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Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 1
Introduction to
Asset Protection Planning
Thomas P. Langdon, Esq.
Objective of Asset Protection
PlanningRemove individual and family wealth from the attacks of :
&
Creditors Predators (IRS)
Asset Protection Involves
Estate, Trust, and Gift Tax Law
Business Law
Family Law
Pension Law
Debtor/Creditor Law
Social Insurance Considerations
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 2
The Client comes to you and says,“This is my Castle.”
We are the “Moat Builders.”
Spendthrifts Litigation
Divorce
The Castle Under Attack
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 3
Successful Asset Protection Planning
How to Dig the Moat
Insurance
Trusts
Annuities
Family Limited Partnerships
Limited Liability Companies
Premarital Agreements
Medicare Planning
Step 1: Adequate Insurance
Property Coverage
Homeowners Insurance
Auto/Boat
Health Coverages
Medical/Dental
Long-Term Care
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 4
Step 1: Adequate Insurance
Income CoverageDisability
Business Continuation
Liability CoverageAppropriate Limits on Property Policies
Umbrella Policy
Professional Liability
Moatbuilding Trusts
Spendthrift
Discretionary
Support Trust
Personal Trust
Children‟s Trusts
Dynasty Trusts
Foreign Trusts
Preparing for the Defensive
Battle
Avoid Fraudulent Conveyances
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 5
Fraudulent Conveyance
“A Conveyance or transfer of property, the object of which is to defraud a creditor, or hinder or delay him, or put such property beyond his reach.”
- Black’s Law Dictionary
Sources of Fraudulent
Conveyance LawThe Statute of Elizabeth (1571)
Still in force in most states
Uniform Fraudulent Conveyances Act of 1918 (UFCA)
Uniform Fraudulent Transfer Act of 1984 (UFTA)
Federal Bankruptcy Law
Fraudulent Conveyances Result
from:inaction
a waiver of defenses
termination of a lease
extension of a loan
use of a disclaimer
incurring an obligation
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 6
Fraudulent Conveyances Result
from:Actual intent to defraud
facts and circumstances test
can be imputed from one party to another
debtor must be competent to formulate
intent
“Badges of Fraud” show intent
inside deal
debtor retained possession and control
undisclosed/concealed/secret
transfer in anticipation of suit
debtor absconded
removal/concealment of assets
FRAUD
“Badges of Fraud” may show
intentinsolvent, or became so, due to the transaction
transaction shortly before substantial debt was incurred
assets transferred through a straw man
FRAUD
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 7
Summary: Fraudulent
Conveyances result fromACTUAL intent to hinder, delay or defraud
When grantor becomes insolvent because of the transfer
transfers for less than fair consideration
secret transactions
Removing the Taint of Fraud
satisfy pre-transfer claims
prove the claim is invalid
invoke the doctrine of laches
wait for the expiration of the Statute of Limitations
Creditor abandons the claim
If a transaction is a Fraudulent
Conveyance, Creditors canrestrain the disposition of property
appoint a receiver to take charge
set aside the conveyance or obligation
Apply to a court, which may impose any order required by the circumstances
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 8
Planning Issues
Violation subjects parties, including the planner, to civil and criminal liability.
solvency: use only assets available to creditors
asset protection planning can render a client insolvent
structure the transaction to avoid badges of fraud
Planning Issues
Fraudulent Transfers are determined at the time the transfer is perfected.
Implement the plan ASAP!!!
Exempt Property
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 9
Types of Exempt Property
Qualified Retirement Plans
Personal Residences (Homestead Rights)
Corporations
Limited Liability Companies
Asset Protection &
Employee Benefits
The “Spendthrift Clause” is
the key to protection from creditors.
