What Every Financial Rep Should Know About Asset ...€¦ · What Every Financial Rep Should Know About Asset ... Exemption is Now Sky-High ... • Advantages • Disadvantages

Magner Presentation on Asset Protection 6/27/2012 10:20 PM

LANNY D LEVIN, CLU, CHfc Chicago Guardian Fin'l Agency 1

What Every Financial RepShould Know About Asset

Protection, and Why

For Producer Use Only. NOT FOR USE BY THE GENERAL PUBLIC.The Guardian Life Insurance Company of America, New York, N.Y.



The information in this presentation is designedto be general in nature and for educational

purposes only. The complete text, with nothingtaken out of context, is the only manner in whichit should be used. The Guardian Life Insurance

Company of America, its agents and employees,do not provide tax or legal advice.

GEAR 2012-6573 Expiration Date: 12/31/2013




When You Call/Email Me…

– Ownership & funding– What are the income and transfer tax consequences?– What potential claims-of-creditors issues are involved?– Tax and debtor/creditor







What Business Are You In?

– Bread-and-butter– Estate liquidity market




Exemption is Now Sky-High

$5,000,000




Top Bracket is Only 35%!

35%

Assumes EGTRRA 2001 sunsets in 2011




De facto Repeal of the Estate Tax

– $5 mil/35% plus exemption portability– Federal estate tax applies to 1.4 decedents out of 1,000

according to the Congressional Research Service– Federal estate tax has already been “de facto” repealed

for more than 99% of Americans– Selling estate liquidity life insurance is more challenging

than ever before




Going to “$5 mil/35%” Shrinks the Pool ofProspects

Source: SpectrumGroup Affluent Market Insights 2010




Going to “$5 mil/35%” Shrinks the Pool ofProspects

Source: SpectrumGroup Affluent Market Insights 2010




What Business Do You Want To Be In?

– Wealth Transfer?– Wealth Creation/Asset Allocation– Wealth Preservation– EU-Style “austerity” in 2013







Revised Elevator Speech…

• I work with business owners, executives andprofessionals who ask my firm to provide themwith estate planning strategies to avoid commonand costly financial mistakes.

• I work with business owners, executives andprofessionals who ask my firm to provide themwith wealth-preservation strategies to avoidcommon and costly financial mistakes.




Questions That Keep Us Up at Night…

– Will I be sued?– Will I ever get divorced?– Will I get divorced again?– Will my investments go south?– Will I be in a serious accident, or employ someone who

causes one?– Why do I work in such a high risk profession?– Why are my kids so psycho?




Where Do Claims Come From?

– Ripeness: nothing vs. potential lawsuit vs. prejudgmentattachment vs. judgment creditor vs bankruptcy

– What assets are we talking about?

– Exempt assets!




Exempt Assets & Your Role on the Team

LifeInsurance

FixedAnnuities

529 Plans

QualifiedRetirement

Plans

IRA’s

Fin’l Rep &Client’s

Advisor Team

GiftingPrograms

LifeInsurance

Trusts

MedicaidPlanning

Homestead

CaptiveInsurance

Companies

AssetProtection

Trusts

Choice ofBusiness

Entity




Revised Elevator Speech…

• I work with business owners, executives andprofessionals who ask my firm to provide themwith wealth preservation strategies to avoidcommon and costly financial mistakes.

• A well thought out wealth preservation strategyshould be part of every client’s integrated financialplan




How Can Our Clients Protect Wealth?

• Let’s discuss strategies executives, professionalsand business owners can use to protect propertyfrom claims of general creditors

• John & Mary Smith




LifeInsurance& Fixed

Annuities

LifeInsurance

Trusts

QualifiedRetirement

Plans

Choice ofBusiness

Entity

CaptiveInsuranceCompany

529 Plans

CommunityProperty

GiftingPrograms




• Advantages

• Disadvantages

Make Gifts to Family Members




• Transfers with intent to defraud are void and can be undone

• Actual fraud vs “badges” of fraud– Secrecy– Transfers to related parties– Secret reservation of interests– Continued enjoyment of property– Insolvency

Ooops: Uniform Fraudulent Transfer Act




• Insolvency is an important factor

• Definition of “insolvency”– Balance sheet vs. inability to pay

• Statute of limitations varies from state to state

• Real world fraudulent transfer issues:– Is it OK for my client to pay this $X premium?– Can I sell my client a new policy?– Can I implement a QRP?– Can the business do a deferred comp or buy-sell plan?– Can I gift $5mil to a dynasty trust ?

