It is prudent to use estate planning techniques to protect assets from claims of creditors and other predators. Fact: the average American will be sued five times during their lives and many lack sufficient insurance to cover such suits. Asset protection planning, if properly structured, will insulate unrelated assets and business activities from the hazards contained in one business or lawsuit. Many clients who need asset protection planning are those with claim-prone lines of business such as doctors and lawyers, those with concerns about how to shelter funds from future divorce, and high net worth individuals who might face frivolous lawsuits. Asset protection should be an integral part of an any estate plan from the outset. Planning for asset protection from the outset presents the strongest evidence to a Court, if needed, to rebut an inference that such planning was motivated by an intent to hinder, delay or defraud creditors.
What is Asset Protection?
Asset protection is the use of various techniques and entities to safeguard attacks from future unsecured creditors. Common asset protection techniques include setting up Family LLCs, Family Limited Partnerships or FLPs and Asset Protection Trusts or APTs.
What type of Asset Protection is not recommended?
Many persons merely transfer assets to a spouse. The problem here is that spouses might divorce, the transferor loses control over the assets to the transferee, and there are gift tax caps where the spouse is not a US citizen.
How can a trust be considered as an asset protection vehicle?
If one settles a spendthrift trust, where a beneficiary is unable to assign the interest to a creditor, such a trust can be considered as asset protection vehicle. A discretionary trust is one where distributions to the beneficiary are left wholly within the discretion of the trustee.
How about corporate ownership of assets?
In regular corporate ownership of assets, a shareholder’s personal assets are protected from the corporation’s creditors, whose claims are deemed to have arisen inside of the corporation’s business dealings. However, such protection can be removed and the corporate veil pierced due to a failure to consistently observe corporate formalities and a shareholder’s interest in the corporate form will be reachable by a judgment creditor.
Are retirement plans effective asset protection vehicles?
Qualified retirement plans, or those that are approved by ERISA are protected from the plan participant’s creditors. In addition, the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act permits a debtor to exempt certain retirement funds. Inherited IRAs, on the other hand, are non-exempt and may be treated differently.
Is life insurance protected from creditors?
Federal law usually defers to state law regarding life insurance. New York distinguishes whether creditors can reach these assets based on whether the debtor is the owner of the policy.
How can I use my house as an asset protection vehicle?
By placing one’s home in a Qualified Personal Residence Trust, or QPRT, a homeowner converts his or her outright ownership of property into a less attractive retained interest into a mere right to reside in the residence for a term of years.
FOREIGN ASSET PROTECTION
What are the benefits of settling a trust outside the jurisdiction of the United States?
Asset Protection Trusts are used to place assets outside of the reach of the United States Courts because many foreign jurisdictions do not honor United States judgments. These jurisdictions force a judgment creditor to litigate his or her claim under the foreign jurisdiction’s laws and system, which is usually more debtor friendly.
FAMILY LIMITED PARTNERSHIPS
What is a Family Limited Partnership?
A Family Limited Partnership or FLP is an asset protection vehicle. The FLP is formed under state law and popular jurisdictions to form them are in Wyoming or Nevada. All fifty states pay full faith and credit to the legality of these FLPs. If a person owns and contributes assets to an FLP, the LPs of the FLP will be the beneficial owners of FLP assets but the GPs of the FLP will retain control over these assets. Creditors may not attach the assets of an FLP which might be real property, bank assets, financial institutional assets and business interests merely because they have a judgment against a particular GP or LP.
What remedies does a judgment creditor have when dealing with a judgment creditor?
A judgment creditor who successfully sues one of the members in FLP, he would only be entitled to a lien, commonly known as a “charging order” that only reaches the limited partnership interest of the person sued, not the underlying assets of the limited partnership or the limited liability company, as the case may be. The judgment creditor would be limited to receiving distributions from the limited partnership, if and when they are made. As the general partner or manager is unlikely to distribute while a charging order is outstanding, assets remain within the FLP. In addition, a judgment creditor might be required to recognize “phantom income” and pay income tax on a current basis, although he or she may not have received a distribution.
Which assets should be placed into an FLP?
The GPs of an FLP should analyze the risk of each asset being attacked individually, based on the chances that it would generate a liability. Treating each asset individually minimizes litigation exposure because assets contained in other FLPs would not be jeopardized.
What assets should not be placed into an FLP?
FLPs are designed for passive assets only because assets such as cars, airplanes, boats and rental properties can cause personal and property damage, thereby creating the risk of litigation.
What are some other benefits of choosing an FLP structure?
Other benefits are that FLPs are not subject to probate and the value of a limited interest in a FLP means that more FLP interests can be gifted tax free to the next generation.
What are the limitations on FLPs?
One may not establish an FLP or any other asset protection vehicle with the intention of defrauding creditors because it will be construed to be a fraudulent conveyance. The lookback for fraudulent conveyances is three years from commencement of a lawsuit. One should be able to prove at least one other valid purpose apart from asset protection, such as estate planning and income tax minimization.
What is the duration of an FLP?
The FLP is usually wound down once there are no General Partners in existence. However, FLPs may be structured so that there is a seamless transition of GPs from parents, who are usually the GPs to children.
What are the costs of maintaining an FLP?
These costs are minimal and mostly pertain to the initial opening of the FLP. States such as Wyoming and Nevada are the most favorable jurisdictions for FLPs.
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