Protected Plans
Pension
Profit Sharing
Keogh
403(b)
Contractual Annuity
Government & Church Plans
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 10
Other Protected Plans
Sec. 419A(f)(6) Severance Plans
Sec. 501(c)(9) VEBA Plans
Risk of Forfeiture
Trusted Benefits
Rabbi Trusts
Protected Insurance Plans
Group Life
Supplemental Voluntary Life
Dependent Life
Some Split Dollar Plans
Plans Not Protected
Top Heavy Plans
Out of Compliance
Sole Participant
IRA and SEP-IRA
Unless State Law provides protection
Welfare Benefit Plans
Top-Hat Plans
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 11
Fiduciary Liability Exposure
ERISA Concerns:
Rules of Plan Operation
Procedural Prudence
Trusteeship:
Non-Qualified Plans
Asset Protection & Life
Insurance
Objective of Asset Protection
PlanningRemove individual and family wealth from the attacks of :
&
Creditors Predators (IRS)
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 12
Why is Life Insurance important?
To avoid a potential shortfall in funds necessary to
provide liquidity to the estate
purchase a business interest under a mandatory buy-sell agreement
Create/Replace Wealth
Life Insurance &
Types of CreditorsFederal Government
State Government
General Creditors
Judgment Creditors
Creditors in Bankruptcy
Types of Life Insurance
Group Life
Individual LifeTerm
Whole Life
Universal
Variable
Variable Universal
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 13
Life Insurance & Asset Protection
Insured’s CreditorsDepends on state law
Most states protect Life Insurance Policies
Beneficiary’s CreditorsOnce paid, creditors have access
Consider annuity settlement option if beneficiary has creditor issues
Creditors & Life Insurance in
PennsylvaniaCash Value
Death Proceeds
Income Payments
Dividends
Estate Taxation of Life Insurance
Proceeds are payable to the executor of the decedent‟s estate. IRC Sec. 2042(1).
Decedent held, at the time of his death, incidents of ownership in a policy on his life. IRC Sec. 2042(2).
Within 3 years of death, decedent transferred incidents of ownership in a policy by gift. IRC Sec. 2035.
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 14
“Incidents of Ownership”
change the beneficiary
surrender/cancel the policy
assign the policy
revoke an assignment
pledge the policy for a loan
obtain loan against CSV of the policy
non de-minimis reversionary interest
“Incidents of Ownership”, Cont.
right to change beneficial ownership of the policy
Attributed incidents of ownership if the decedent was a sole or controlling stockholder.
ILITs & Asset Protection
Existing policy transferred to ILIT is a gift, subject to IRC Sec. 2035
If trust purchases a new policy, and insured never held an incident of ownership, Section 2035 does not apply.
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 15
IRC Sec. 2035
The gross estate includes the value of the gratuitous transfers within 3 years of death if the interest would have been includible under:
Sec. 2036 (Transfers with retained life int.)
Sec. 2037 (Transfers effective on death)
Sec. 2038 (Revocable Transfers)
Sec. 2042 (Proceeds of Life Insurance)
Application of Sec. 2035
Applies to Gratuitous transfers.
A bona fide sale for full and adequate consideration in money or money‟s worth will not invoke Sec. 2035.
• Beware the Transfer for Value trap for sales of Life Insurance
ILITs, Sec. 2035, & Asset
ProtectionProper use of an ILIT will avoid estate tax inclusion on insured‟s death, since insured does not own the policy
During the applicable Statute of Limitations, the annual transfers from the insured to the trustee can be considered fraudulent conveyances.
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 16
Consequence & Solution
Both the policy loan value and the cash surrender value are available to refund payments deemed to be fraudulent conveyances
A foreign ILIT can provide additional protection by taking advantage of a shorter Statute of Limitations.
Bankruptcy
Cash Value
Income Payments
Dividends
Death Proceeds
Buy-Sell Agreements
Cross Purchase Agreement
policies are owned by associates of the insured
Asset Protection Issues
if a party files for bankruptcy, insurance policies funding buy-sell agreements are included in the bankruptcy estate.
Alternative:
use a trust to hold the policies
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 17
Asset Protection Using
Annuities
Annuities & Asset Protection
State Law Specific
Generally, if the contract is annuitized, a creditor can only get to the payments
Principal is protected
Asset Protection & Choice of
Business Entity
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 18
Family Limited Partnerships
Mom & Pop
Family Limited Partnership
Mom & Pop Children
General PartnershipInterest
Limited PartnershipInterests
Family Limited PartnershipsBusiness Interest
Advantages of FLPs
Control
Simplified Annual Giving
Transform Real Property into Personal Property
Transfer Restrictions -- Valuation Discounts
Creditor Protection
Facilitate Family Communications
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 19
Limited Liability Companies
Corporate Characteristics
Continuity of Life
Centralized Management
Limited Liability
Free transferability of Interest
Advantages of LLCs
Limited Liability for all members
Any member may materially participate in management
Valuation Discounts Available
Transform Real Property into Personal Property
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 20
Advantages of LLCs, cont.