Uniform Fraudulent Transfer Act







• Total Assets $25,000,000

• Current Debts $1,000,000

• Potential Claims $19,000,000

• Protected Assets $1,000,000

Unprotected Net Worth $4,000,000

Solvency Analysis




• The $5M gift tax exemption opens up hugeopportunities– Use a transfer tax strategy as an asset

protection tool

• Insulation from creditor claims– Donor– Beneficiary

• Make sure to include a spendthrift provision!

“Let’s Put Stuff in Trust for the Kids"




Each and every Beneficiary under this trust is herebyrestrained from and shall be without right, power orauthority to sell, transfer, assign, pledge, mortgage,hypothecate, alienate, anticipate, bequeath or devise orin any manner affect or impair his, or her, or theirbeneficial right, title, interest, claim and estate in and toeither the income or principal of any trust createdhereunder, or to any part thereof, during the entire termof said trust; nor shall the right, title, interest, or estateof any Beneficiary be subject to any right, claim,demand, lien or judgment of any creditor of any suchBeneficiary, nor be subject nor liable to any process

….continued

“Spendthrift Clause"




of law or equity, but all of the income and principal,except as otherwise provided in this TrustAgreement, shall by the Trustee be payable anddeliverable to or for the benefit of only the beforenamed designated Beneficiaries, at the timehereinbefore set out, and receipt by suchBeneficiaries shall relieve the Trustee fromresponsibility for such good faith distributions. Thisparagraph shall not limit express powers ofappointment created hereunder.





Each and every Beneficiary under this trust is hereby restrained from and shall be without right, power or authority to sell,transfer, assign, pledge, mortgage, hypothecate, alienate, anticipate, bequeath or devise or in any manner affect orimpair his, or her, or their beneficial right, title, interest, claim and estate in and to either the income or principal of any

trust created hereunder, or to any part thereof, during the entire term of said trust;

nor shall the right, title, interest, or estate of anyBeneficiary be subject to any right, claim, demand, lienor judgment of any creditor of any such Beneficiary,nor be subject nor liable to any process of law orequity, but all of the income and principal, except asotherwise provided in this Trust Agreement, shall bythe Trustee be payable and deliverable to or for thebenefit of only the before named designatedBeneficiaries,

at the time hereinbefore set out, and receipt by such Beneficiaries shall relieve the Trustee from responsibility for such

good faith distributions. This paragraph shall not limit express powers of appointment created hereunder.





Discretionary Trusts vs. Support Trusts

• “Sole and absolutediscretion”

• Typically protectedfrom all creditors

• Distribution trusteemust be independent

• “Shall/may”” forbeneficiary’s “health,education, maintenanceand support” (HEMS)

• Available to certain“exception creditors” suchas divorcing spouses

Is Your Trust a Discretionary Trust or aSupport Trust?




Trust for Spouse and Descendants

• Grantor retains the power to fire and hire trustees

• Use a “floating spouse” provision

• If grantor loses his assets, his spouse can takecare of him




Which Would You Rather Have?

• Option 1: $10M net worth– If you’re sued and the judgment is for more than $10M,

you’re broke

• Option 2: $10M net worth– Gift $2M to discretionary trust for spouse and descendants,

so net worth is now $8M– If you’re sued and the judgment is for more than $8M, you’re

broke, but you can indirectly live off of the $2M discretionarytrust







Life Insurance

• Death benefits:

– General rule: payable to a named beneficiary other thanthe estate generally protected from claims of creditors ofthe decedent

– Avoid having death proceeds payable to “estate”– Proceeds payable to a business subject to business

creditors




Illinois’s Exemption Statute

• 215 ILCS 5/238) (from Ch. 73, par. 850)Sec. 238. Exemption.(a) All proceeds payable because of the death of the

insured and the aggregate net cash value of any or all lifeand endowment policies and annuity contracts payable toa wife or husband of the insured, or to a child, parent orother person dependent upon the insured, whether thepower to change the beneficiary is reserved to the insuredor not, and whether the insured or his estate is acontingent beneficiary or not, shall be exempt fromexecution, attachment, garnishment or other process, forthe debts or liabilities of the insured incurred subsequentto the effective date of this Code, except as to premiumspaid in fraud of creditors within the period limited by law forthe recovery thereof.




