Asset Protection
Strategies
Presented by:
Reasons For Considering Asset
Protection Strategies
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We live in a litigious society: lawsuits against
professionals, business owners, executives and
institutions have simply become a cost of doing
business.
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When markets decline, lawsuits tend to increase.
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Increased media attention on asset protection.
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Increased availability of asset protection tools and
strategies.
Asset Protection Events
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Bankruptcy
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Chapter 7 “liquidation”
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Chapter 13 “reorganization”
Judgment creditors attempting to enforce a judgment
as a result of winning lawsuit.
Asset Protection Strategies
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Life insurance
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Annuities
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Qualified retirement plans
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IRA’s
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Homestead exemptions
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Self-settled trusts
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Q-PERT’s
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GRAT’s
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Account Receivable Factoring
Life Insurance: Non-Bankruptcy
Context
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All states exempt life insurance cash value and death benefits:
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In some states the exemption is unlimited, absent a fraudulent
conveyance.
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In other states, the death benefit and cash value exemption are
capped.
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In still others, the exemption is available only for proceeds payable to
a spouse, child, parent or other dependent.
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Term, whole life, variable and universal life all qualify.
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The exemption applies only for personally-owned policies;
corporate-owned policies don’t qualify.
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Click this link to learn more:
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http://www.mosessinger.com/articles/files/creditprotec.htm
Non-Qualified Deferred Annuities:
Non-Bankruptcy Context
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All states exempt cash value and death benefits in nonqualified deferred annuities:
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In some states the exemption is unlimited, absent a fraudulent
conveyance.
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In other states, the death benefit and cash value exemption are
capped.
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In still others, the exemption is available only for proceeds payable
to a spouse, child, parent or other dependent.
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Click this link to learn more:
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http://www.mosessinger.com/articles/files/creditprotec.htm
State Exemption Statutes &
Bankruptcy
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The 2005 Bankruptcy Act requires a 730 day (2 year) waiting
period before a debtor may use his state's exemptions in a
federal bankruptcy filing.
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Where a debtor fails to live continuously in one state for 730
days, the debtor must select the exemptions for the state
where he lived the greatest part of the 180 days preceding
the 730 day period before filing.
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Should the prior state laws prevent him from using all of that
state's exemptions, the debtor would be able to claim federal
exemptions.
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Definitions of federal exempt property and the valuation rules
for that property are also more precisely defined in a manner
favorable to creditors compared to old law.
Qualified Retirement Plans
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Qualified retirement plans are exempt from the claims of
creditors in bankruptcy and from judgment creditors.
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These so-called ERISA plans are required to include an
anti-alienation clause that protects the interest from
creditors.
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The list of ERISA plans includes:
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Defined benefit & defined contribution plans
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Profit sharing plans
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403(b) tax sheltered annuities
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401(k) plans
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457 plans sponsored by state & local governments & tax-exempt
organizations
Special Limits for IRA’s & Roth IRA’s
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The 2005 Bankruptcy Act limits the bankruptcy exemption
for IRA’s & Roth IRA’s to $1 million, adjusted for inflation.
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The cap does not apply to rollovers from other plans to
IRA’s, SEP IRA’s and SIMPLE IRA’s!
IRA’s In Non- Bankruptcy Contexts
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In non-bankruptcy situations, state law governs how much
of an IRA is protected from judgment creditors.
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Some states provide an unlimited exemption for IRA’s:
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Florida, Illinois, Texas, New Jersey and Kansas
Planning tip: if the state exemption doesn’t fully protect the
IRA, consider rolling the unprotected amount to a fully
protected ERISA plan.
Homestead Exemptions
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The 2005 Bankruptcy Act cuts back on generous homestead exemptions
available under prior law.
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The new rules impose a $125,000 limit on the value of a homestead
acquired 1,215 days before filing a bankruptcy petition.
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Interests exceeding $125,000 that are acquired within the 1,215 day
period are no longer protected!
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You can no loner pay down your mortgage at the last minute and have
the home equity >$125,000 protected!
