Asset Protection Planning

19. September 2017 11:30 by Junita Jackson in

Now that you are familiar with the most important asset protection and estate planning concepts how do you create the best plan? Protecting what you have from liability and preserving your estate for your family involves many new concepts for you and it’s not always easy deciding where to begin.

In this section, we will present a summary of the issues and options available-techniques to think about to frame the building of your overall plan. This is the approach we use with our clients to analyze their particular needs and to build an efficient program for asset protection, estate planning, and tax savings.

“Asset Protection and Estate Planning with the Family Savings Trust“

An increasingly popular tool used for asset protection and estate planning is known as The Family Savings Trust.  The term is broadly descriptive of a trust designed specifically to hold and protect a variety of assets against lawsuits and business risks.  It can be very flexible in form and allows for the accomplishment of most important asset protection and estate planning goals. 

“What is the Best Asset Protection Plan for Physicians?“

In our initial discussions with a client, these questions always come up “What’s the best asset protection plan?”  “Are there any plans which are completely bulletproof?”

Like any well-trained professional, I usually duck those kinds of direct and unconditional questions. After all, this is the legal system we’re talking about and when we compound the mixture of judges, jurors, and lawyers,  the results can be unexpected, to say the least.  The  Law is probably a lot like medicine in that respect.  So while we can’t honestly guarantee that the particular plan we design will produce the exact outcome we want, we do know what has happened before in similar situations.  If existing case law and legislation are clear and well developed then an asset protection plan that falls within the pre-set boundaries will have favorable and predictable results.

“Answers to Key Asset Protection Questions“

When I sit with clients to prepare or review their estate planning and asset protection goals in a wide variety of questions and issues arise: What plan is most efficient? How are tax savings created?  How do we protect against the lawsuit and business risk?  Although I have addressed many these topics in detail in previous columns, here are a few starter questions which often arise and which may open the door for further thought and discussion. 

“Asset Protection: Needs Change Over Time“

The type of asset protection planning you need depends on where you are in your career. Because the amount and form of your investments and the particular risks you face will vary over time, your initial planning should be appropriately flexible and capable of adjusting to meet these changing needs. 

“When Is It Too Late For Asset Protection?”

One of the life’s ironies is that the worst time for asset protection planning is when you really feel like you need it the most. Although the law favors and encourages asset protection in most circumstances, there comes a point in financial transactions and legal proceedings when it is no longer permitted. In some cases, this boundary is clearly defined, but often the question of when the remedy of asset protection is still permissible is fuzzy. Experienced planners can follow several guidelines and make some educated guesses about where the line should be drawn in situations that physicians may encounter in their practice. 

 

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Beware Of Domestic Asset Protection Trusts

13. September 2017 14:19 by Megan Kunis in

The Domestic Asset Protection Trust ("DAPT") is an irrevocable trust that allows the settlor (or creator) of a trust to be a discretionary beneficiary.  While this trust has some advantages, it should not be used for Asset Protection as recent litigation has highlighted concerns about the DAPT, as it is often an inadequate entity to protect assets.  The DAPT is often referred to as a "self-settled trust" because the settlor is one of the beneficiaries.  Self-settled trusts allow the trustee to have the discretion of whether to make distributions to the settlor, while simultaneously protecting the assets from the settlor's creditors.The primary goal of the DAPT is to protect the assets of the settlor from their creditors.  The DAPT may also allow a settlor to transfer assets to a trust, preventing these assets from being included in the settlor's gross estate.

The major disadvantages of using the DAPT as a personal asset protector are as follows:

  • In creating a DAPT, you are more susceptible to litigation on your trust (fraudulent transfer claim) as Creditor's use this argument often to break through DAPT trusts to get to debtor assets.
  • The laws of the state where the DAPT is formed will not necessarily apply where the settlor, beneficiaries, or the trust's assets are not subject to the jurisdiction of the state.  In other words, a DAPT is only valid if the settlor and beneficiaries, as well as the trust assets, are all in the DAPT state.  Further, only twelve jurisdictions recognize the DAPT – so there is little uniformity across the United States.
  • State law pursuant to the Supremacy Clause of the US Constitution does not always bind federal courts.  Therefore, DAPT statutes may not protect the settlor against judgments in federal courts or by federal administrative agencies.
  • DAPT, as self-settled trusts, have a longer statute of limitations for creditors to sue on than most other Asset Protection Tools.

On the other hand, the limited liability company (LLC) and limited partnership (LP) are far more adequate entities for Asset Protection planning.

See more on these entities at the following links:

  • Limited liability companies
  • Limited partnerships

If you have any more questions regarding DAPT's or any other Asset Protection Planning tools, feel free to contact our Attorneys.

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Income Tax Liability In Bankruptcy For Appreciated Property

12. September 2017 19:25 by Zach Haris in

People avoid filing Chapter 7 bankruptcy if they have the nonexempt property with significant equity. Yet, consider a debtor who owns real estate that has appreciated and therefore has a built in liability for capital gain. If that debtor files bankruptcy could the IRS hold him personally liable after bankruptcy for the income tax liability associated with the gain on the property?

When a person files bankruptcy all of his property interest is transferred to the Chapter 7 trustee and the property constitutes the bankruptcy estate. The trustee acquires the debtor’s property with its tax characteristics including gain and character. The trustee controls the sale of the property, and the trustee receives the sales proceeds for the benefit of creditors.

The trustee and the bankruptcy estate is liable to pay the tax liability created by the sale of the debtor’s property. The tax is an administrative expense. The debtor is not liable for tax on the sale of property he had conveyed to the bankruptcy estate upon filing bankruptcy. A trustee may avoid tax liability by abandoning the property instead of selling it.

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