Massachusetts’ Exemption Statute

• Section 125. If a policy of life or endowment insurance is effected by anyperson on his own life or on another life, in favor of a person other than himselfhaving an insurable interest therein, the lawful beneficiary thereof, other thanhimself or his legal representatives, shall be entitled to its proceeds against thecreditors and representatives of the person effecting the same, whether or notthe right to change the named beneficiary is reserved by or permitted to suchperson; provided, that, subject to the statute of limitations, the amount of anypremiums for said insurance paid in fraud of creditors, with interest thereon,shall enure to their benefit from the proceeds of the policy; but the companyissuing the policy shall be discharged of all liability thereon by payment of itsproceeds in accordance with its terms, unless before such payment thecompany shall have written notice, by or on behalf of a creditor, of a claim torecover for certain premiums paid in fraud of creditors, with specification of theamount claimed. No court, and no trustee or assignee for the benefit ofcreditors, shall elect for the person effecting such insurance to exercise suchright to change the named beneficiary.




Life Insurance

• Cash value:– Laws vary from state to state

– Total protection to partial protection to no protection– What happens to cash value that is withdrawn by loan or

surrender?

• Impacts how we establish buy-sell agreements andfringe benefit plans




•All things being equal, do you want yourclient’s life insurance owned inside oroutside of their business?

•Buy-sell agreements

•Non-qualified fringe benefit plans– Executive Bonus– Split Dollar– Deferred Compensation

The $64,000 Question…




Use the Right Type of Business Entity

• Individual creditors may be able to attach a client’smembership interest in a regular corporation, C or S

• Individual creditors may not be able to attach aclient’s membership interest in an LLC

•A “charging order” may be the sole remedy insome states

•A “foreclosure sale” may be the remedy in a fewstates




C/S Corporation

John Smith

Smith C/S CorpCreditor

Levy on Stock


Control



Charging Orders & LLCs

John Smith

Smith LLCCreditorK-1

Charging Order

Taxable Income withno actual distributions!




Types of Buy Sell Agreements

• Entity Purchase / Stock Redemption

• Cross Purchase

• Trusteed Cross Purchase




Owner B$50k Basis

Guardian

Owner B,Family or

Estate

3. Policy Proceeds

C Corp($1 million)

2. Buy Insurance on A & B

Owner A$50k Basis

1. Buy-Sell Agreement

Stock Redemption




Balance Sheet

Assets Liabilities

Cash Note Payable

Full Policy CSV Mortgage

Long Term Liability




Guardian

Owner B,Family or

Estate

1. Buy-SellAgreement

3. InsuranceProceeds on B’s

Death

Cross Purchase

Owner A($500k policy on B)

Owner B($500k policy on A)

Owner A

2. Buy Insurance onEach Other

4. Pay Buy-Out Price

5. Transfer OwnershipInterest




Balance Sheet

Assets Liabilities

Cash Note Payable

Mortgage

Long Term Liability




Guardian

Owner B,Family or

Estate



Death

Cross Purchase



Owner A







What Type of ExemptionStatute Do You Have?

• Narrow exemption that only applies where familymembers are beneficiaries?

• Broad exemption that applies so long as the policyowner has insurable interest?




Guardian

Owner B,Family or

Estate



Death

Cross Purchase



Owner A







Guardian

Owner B,Family or

Estate



Death

Trusteed Cross Purchase

Trustee

All Owners

2. Buy Insurance on AllOwners


5. Transfer Ownership Interest

6. How Do you Cure 1st DeathTransfer For Value Issue?


Spendthrift Provision



Guardian

Owner B,Family or

Estate



Death

The LLC Buy-Sell Plan

LLC

All Owners











Guardian

Owner B,Family or

Estate



Death

The LLC Buy-Sell Plan

LLC

All Owners








Asset Protection &Fringe Benefit Plans

• Executive bonus

• Deferred compensation

• Split dollar




Executive Bonus

Insured

GuardianBusiness

Income

GuardianLife

Insurance

Deduction

Premiums




Deferred Compensation

Insured

GuardianBusiness

Income

Agreement

Premiums




Deferred Compensation

Insured

GuardianKodak

Income

Agreement

Premiums




Balance Sheet

Assets Liabilities

Cash Note Payable


Long Term Liability




Split Dollar: Insured/Trust Owned/aka“Collateral Assignment” Split Dollar

Insured/Trust

Tax Cost

Business

CollateralAssignment SplitDollar Agreement

Premiums

DeathBenefit

Family

Guardian




Balance Sheet

Assets Liabilities

Cash Note Payable

Note receivable Mortgage

Long Term Liability




Split Dollar: Business Owned/aka“Endorsement” Split Dollar

Insured

Tax Cost

Business

Endorsement Agreement

Premiums

DeathBenefit

Family

Guardian




Balance Sheet

Assets Liabilities

Cash Note Payable


Long Term Liability




Annuities

• No real distinction between deferred annuity orimmediate annuity

• Laws vary greatly from state to state– Total protection– Specific amount– Reasonable needs of the annuitant– No protection




