Pointers for Asset Protection Planning

An article in Forbes likens asset planning to “taking chips off the table in good times, so that you can still walk away from the table a winner.” With that idea in mind, the article offers several tips for protecting your assets from creditors.

One of the first things you can do to protect your assets is to have a plan for asset protection before a claim even arises. This is important because creditors can potentially undo many asset transfers undertaken after a claim arises under various “fraudulent transfer” laws. Moreover, if a creditor is successful in undoing a fraudulent transfer, he may also be able to hold the debtor, as well as anyone who assisted in executing the transfer, liable for attorney fees.

Clients must also realize that asset protection is not a substitute for having a proper insurance policy. Asset protection, rather, should be seen as a supplement to one’s liability and professional insurance plans. Moreover, in the event of a lawsuit, proper liability and professional insurance will pay to defend and settle the lawsuit. An asset protection plan will not.

A final note offered by the article is that asset planning should be based on the underlying assumption that creditors will be aware of and understand the purpose and extent of your asset protection plans.


Equalizing Inheritance for Your Children

When one estate planner hears his business-owning clients say, “I love my kids equally, so I want to share my assets equally,” what he actually hears is, “I don’t know how to handle this, so when I’m gone, I’ll leave the business to the kids and let them sort it all out.”

The article in Forbes goes on to state that clients who truly want their business to continue to grow and thrive after their death, but also want their children to succeed in whatever career path they have chosen, should speak with an estate planning attorney about logically equalizing their children’s inheritance.

One potential method of inheritance equalization is through life insurance. Using this strategy, one can set up their estate plan so that, upon their death the children who would like to take an active role in the family business inherit your stock in the business, while those children who have chosen another career path receive monetary inheritance equivalent to the value of the stock through life insurance death benefits and other non-business assets you hold at the time of death.

Through inheritance equalization, parents can create equal and equitable transfers to the next generation.


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Estate Planning for Married Couples

In light of the fiscal cliff bill, a recent article in Forbes offers some estate planning advice for married couples.

One important item made permanent by the fiscal cliff bill was portability, the ability for a widow or widower to increase their $5.25 million tax-free amount by the unused exemption of their recently deceased spouse. When using the two exclusions in tandem, a widow or widower can potentially transfer up to $10.50 million tax-free.

Regardless of portability, spouses are able to transfer unlimited funds to each other both during life, as well as part of their respective estate plans. This is known as the marital deduction. Without portability, however, the first spouse’s tax exemption is often lost when the second spouse dies. Careful tax planning maneuvers, such as bypass or credit-shelter trusts, are often used to avoid this problem.

With the extension of portability, spouses who qualify will not have to create bypass or credit-shelter trusts for the sole purpose of preserving their deceased spouse’s federal exemption amount. The extension of portability only applies to spouses who died after December, 31, 2010. It is important to remember that portability is not automatic. In order to utilize this tool, an estate planner will have to assist you in transferring the unused exemption to the surviving spouse.

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Pitfalls of Joint Ownership

One popular estate tax avoidance device is joint ownership of property between generations. Unfortunately, this device often leads to an ugly and expensive family feud. An article in Forbes discusses common pitfalls to be wary of when considering joint ownership between generations.

When you become a joint owner with another person, you become vulnerable to their creditors. Due to the very nature of joint ownership, one owner’s creditors can attempt to satisfy their claim through some or all of the shared assets. Similarly, if the spouse of one joint owner files for divorce, he or she may claim that the joint assets are part of the marital estate.

Another common pitfall arises when a joint owner decides to borrow from a joint asset, because joint owners can borrow from such assets without getting permission from the other. Finally, once you pass away, there is nothing requiring the joint owner to share the assets with other heirs unless they file a lawsuit to enforce the joint owner’s intent. Such lawsuits often end in bitter family court disputes.

If you are considering joint ownership as part of your estate plan, it is important to speak with an estate planning attorney about these and other pitfalls.

Using a Flexible Irrevocable Life Insurance Trust to Shelter Life-Insurance Proceeds

Many people do not realize that life insurance proceeds are in fact taxed. Although these proceeds escape income taxes, they ARE  counted as part of your taxable estate. An article in The Wall Street Journal discusses one way to shelter such proceeds from estate taxes, the Irrevocable Life Insurance Trust.

In order to avoid such tax consequences, you may choose to transfer ownership of your existing life insurance policy to an Irrevocable Life Insurance Trust (“ILIT”). By transferring such ownership, the ILIT is removed from your estate. Once established, an ILIT also allows you to split death benefits among several beneficiaries any way you wish. You also retain the power to decide how and when the benefits will be distributed to your heirs.