No gain recognized upon contribution of appreciated property
Facilitates Family Gifting Programs
Foreign Organized Business Entities can be Classified as LLCs for US Fed. Tax Purposes
Disadvantages of LLCs
Tough Passive Activity rules
Subject to Franchise Tax
Limited Liability not absolute
Some Fringe Benefits excluded from income of “Partners”
Taxable distribution upon conversion from Corporation to LLC
Dynasty Trusts
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 21
Dynasty Trusts
Long-Term, preferably perpetual trusts
Objective
avoid transfer taxation by restricting ownership of trust assets
ownership does not vest in any individual beneficiary
Taxation of Dynasty Trusts
Income Tax - treated as a complex trust under Subchapter J
To be effective, must have a zero inclusion ratio for GST purposes.
The Generation Skipping
Transfer TaxApplies to
Direct Skips
Taxable Distributions from Trusts
Taxable Terminations of Trusts
Tax is a flat 55% of the Transfer
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 22
Minimizing the impact of the
GSTTThe Lifetime Exemption
$1 Million, indexed in $10,000 increments
In 2001, the exemption is $1,060,000
Direct gifts subject to the Gift Tax Annual Exclusion
Currently $10,000 per donee per year
Educational and Medical Expenses paid to the service provider
The Rule Against Perpetuities
(RAP)“No interest [in real or
personal property] is good unless it must vest, if at all, not
later than 21 years after some life in being at the creation of the interest.”
Lord Chancellor Nottingham
Why the „RAP‟?
“Arrangements for the distant future are likely to result in an inefficient use of resources brought about by unforseen
contingencies.”
• R. Ponsor, Economic Analysis of the Law, p. 486, (3rd Edition, 1986)
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 23
Some States have outlawed
„RAP‟South Dakota
but has anti-alienation statute
Delaware only applies to personal (not real) property
Alaska
Wisconsin
Idaho, Illinois, Maryland, Rhode Island, New Jersey, & Others
Dynasty Trust Provisions
Usually grant discretion to the trustee
Name the Trustee
Change of Situs Provisions
Trustee may purchase assets for beneficiary use
Allow Trustee to refuse contributions
Dynasty Trust Provisions
Spendthrift Clause
Definition of terms
“Issue”
“Spouse”
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 24
Offshore Trusts
Offshore Trusts Offer
Favorable Standards of Proof & Judgments
Favorable Statute of Limitations
Avoidance of Forced Heirship Rules
Avoidance of the „RAP‟ (Rule Against Perpetuities)
“Flight” Provisions
Potential Consequences of
Offshore TrustsUS Judgments may be enforceable
US Courts may not recognize the foreign trust
Presence of an Offshore Trust may result in denial of discharge in bankruptcy
DO NOT save Income Taxes.
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 25
Premarital Agreements
Premarital Agreements Defined
“A legal contract entered into by prospective spouses prior to marriage but in contemplation and in consideration thereof; by it, the property or other financial rights of one or both of the prospective spouses are determined or are secured to one or both of them or their children.”
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 26
The Uniform Premarital
Agreement ActAdopted in 1983
Currently in force in several states
limited in scope
Permissible Content
ANYTHING, not in violation of public policy
Generally, courts will only enforce financial provisions.
A Premarital Agreement is
Enforceable if:threshold tests of offer, acceptance, and consideration are met
it is a WRITTEN agreement
it does not violate public policyencourage divorce
forces one spouse to become a public charge
adversely affects a child‟s rights
Copyright © 2003, 2011. Thomas P. Langdon. All Rights Reserved. 610-357-5233 27
Successful Asset Protection Planning
Break Time.....