Homestead & Personal Residence

• Most states provide homestead protection thatexempts the residence from creditor claims

• NJ, PA , DC vs. TX & FL

• MA $125,000 automatic, $500,000 if you file

• Fraudulent transfer in bankruptcy: homesteadlimited to $146,450




Community Property (CP) States &Marital Property Partitions

• General rules:– A spouse’s separate property isn’t liable for debts of

other spouse– A spouse’s creditor can reach the separate property

of the debtor-spouse, both halves of sole-management CP of the debtor-spouse and alljointly managed CP

– Debts incurred by either spouse are presumed tobe community debts

– States allow couples to “partition” communityassets to create separate property




Books & Records Are Critical!

• Mixing/comingling could result in loss of asset protection

• Can you say The Living Balance Sheet® (LBS)?

• Marital property agreements:– Pre-Nuptial– Post-Nuptial

• Marital gifts

• Tenancy by the Entirety

• Community/marital property

The Living Balance Sheet® and the Living Balance Sheet® Logo are registered service marks of The Guardian Life Insurance Company ofAmerica (Guardian), New York, NY. The graphics and text used herein are the exclusive property of Guardian and protected under U.S. andInternational copyright laws. © Copyright 2005-2012, The Guardian Life Insurance Company of America




Create Wealth in a Qualified Plan

• General rule: Under ERISA, participant accounts are notsubject to business or personal creditors– Exception for spouse/kids under a QDRO and certain IRS liens

• Maximize contributions to create as much wealth aspossible in:– Defined benefit plan– Profit sharing

• Make sure your prototype has a favorable IRSdetermination letter: presumption of exemption!

• What happens when a distribution occurs?




IRAs

• Most states have enacted laws providing protectionagainst creditor claims

• Federal Bankruptcy protection limited to $1,000,000

• Limitation does not apply to rollovers from qualifiedplans

• Inherited IRAs: yes + no depending upon the state

• Mitt Romney’s IRA: $20.7 mil-$100.6 mil







Captive Insurance Company

2nd/3rd GenerationFamily Members/Trust

OpCo CaptiveInsuranceCompany$1.2 million




Captives & Asset Protection

• Statutory protection in all states for insurancecompany assets

• Sole claimants are policyholders

• Assets of the captive won’t be subject to theclaims of the creditors of the operating companyor their owners.

• Neither Guardian, nor its subsidiaries, agents, or employees provide tax or legal advice, nor, aside fromproviding general informational material, offer guidance on the establishment or use of captive insurancecompanies. Clients should consult with their own tax and legal advisers with respect to establishing andstructuring captive insurance companies. Guardian and its subsidiaries, agents, and employees areprohibited from receiving any compensation in connection with the establishment or structuring of captiveinsurance companies, including referral fees for referring clients to tax, legal or other advisers, orcompensation for providing general information.For Producer Use Only. NOT FOR USE BY THE GENERAL PUBLIC.

The Guardian Life Insurance Company of America, New York, N.Y.



529 Plans

• Full exemption is provided only for funds contributed to529 plans more than two years prior to the bankruptcyfiling.

• Protection is limited to $5,000 for funds held for only one totwo years.

• College savings accounts less than one year old are notshielded at all under the new provisions.




Domestic Asset ProtectionTrust (DAPT)

• Also called a “self settled trust”

• Some states (e.g. AK, DE, RI, NV, NH) have lawsthat permit individuals to create and fund truststhat may be exempt from creditor claims

• Trust is spendthrift with regard to settlor

• All creditors have 4 years from date of funding toset aside transfer as being fraudulent

• Law is unclear with respect to enforcement ofjudgments from other states




Will We See More of This?




• Remember your role on the team

• Understand how assets can be protected

• Understand how estate planning and assetprotection planning go hand-in-hand

• Review balance sheets differently

• All things being equal, do you want you client’sinsurance inside or outside of their business?

•

Recommendations




LifeInsurance& Fixed

Annuities

LifeInsurance

Trusts

QualifiedRetirement

Plans

Choice ofBusiness

Entity

CaptiveInsuranceCompany

529 Plans

GiftingPrograms

Homestead

LLC’s

Buy-SellFringe

Benefits

DAPT’s




FU Melvin!

Hong KongTrusts

Bermuda

Shanghai


这里有人会说英语吗

MelvinFLSA

South Korea

$1 million



Questions?




Let’s Take a Short Break…


Documents

What Every Financial Rep Should Know About Asset ...€¦ · What Every Financial Rep Should Know About Asset ... Exemption is Now Sky-High ... • Advantages • Disadvantages