If you believe that an ILIT is right for you, you should act sooner, rather than later. Existing policies transferred to ILITs are subject to a three-year look-back period, meaning that if you die within three years of its creation, your life insurance proceeds will revert back to your name and be included within your taxable estate (Although this is not the case for new policies purchased directly by the life insurance trust.

An ILIT is usually used for life insurance policies that were set up for the sole benefit of the heirs. If you need to own or access your life insurance policy at anytime, an ILIT may still be a good solution for you, but it must be drafted with that goal in mind.

What is a Family Limited Partnership (or Family Limited Liability Company)?

There are many sophisticated estate planning strategies available to affluent families to ensure that the majority of their hard earned money stays within the family, rather than in the hands of the IRS and state taxing authorities. One such device is the Family Limited Partnership (“FLP”) or Family Limited Liability Company (“FLLC”.) FLPs & FLLCs are advantageous because they provide estate tax savings, gift tax savings, and asset protection.

A FLP or FLLC may own a variety of things, such as real estate or shares on your company. In order to retain control over the assets, you may choose to be the general partner or managing member. That way you can comfortably give your children a majority of the equity in the FLP/FLLC while maintaining control yourself.

By gifting limited partnership/membership interests to trusts or directly to members of your family, you reduce your taxable estate. Consequently, the amount of any applicable estate tax that your heirs will have to pay upon your death will be reduced by the ownership interest you gave away. Such gifts also apply for the annual gift tax exclusion.

As an article in Forbes points out, FLPs require not only good planning but good execution as well. Many times an FLP fails not because of a faulty set-up, but because of a poorly carried out transaction. The same can be said of FLLCs. It is therefore vital to coordinate between those who create your Family Entity, and those who will be working with it, such as accountants, to avoid problems.

Cutting the Estate Tax Burden for Private Company Owners

Owners of private companies often hope that the business they have built will benefit their families in the long term. No matter whether you plan to benefit your loved ones by selling the business upon your death and providing them with the proceeds, or passing the business itself on, there are certain steps you can take now that will minimize the tax burden when your business eventually changes hands. An article in the Financial Post details some of these steps.

One of these steps is to provide for charitable donations in your will. Such donations are treated as gifts made in your last year of life, and therefore provide a credit on your final tax return. In the year of and immediately preceding your death, the charitable donation limit is 100%, rather than 75% in all other years.

There are also a multitude of trust arrangements you can set up in your will  (testamentary trusts) as a tax-effective way to transfer business assets to your families. Testamentary trusts pay income tax at graduated rates as though it were an individual. Therefore, by creating a “new taxpayer” through the trust, you may provide your family with an annual tax savings. Moreover, your spouse will not have to pay capital gains tax on assets transferred from your will to a spousal trust.

Estate Planning Tips for Female Entrepreneurs

For female entrepreneurs who juggle running a business as well as a family, it is often hard to find time to create an estate plan. However, as an article in Forbes discusses, not creating or updating an estate plan may create undesirable consequences for a female entrepreneur’s family after she passes.

The article suggests that female entrepreneurs take three simple steps to avoid leaving chaos for their families and business partners. Moreover, even if the female is responsible for managing the business and household finances, it is vital for her to make sure that her spouse — if any — has a working understanding of the finances.

One key area to focus on is ensuring that your business assets travel in the right direction. While many owners would like their ownership interest in the company to pass to their business partners, the laws of intestate succession  — which dictate disposition of your assets if you die without a will — will most often pass your share to your spouse or children. One way to avoid this is to put in place a buy/sell agreement. Such agreements provide instructions for how shares will be sold or distributed if a partner dies or otherwise disposes of his shares.

It is also important to assemble and make sure that you and your family are familiar with your team of advisors, and to put mechanisms in place to protect your family assets.

Increase the Value of Your Charitable Giving

As the economy continues to heal, charitable giving is again growing. Following two consecutive years of decline, charitable giving increased 3.8 percent from 2009 to 2010. According to nonprofit leaders, however, it could take years for charitable giving to return to pre-recession levels.  A recent article in InvestingDaily discusses strategies for those who are able to make charitable contributions to maximize the current and future value of the gifts transferred.

Property (Photo credit: mallix)

First, consider giving property that you know is going to appreciate. By gifting such property out before it appreciates, you remove that appreciation from your own estate. Gifting appreciable assets should happen early in the year so that any subsequent appreciation during the year will not count against your exclusion amount. Alternatively, you can also save on appreciation costs by giving an asset when it has a low market value.