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Home value >$125,000 will not be exempt if the Bankruptcy Court
determines that the filing was abusive, if the debtor was involved in
securities fraud or criminal activity that caused serious injury or death.
Self-Settled, “Asset Protection Trusts”
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Until the late 1990’s, states prohibited a settlor from creating
a trust that protected trust assets from the claims of the
settlor’s creditors where the settlor was a trust beneficiary.
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In the 1990’s, foreign countries modified their trust law to
permit “self-settled” trusts.
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In response, a number of states followed suit and adopted
laws that permitted self-settled “Asset Protection Trusts”
• Alaska, Delaware, Nevada
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The 2005 Bankruptcy Act cut back on the ability to use these
Asset Protection Trusts.
“Asset Protection Trusts” & New
Section 548(e) of the Bankruptcy Code
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The 2005 Bankruptcy Act added new section 548(e) that
allows the trustee to avoid the transfer of property to a trust
if:
• The transfer was made on or within 10 years before the filing of
the bankruptcy petition;
• The transfer was made to a “self-settled trust or similar device”
• The transfer was made with the intent to hinder, delay or defraud
a creditor.
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Bottom line: Asset protection trusts will not protect property
transfers made within 10 years of the date of the filing of the
bankruptcy petition.
Remainder Interests Q-PERTs &
GRATs
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Q-PERT = Qualified Personal Residence Trust
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GRAT = Grantor Retained Annuity Trust
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Both are short term trusts that all for an interest in property
to be retained by the grantor.
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Q-PERTs allowed the grantor to live in the house for a set #
of years, after which time full ownership of the house (i.e.,
the remainder interest) typically passes to younger family
members.
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GRATs allow the grantor to retain the income from the trust’s
property for a set # of years after which time full ownership
of the property (i.e., the remainder interest) typically passes
to younger family members.
Can Creditors Attach Remainder
Interests in Q-PERTs & GRATs?
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In the case of In Re Livingston (804F.2d 1219, 1986) ruled
that a bankruptcy trustee did not have the power to sell a
remainder interest in an asset in which the debtor held a life
estate.
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The same logic should apply to remainder interests in QPERTs and GRATs, if there was no intent to hinder, delay or
defraud creditors.
Account Receivable Factoring
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The goal: to place a professional’s receivables out of reach
from creditors.
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The transaction steps:
1. The professional borrows an amount equal to his/her share of the
firm’s accounts receivable;
2. The loan proceeds are used to buy a single premium immediate
annuity (SPIA) and a life insurance policy, both of which are pledged
to the lender to secure the loan;
3. Loan interest is paid by the employer and taxed to the professional;
4. At retirement the loan is repaid from the receivables.
Account Receivable Factoring: Does It
Work?
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Receivables may not be reachable by creditors since the
bank holds a prior lien on them.
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Thus, creditors may have “subordinated” liens which may
not be attractive.
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The SPIA and the life policy should avoid attachment under
state exemption statutes.
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Disadvantages:
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The ER is taxed on the receivables as they are paid;
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If the ER is a pass through entity, the professional will pay his/her
share of income tax on the K-1 distribution.
Disclaimer
This seminar is for Broker-Dealer Use Only. Not for use with the general
public. It is intended to be accurate and authoritative in regard to the subject
matter covered. It is presented with the understanding that I am not engaged
in rendering legal or tax advice. Ogilvie Security Advisors Corp and Gentry
Partners Ltd., provides the sales concepts discussed for informational
purposes only. While this seminar discusses general tax aspects and
concepts of planning with insurance, we make no representations as to
suitability for individual clients. Interested parties should be strongly
encouraged to seek separate tax and legal advice before implementing a
plan of the type described in this presentation. Any discussion pertaining to
taxes in this communication (including attachments) may be part of a
promotion or marketing effort. As provided for in government regulations,
advice (if any) related to federal taxes that is contained in this communication
(including attachments) is not intended or written to be used, and cannot be
used, for the purpose of avoiding penalties under the Internal Revenue
Code. Individuals should seek advice based on their own particular
circumstances from an independent tax advisor.