Estate Planning and Asset Protection Planning Doesn’t Always Create A Fork In the Road…If Done Right!
By: Randall A. Denha, J.D., LL.M.
Those of us engaged in structuring an asset protection or estate plan need to constantly advise clients that should any problem arise, their planning will come under intense scrutiny. Not only will the timing of any transfers be examined, but also courts will consider whether: (i) assets claimed to be titled in a protected format are in fact so titled; and (ii) assets claimed to be protected through trusts, partnerships or LLC’s, have been properly transferred to the trust, partnership or LLC and administered in an arm’s length format rather than as the alter ego of the debtor.
Debtors subject to a judgment should anticipate a series of information requests from creditor lawyers whose clients have accountants that are likely to be authorized by the court to pay a visit to the debtor subject to the judgment in order to examine the debtor’s relevant bank, accounting and financial records. Most likely, a timeline of all transfers by the debtor will be created by both the debtor and the creditor to bolster their respective positions as to the effectiveness of any asset protection planning and the debtor’s financial condition at the time the transfers were made. An effective creditor’s attorney will leave no stone unturned.
Clients who combine asset protection planning with estate planning want, at the very least reasonable assurance that the techniques used are time tested and are likely to be effective. With the vast number of potential asset protection alternatives available, planning for those who have no existing or pending claims should have strong statutory or case law protection. Many asset protection techniques provide significant benefits in addition to asset protection and should be considered as part of a diversified approach to estate planning and asset protection. Some alternatives (with brief explanations) follow and all of which receive some form of protection under various state laws:
• Tenancy by the Entireties – protection of real property and some personal property
• Cash Surrender value of Life Insurance – accumulated value inside of policy is protected if properly planned for
• Annuities – same protection as insurance but subject to state law
• Qualified Retirement Plans – tax deferred growth and protection under state law
• Discretionary Trusts – a trust established for another person or persons which allow a Trustee, in its sole discretion, to determine if a distribution will be made. These trusts also contain spendthrift clauses which prohibit creditors from compelling a distribution.
• Family Limited Liability Company – charging order protection which makes it difficult for a creditor to get to the underlying asset that also has huge estate and tax planning benefits
• Inter-Vivos QTIP Trusts – donor spouse transfers wealth to donee spouse and retains a right to the asset if done spouse dies first. Asset protected and statutorily authorized in some states. Great technique!
• Self-Settled Domestic Asset Protection Trust or Foreign Asset Protection Trust – various states have a statute that allows for these special trusts to be created and protect the assets transferred that the donor may still enjoy or the donor’s family to enjoy. Either way, more protection is afforded to the donor and Nevada is my favorite jurisdiction for this technique.
• Foreign Asset Protection Trust – if a donor is really concerned then they can transfer assets overseas. Be careful: plenty of IRS forms to complete and there is always a risk of social, political and economic turmoil.
There are many techniques that can be undertaken to protect your hard work from the claims of creditors and predators. Whatever your action, you need to make certain it doesn’t result in a fraudulent transfer. However, aside from the many rules of fraudulent transfer law, one thing remains clear: like Noah, begin building your ark now when the skies are clear!
Economic times have created hardships for many previously successful real estate developers, business owners and investors. Asset Protection and Estate Planning certainly go hand in hand. If done properly, the techniques described in this article will result in a seamless and smooth road ahead.
THIS ARTICLE MAY NOT BE USED FOR PENALTY PROTECTION. THE MATERIAL IS BASED UPON GENERAL TAX RULES AND FOR INFORMATION PURPOSES ONLY. IT IS NOT INTENDED AS LEGAL OR TAX ADVICE AND TAXPAYERS SHOULD CONSULT THEIR OWN LEGAL AND TAX ADVISORS AS TO THEIR SPECIFIC SITUATION.