On the other hand, it is wiser to retain “loss property.” If a piece of property decreases in value during your ownership of it (rendering it “loss property”), neither you nor a future recipient is allowed to deduct that loss upon gifting the property. A better choice would be to sell the loss property so that you can deduct the loss on your tax return, and then gift the cash instead.

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Succession Plans for Franchises

Although most people do not enter into a franchise agreement with the goal of creating a family business, children are increasingly choosing to succeed their parents in owning the family franchise. However, the International Franchise Association (“IFA”) reports that only 30 percent of family-owned franchises survive into a second generation. A recent article in Entrepreneur discusses how franchise owners can best prepare for a successful succession.

Succession plans for franchises are inherently difficult because the franchisor generally yields veto power over any proposed succession, and is the sole decider of whether a person is qualified to succeed his or her parents as a franchise owner. According to attorney and co-author of the IFA handbook William Slater Vincent, Franchise Succession Planning and Transfers, “I’ve worked with franchises from over 100 systems, and every single franchise agreement I’ve seen clearly states that if the franchise owner dies, the franchisor has to approve the successor.” Such provisions mainly serve as a protective mechanism for the franchisor. Said Vincent, “I don’t know how many times a husband dies and his wife takes over the business even though she was never involved before. Instead of being a viable business, it becomes an asset sale. Franchisors don’t want that.”

Each franchise has a different protocol for succession planning. These protocols range from not paying attention, to allowing local reps to sign off on proposed successions, to requiring that successors undergo rigorous training akin to that of a new a franchisee. The key to creating a successful succession plan, therefore, is speaking to your franchisor about any succession requirements, and creating a plan that qualifies your chosen successor in the eyes of the franchisor.

Death of Equities? Not So Fast

Many a Wall Street Guru has opined that the American public has simply given up on stocks. To make their case, they point to low trading volumes, as well as the $440 billion that investors have removed from stock mutual funds since the stock market crash of 2008. However, a recent article in The New York Times reveals the bigger picture that equities are far from dead.

Currently, investors have over $5.7 trillion invested in stock mutual funds. This figure is more than the total amount of money investors have in bonds and money markets, combined. Investors have an additional $880 billion invested in stock-centric exchange-traded funds. These numbers show that, while investors have not forgotten the plunge of 2008, they prefer the stock market to alternative investment opportunities.

Treasury bonds, for example, are currently paying an interest rate less than the annual rate of inflation. The interest rates currently being offered on certificates of deposit average .8 percent, and the payout from money market accounts is even less. Many investors are driven to equities because they believe that equities are their best option for a comfortable retirement. According to Adam B. Scott of Argyle Capital Partners, “if your time frame is 10 years or more, you’re better off in stocks.”

T’was The Month Before ‘Cliff’-mas…

As I attended a Christmas play with my family last weekend (TWAS THE NIGHT BEFORE CHRISTMAS @ the Kelsey Theater), I tried for a couple of hours to completely ‘unplug’ myself from the office and focus on being “there” with the family.

Sadly,  I found myself so preoccupied with the year-end planning we are doing in the office (for client’s seeking to tax advantage of the increased exemption this year), that visions of ‘esate-planning’ danced in my head throughout the show.  My mind must have somehow mixed the two concepts, because the idea for the below poem came to me.

(Don’t worry, I won’t give up my day job.)

T’was The Month Before ‘Cliff’-mas…

T’was the month before the New Year and all through the country,

all were in a good mood, except (that is), Trust Attorneys.


It seems like we will miss all the holiday cheer,

as our procrastinating clients finally plan out of fear.


It will be taxed at their deaths or when they give it away,

But much less for those who actually plan today.


The gifts on our minds will involve Gift Tax Exemptions,

instead of Barbie and Wii’s  and Sony Play-stations. 


Oh, how we wished we could drink, eat and relax,

and forget for a while about the Gift & Estate Tax.


The House passed a bill and so did the Senate,

but since the mid-summer, they’ve just sat on it.


As $1 Million may well be the new Exemption,

we are swamped with the tasks of trusts cre-a-tion,


So on New Year’s Eve, make my drink real stiff,

as I’ve tried to steer clients from their own fiscal cliff.

Protecting Your Assets From Potential Lawsuits

While many people write off asset protection as a mechanism for the very wealthy, the reality is that it would be worthwhile for middle class people with a nice home and a couple of cars to consider as well. Engaging in asset protection is even more worthwhile for people who can see themselves being sued one day, such as lawyers and doctors. A new article in The New York Times discusses how to protect your assets in the event of a future lawsuit.

