Asset Protection Planning

Part I

By: Roccy DeFrancesco, JD, CWPP, CAPP, MMB

Founder: The Wealth Preservation Institute

Co-Founder: The Asset Protection Society

Is your asset protection plan put Is your asset protection plan put together?together?

Most people only Most people only have a have a few piecesfew pieces of of their asset protection their asset protection puzzle put together.puzzle put together.

Don’t Put all of your Eggs in One Basket

• Multiple Entity Approach

• Debt shields

• Segregation techniques– AR– Real Estate– Valuable Equipment

Personal Protection ToolsPersonal Protection Tools

By Law

• Homestead

• Life Insurance, Annuities

• Wage account

By Action

• FLPs/LLCs

• Offshore

• Irrevocable trusts

• Debt shields

What is Asset Protection Planning?

• The vast majority of time is spent protecting assets from negligence lawsuits (which is also what this presentation will focus on).

• However, proper asset protection also protects against:– Taxes (capital gains, income, and estate)*– Losing money in the stock market*– Long-term care*

(*Covered in a separate presentation on “global” asset protection).

What is good asset protection planning?

• It is NOT about “hiding” assets. – It uses existing laws to put up barriers in front of

creditors to discourage creditors from attacking assets.– It is legal.– It can be complicated or simple.– It can be expensive or not.– It can be domestic or offshore.

• Good asset protection CAN NOT prevent lawsuits.– Anyone can be sued for anything (although the claim

might get dismissed, a defendant still has to deal with it).

Who needs asset protection?

• Anyone with Money (the simple answer).– High income/net worth

• Anyone who can not hide behind the asset protection of a corporation. – Physicians– Attorneys– CPAs/accountants, EAs– Financial Planners– Stock Brokers– Insurance agents– Architects

• Even if a professional is acting as an employee of a company, he/she can not hide behind the limited liability of the company and can be sued personally.

• Therefore, if you are in one of the above listed fields, you have a heightened need for asset protection.

Reasons non-professionals need asset protection• If your clients have or own the following, they

have asset protection problems:– Residence.– Teenage children.– Boat, automobile, waverunner, snowmobile (protect the estate

from the asset not the asset from creditors)– Vacation rental.

• Why?– Slip and fall at your home due disrepair of the property. – You could have a office, Christmas party, etc. at your home

where you serve alcohol and someone drove home and caused and accident.

– Teenage children who are driving your automobiles. – If you own a cell phone today you are a negligence suit waiting

to happen (texting, e-mailing, etc. on the phone while driving).

Keys to asset protection planning

• Do not wait– Clients (and their advisors) are famous for procrastination. Due

to the busy professional and personal lives of most clients, it is not easy to find the time necessary to sit down with a qualified attorney to put together an asset protection plan.

• Do not go cheap on your attorney– It is okay to go cheap on a lot of “experts” you will use in your

life, but going cheap on an asset protection attorney will get you nothing but grief.

Other Keys to asset protection planning

• Keep an open mind

• Support of the family

What assets should be protected?

• Family Home or Condominium• Rental Property• Non-Rental Property• IRAs• Stocks or Mutual Funds• Life Insurance• Bank Account or CD’s• Planes, Boats, Automobiles, Wave runners or Motorcycles• Other business entity (especially S or C-Corp stock)• Collectible items that have significant value• Accounts Receivables (at the medical practice) *• Other personal real property of value• Future Inheritance for Family

The Homestead Exemption (HE)

• Most states (through statute) protect some

value your personal residence through the HE.

• However, a few have no HE and some states have unlimited exemptions.

• Most exemptions are $5,000-$50,000.

• Unless you live in a state that has an unlimited exemption, the some or all of the equity in your home may be at risk to creditors.

Life Insurance as an asset protection Tool

• As may be aware, one of the best protective wealth building tools at your disposal is a properly designed cash value life insurance policy.

• Almost all states have laws that protect the DB from creditors.

• However, is the cash value inside a non-term life policy protected.

• Over 50% of the states protect the majority or even all of the cash in a life insurance policy.

