asset protection advance planning is key · asset protection planning – strategies for the...

Asset ProtectionAdvance Planning is Key

Barbara Freedman Wand, Esq.Estate Planning Group

Bingham McCutchen LLPBoston

Partners Office forWomen’s Careers at MGH

Presents

Asset Protection Planning is the Process of…

Structuring your assets

In advance of creditor problems

Before insolvency

For purpose of reducing your vulnerability to judgments

Estate Planning is the First Step inAsset Protection Planning

Estate planning helps you to:

Understand the nature and extent of your wealth

Structure the ownership of your wealth to accomplish your goals

Minimize exposure to one omnipresent creditor—the IRS

Establish a baseline to measure changes in your financial status

Facilitate financial planning, including asset protection planning

Asset Protection Planning Cannot TakePlace in a Vacuum

Part of your larger financial plan

Can have an impact on income taxes, estate taxes and gift taxes

Can have an impact on spousal rights on divorce, retirement

Asset Protection Planning - Timing

Must occur in advance of specific creditor problems to be effective

“Fraudulent Transfers” prohibited – Actual or Constructive Fraud Transfers with intent to hinder, delay, or defraud creditors

Transfers for less than “reasonably equivalent value”

• while insolvent or

• having the effect of making you insolvent or

• leaving your business with unreasonably small capital

Transfers to pay debts owed to “insiders” while you are insolvent

Asset Protection Planning Strategies

Identify risks to be planned against…

Malpractice

Business reverses

Environmental hazards

Personal injury

Divorce

Taxes

Different strategies are appropriate for different risks

Asset Protection Planning Strategies

Not all debts are equal:

Taxes

Alimony

Child support

Necessaries

Asset Protection Strategies –Business Reverses

Corporate structure / limited liability

Professional Corporation

Doesn’t protect you from own acts

May provide protection from acts of others

May provide protection from debts of business

Important to follow corporate/LLC formalities!

Asset Protection Strategies –Environmental Hazards

Limited liability entities to hold title

Separate entities for each asset

Asset Protection Strategies –Malpractice / Personal Injury

Malpractice insurance

Umbrella coverage

Asset Protection Strategies - Divorce

Prenuptial Agreements

Segregation of assets during marriage

Asset Protection Planning –Titling of Assets

Consider titling of assets in name of spouse less likely to be sued

If either spouse is not a U.S. citizen, there may be gift tax issues to transfers

Transfers between spouses may interfere with other income or estate planning goals

Transfers may have implications on divorce

Fraudulent transfers may be avoided

Asset Protection Planning –Strategies for the Personal Residence

Tenancy by the Entirety – special form of joint tenancy of residential real estate for husbands and wives


Protection of Tenancy by the Entirety:

Creditor can attach debtor’s interest, but can generally not force sale while non-debtor spouse resides there


Tenancy by the Entirety

▪ Pre-1980 – not as beneficial

▪ Post-1980 – more beneficial

Can convert pre-1980 tenancy by deed to post 1980 tenancy


Limitations on Tenancy by the Entirety

▪ Does not protect against joint debts

▪ Cloud on title if debtor attempts to sell property

▪ Under certain circumstances, may not protect against sale upon bankruptcy of co-owner


Homestead Exemption – For Primary Residence

▪ $300,000 of equity is protected; $300,000 for those aged 62 and older and disabled

Probably no “stacking” of homestead exemptions

▪ Can be filed after purchase

▪ Doesn’t protect against purchase money mortgage or voluntary liens

▪ Outside of bankruptcy proceeding – protects only against debts which arise after declaration of homestead

Essential to claim prior to filing a bankruptcy proceeding

Asset Protection Planning –Retirement Benefits

▪ “Qualified” plans under federal law are exempt

▪ In Massachusetts, IRA’s and non-qualified retirement plans are generally exempt (some exposure to recent excess contributions)

▪ Consider maximizing all retirement plan/IRA contributions

Asset Protection Planning –Protecting Your Inheritance

▪ Have wealth left to you in trust with “spendthrift” clause and discretionary terms

▪ Rights of withdrawal – may not affect creditor protection in Massachusetts

▪ This strategy applies to structuring estate plan between spouses as well

▪ Joint tenancy of property should be avoided

At Mary’s Death in 2003

Mary’s Revocable

Trust

Mary’s Revocable

TrustDiscretionary incomeand principal

CHILDREN

$2,300,000

all income

discretionary principal

MaritalTrust

MaritalTrust

$700,000

By will and beneficiary designation

Tangibles and joint property

FRED

Mary’s assets$3 Million

FamilyTrust

FamilyTrust

Asset Protection Planning –Self-Settled Trusts for Your Own Benefit

Certain self-settled trusts provide no creditor protection:

▪ Revocable trusts

▪ Nominee trusts

Asset Protection Planning –Self-Settled Trusts for Your Own Benefit

▪ In most states, no creditor protection for irrevocable self-settled trusts where donor is beneficiary

▪ Assets of trusts are reachable by creditors to extent they can be used for donor’s benefit

Asset Protection Planning –Self-Settled Trusts

Domestic self-settled trusts may provide protection

Alaska Nevada

Delaware Rhode Island

“Off-shore” self-settled trusts may provide protection


How they work:

▪ Often assets and trustees must be in state or country offering protection

▪ Donor cannot have ultimate control, but may be a beneficiary

▪ Laws or jurisdiction favor debtors


Do they work?

▪ Virtually untested in courts

▪ May increase debtor’s bargaining power in settlement negotiations

▪ May subject debtor to contempt

Asset Protection Planning –The Big Picture

▪ Array of strategies from simple to complicated

▪ Must be integrated with your total financial plan

▪ Should be supervised by knowledgeable counsel –don’t try this at home!

▪ Advance planning is key

asset protection advance planning is key · asset protection planning – strategies for the...

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