The article begins with the caveat that it is virtually impossible to shield all of a person’s assets. Rather, asset protection involves taking steps to discourage creditors from going after certain assets. As Jason Cain of Credit Sussie Private Banking USA explains, “there is no such thing as asset protection… What there is is good business and estate planning that as a byproduct insulates your assets from future, potential creditors.”

Several tips for protecting your assets from potential lawsuits include:

  • Assess what assets you own, and the respective likelihood of a creditor pursuing them.
  • Remember that insurance is the most crucial part of an asset protection plan. Consider the many different types of insurance, from automobile and homeowners insurance, to an umbrella policy to limit liability to arising from the unexpected, to professional insurance.
  • Check current state law to see what assets are automatically protected.
  • Consider holding money meant for transfer to heirs in an irrevocable trust.

An Update on Developments, or ‘lack thereof’, on Estate Tax Reform, and a Little Estate Tax Trivia

Two articles about this week sought to shed some light on the estate tax developments, political positions as it pertains to the estate taxes & the “Fiscal Cliff.”

The Associated Press went the route of detailing the specifics of bills passed in the Democratic-controlled Senate in July and the Republican-led House in August:

Senate: Does not address the estate tax, allowing the top rate to increase from 35 percent to 55 percent. Currently, the first $5.1 million of an estate is exempt from the federal estate tax; the exemption rises to $10.2 million for married couples. If the tax cut expires, the exemption would be reduced to $1 million for individuals and $2 million for couples.

House: Extends the top rate of 35 percent through 2013, with the larger exemption [$5.12 million.]

You can find the article by clicking here

A Yahoo! article speaks a little more specifically about President Obama’s views on the estate tax, divisions among the Democrats within the party and it’s impact on illiquid assets such as farms and ranches (click here for the full article.) A testament to the discord between the two parties is their inability to agree upon a label for the tax:

The divide between the political parties over the tax is so wide that they cannot even agree on a name for it. Democrats call it the estate tax, as it is described in law.

Republicans, who generally want to repeal it, have another, more provocative name. They call it the “death tax” and characterize it as a penalty on being wealthy and successful.

Ever wonder what the highest rate in history has been for the Estate Tax? Although it has fluctuated, the rate hit a high of 77% before World War II.

According to the article:

“It was a Republican president, Teddy Roosevelt, that proposed the first permanent inheritance tax, arguing that inheritance of “enormous fortunes” does a society no good.

“No advantage comes either to the country as a whole or to the individuals inheriting the money by permitting the transmission in their entirety of the enormous fortunes which would be affected by such a tax,” Roosevelt said.

Estate Planning Devices That May Help Greedy Heirs to Your Assets

Several widely used estate planning devices may actually assist greedy heirs in helping themselves to your assets. A recent article warns of what these estate planning devices are.

The first device is a power of attorney for finances. This is a document that allows you to specify who you would like to make financial decisions for you should you become unable to make such decisions yourself. Depending on what your specific power of attorney document states, the person who holds your durable power of attorney may be able to write checks out of your bank account, buy and sell your securities, and collect your social security payments.

To avoid abuse of these privileges, it is important not only to carefully choose an agent whom you trust, but also to speak with your estate planning attorney about broadening or narrowing your agent’s power based on your unique situation.

Another device that may easily lend itself to abuse is the joint bank account. If two people jointly own an account, either can make a deposit or withdrawal. Furthermore, at the death of one joint owner, the bank account automatically reverts to the other owner. This reversion occurs even where the deceased joint owner’s will specifies that they would like the account to be inherited by someone else.

Exit-Planning for Business Co-Owners

Many times, the last thing entrepreneurs consider in the process of starting a new business venture is how they will handle the departure, on good terms or otherwise, of a co-owner. As a recent article explains, it is never too soon to begin crafting an exit plan.

By its very nature, co-ownership of a business by its founding individuals cannot last forever. Consequently, the article suggests that co-owners need to address and have an action plan for three important questions:

  1. When will a co-owner have an option or obligation to sell or otherwise divest himself of his ownership interest?
  2. In situations where an ownership interest will be sold, how will the co-owners determine an appropriate purchase price?
  3. After an appropriate purchase price is determined in sale situations, where will the money to pay it come from?

“Trigger events” are events that lead to the option or obligation to sell an ownership interest in a business. Some of the more common trigger events occur when a co-owner dies or becomes disabled, or terminates his employment with the business. Although planning for these decisions may involve difficult or uncomfortable discussions, wise co-owners will maintain and update a well-documented exit plan.