• Some states do not protect any cash value and other states choose to protect a limited amount such as $5,000-$25,000.

Annuities

• Annuities are treated much the same way as LI.

• Most states provide some protection and some provide complete protection.

• One difference between LI and annuities is the fact that an annuity can be annuitized and pay a stream of income.

• Therefore, it is important to know if your state protects the cash value and or an annuity stream (or some portion of one or both).

Fraudulent Transfers

• A fraudulent transfer is a transfer of an asset (or incurring an obligation) with the actual intent to hinder, delay, or defeat a creditor's claim (actual fraud), and, regardless of intent, making a transfer while insolvent or which renders the transferor insolvent (constructive fraud).

Actual Fraud

• Actual Fraud

• What is important to understand is that the claim does not need to be filed to have actual fraud. – For example: If Dr. Smith cut off the wrong leg, he

knows a claim should come from that negligence. Any transfer made to defraud a creditor is actual fraud.

Constructive Fraud

• Constructive Fraud is much more difficult to prove.

• It is more likely that a fraud will be more subtle such as selling an asset 1) for less than its fair market value, 2) when a claim for damages against the seller is known, or 3) that makes the seller insolvent.

• FMV example, if you sell an antique car worth $40,000 to a brother or “friend” for $10,000.

Defenses to Fraud

• Legitimate business purpose. – People who get sued still need to carry on their lives. If

you need to continue on with a business, every transaction that is for a legitimate business purpose should not be a fraudulent transfer.

• Transfer before liability incurred. – This is the classic way to avoid a fraudulent transfer.

• Believing that the claim against you is frivolous is NOT a valid defense.

Retirement Plans

• ERISA qualified plans are protected from creditors.• The following are ERISA qualified plans.

– 401(k) Plan– Profit Sharing Plan– Money Purchase Plan– New Comparability Plans– Defined Benefit Plan– 412(i) Defined Benefit Plan

• Therefore if you have money in the above listed plans, your assets are protected from creditors.

Non-ERISA Qualified Plans

• Simplified Employee Pension plans (SEPs) and Keogh plans are not specifically protected by federal law. – Having said that, if they meet the guidelines outlined by

the Supreme Court as to what an ERISA qualified plan is, a court could find that they are asset protected.

IRAs

• Until April of 2005, the federal government did not asset protect IRAs.

• Then the U.S. Supreme Court in April of 2005 ruled on Rousey v. Jacoway. – IRAs are protected in a bankruptcy case.

• This S.C. case may not be helpful if you do not file bankruptcy.

• 26 states give partial or complete asset protection to IRAs.

• Therefore, if you have wealth including money in an IRA and live in a state that does not protect IRAs, you should take proactive steps to protect your IRAs assets.

Protecting IRA assets in a state that does not have favorable laws

• If you are currently employed:– You can protect your IRA assets by rolling them into

your current employer’s ERISA governed qualified plan.

• If you are retired or your employer does not have an ERISA governed qualified plan:– You can create your own family limited partnership

(FLP) used to “govern your assets” and then become an employee (manager).

– Once you become an employee of such an entity, you can create your own ERISA qualified plan and roll the IRA money into the new plan.

IRA protection schematic

1.5 million- dollar IRA

Newly formed FLP

C.V. Life Insurance

Brokerage Account

New FLPWith: Cash Value Life Insurance, Brokerage Account

With: A new Employee AND newly created Profit Sharing Plan (PSP)

Transfer

Newly formed FLP

PSP

Transfer

Summary of AP Part I

• You need to first understand if you are at risk to lawsuits– Do you own a residence, boat, automobile, waverunner,

snowmobile, vacation rental, etc.?– Do you have teenage children?– Are you a professional with personal liability?

• You need to determine what valuable assets are at risk:– Stocks, mutual funds, real estate, annuities, real estate, etc.

• If you have liability issues AND you have assets of value to protect, then you NEED to implement an asset protection plan in a timely manner (DO NOT WAIT).

There is only one way to help you reach your goal to become asset protected.