction Antigua/Barbuda X X X X X X X X Bahamas X X X X X Belize X X X Bermuda X X X X Cayman Islands X X X X X Cook Islands X X X X X X X X Cyprus X X X X Gibraltar * X X Jersey X X Labuan X X X X X X X Mauritius X X X X X Nevis X X X X X X X X X Saint Vincent and the Grenadines X X X X X X X X Seychelles X X X X Turks and Caicos X X X Alaska X X X X N/A Colorado X X X N/A Delaware X X X X N/A Missouri X X X X N/A Nevada X X X X X N/A New Hampshire X X X X N/A Oklahoma X X X N/A Rhode Island X X X X N/A South Dakota X X X X X N/A Tennessee X X X X N/A Utah X X X X X N/A Wyoming X X X X X N/A 8 2010 (original 1993) Engel & Reiman pc All Rights Reserved

Provisions (10) that trust remains valid if fraudulent transfers determined to have taken place (11) Retroactive protection afforded immigrant trusts (12) regarding requirements for freezing assets for an APT Integrated Estate Planning Trust Law Comparative Grid - Select Jurisdictions (As of January 1, 2010) (13) Presumption against fraudulent intent if transferor remains solvent following transfers (14) Binding effect of choice of law (15) Forced heirship override provisions (16) Community property provisions Jurisdiction Antigua/Barbuda X X X X Bahamas X X X Belize X X Bermuda X X Cayman Islands X X X Cook Islands X X X X X X X Cyprus X X Gibraltar X X X Jersey X Labuan X X X X X Mauritius X X X Nevis X X X X X X Saint Vincent and the Grenadines X ** X X X X Seychelles X X Turks and Caicos X X X Alaska X X X Colorado Delaware X Missouri Nevada New Hampshire X Oklahoma Rhode Island X X So uth Dakota Tennessee Utah X X Wyoming X F:\OUTLINES and POWERPOINTS FOR SEMINARS\BARRY OUTLINES\Comparative Grid January 2010.doc 9 * While some believe Gibraltar law provides "instant" protection if transferor is solvent following transfers, post-transfer solvency of transferor and hence validity of transfers can be challenged. ** Non-specific treatment in the law. NOTE: Local bank secrecy and other non-disclosure provisions do not appear because of the author's view that such provisions are not material considerations in asset protection planning. 2010 (original 1993) Engel & Reiman pc All Rights Reserved