Justice Department Seeks $28M Restitution in Estate-Planning Scheme

As reported in The Chicago Tribune, two men have been indicted in an estate-planning scheme that yielded $28 million from 120 investors. According to the Justice Department, Robert C. Pribilski and John T. Burns III fraudulently obtained the money by persuading wealthy retirees to invest in Turkish bonds. The ponzi-like scheme was in place from 2005 to 2010.

The men found investors through mass mailings that invited them to local estate-planning seminars. The investors were “absolutely and unconditionally” promised that, at the note’s maturity date, they would receive the principal and interest due on their note. In reality, the invested funds were paid out to other investors. The Justice Department alleges that Pribilski and third defendant Mahmut Erhan Durmaz – who has fled the country – took over $2.5 million of the investor’s funds to make payments to themselves, their friends, and their families. The pair also used invested funds to speculate in real estate and restaurants.

Counsel for Burns, Joseph Lopez, has stated that Burns should not have been indicted because he was simply an employee of Pribilski and Durmaz. He “didn’t get any proceeds” from the scheme beyond his usual compensation, Lopez said. The Justice Department hopes to retrieve the $28 million.

Learning From Celebrity Mistakes: The Case of the Houston Estate

English: Whitney Houston talking to the audien...

The premature death of six-time Grammy winner Whitney Houston should serve as a somber reminder that wills not only need to be created, but updated every few years. As estate planner Andy Mayoras points out, “Celebrity stories like this are a great educational tool to share with clients and highlight what should be done, what was done wrong, and what was done right.”

According to the Investment News, Houston’s will named daughter Bobbi Kristina Brown as the main beneficiary. Surprisingly, Houston drafted her will in 1993 – while still married to Bobby Brown – and never updated it. The will specifies that if Houston had no living children at the time of her death, her estate would pass to Bobby Brown and specified members of Houston’s family. Furthermore, Brown is named as the guardian for their daughter Bobbi Kristina.

Even if this is what Houston wanted, she should have clarified her intentions in a modified estate plan after her split with Brown. Estate plans should be routinely updated after major life events such as divorce, death of a beneficiary, or birth.

Also interesting is that Houston’s will created a testamentary trust for her daughter. A testamentary trust is created by a will, and therefore must pass through probate. By passing through probate, it becomes a public document. Had Houston wanted to keep the associated financial information private, she could have created a “living trust.” Living trusts pass outside of probate, and therefore remain hidden from the public eye.

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The Human Component of Estate Planning: Leaving Your Legacy

Current estate planning clients are looking to leave more than money and property to the next generation. As Businessweek reports, people are now attempting to leave their personal legacies through devices such as ethical wills, life histories, and video recordings. Through these devices, people are adding a human component to traditional estate planning.

According to certified financial planner Neal Van Zutphen, “There’s an element regarding money, but it is really more about affirming your life as a legacy.” Because of the various ways to create a personal legacy component of a will, these can be done as a small do-it-yourself project, or a more intensive, expert-guided concept. Perhaps the most frequently used form is the ethical will, which is a simple letter to one’s family. Van Zutphen provides all of his clients with workbooks to assist them in preparing ethical wills.

Retired psychiatrist Paul Wilson undertook a more involved project when he decided to write a 60-page memoir for his children and grandchildren. Wilson plans to self-publish the memoir, which will contain photographs and newspaper articles. Wilson explained, “It’s therapeutic in that I come out of this learning more about myself – my present and my past … but the reward is more the experience of allowing myself to wander back to those times, and describe them in words as precise and concise as I can.”

Court Finds that J.P. Morgan Mishandled Trust, Orders $18.1 Million Payout

An Oklahoma judge has recently held that J.P. Morgan & Chase Co.’s administration of the Carolyn S. Burford trust was “grossly negligent and reckless.” As a result, the court ordered J.P. Morgan to pay the trust $18.1 million, as well as punitive damages and legal fees.

English: Category:JPMorgan Chase

According to a recent article in the New York Times, the order for monetary damages came after the Tulsa County Judge found that J.P. Morgan breached its fiduciary duties in handling the trust account. In 2000, J.P. Morgan sold variable prepaid forward contracts to the trust. The court determined that this sale was a breach of fiduciary duty. Not only did the bank fail to ensure that the client understood what the product was, but it also failed to disclose the fact that the transaction was beneficial to the bank. The court further found that the bank was “double dipping” when it used the proceeds from the contracts to further invest in it’s own investment products.

Current law requires that brokers handling trust accounts act in the best interest of the client. According to J.P. Morgan spokesperson Douglas Morris, “We disagree with the court’s decision and will take all appropriate measures to respond, including appealing the decision.”

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