Copyright Law Blog

What Every Physician, Business Owner and Professional Needs to Know About Asset Protection

August 2nd, 2009 at 12:42pm Under copyright protection

Copyright (c) 2009 Jeffrey Matsen

As we are all aware, over the last few decades expanding theories of liability and the proliferation of litigation has given increased emphasis to Asset Protection Planning to the extent that it is now a well recognized area of practice. However, traditional Estate Planning has always encompassed the concepts of asset preservation and protection. Accordingly, all of us who have business owners, physicians and other professionals as clients need to be able to integrate our Estate and Business Planning with Asset Protection Planning in order to properly serve the needs of our clients. Certainly the area of Asset Protection Planning is a concern for all of these types of clients.

Why has there been such an increase liability exposure over the past thirty years? There are several reasons, the principal ones of which are as follows:

1.Plaintiffs’ lawyers have made huge contingency fees on malpractice and other kinds of claims and class action lawsuits. Obviously, the financial reward drives this kind of legal action.

2.The deep pocket theory where those who are “have nots” want a piece of the assets of those “who have”.

3.We live in a victim-oriented society where everyone tries to place blame with financial remuneration attached to it on someone who has the financial resources to pay.

4.The increase media and society awareness of claims results in high notoriety for these types of lawsuits and creates a ready and willing audience of plaintiffs.

Business owners, physicians and other professionals are especially high profile targets because of the public perception of wealth of these types of individuals. The job of the lawyer is to assist these types of clients in setting up and arranging their assets and affairs in a manner that will successfully transfer their legacy to their heirs in the most orderly and tax saving manner while at the same time preserving and protecting their property during lifetime.

I like to talk about implementing the three “Ps”:

*Preserve assets for their heirs and family by structuring the proper Estate Plan and by reducing death taxes.

*Protect assets during their lifetime by creating liability shielded entities and lowering financial profiles

*Process the plan by properly designing and implementing strategies in the most practical and skillful manner.

I have devised a significant and fundamental approach to addressing all the legal and tax concerns of business owners, physicians and other professionals by implementing the three “Ps” in a systemic tiered approach which I call “The Ladder of Success”. Each step on the ladder or level of strategy provides immediate asset protection and estate planning benefits. Some or all levels of the complete ladder will be applicable to every business owner, physician and professional depending on the individual state of their career development and net worth. The steps on the ladder and the levels of strategy are as follows:

Level One: The Business Entity Itself: This is the entity that must shield and protect the business owner or professional from direct claims against the operating business. There are also several tax and management issues that have to be addressed at this level dealing with the operation of the client’s business.

Level Two: Basic Estate Planning: This is the fundamentals of Estate Planning involving the Revocable Trust, Pour Over Wills, Durable Powers of Attorney, Healthcare Directives and Medical Record Release Forms. This level has to be integrated with all the other levels so that the entire plan is cohesive and well coordinated.

Level Three: Exemptions and Marital Planning: At this level, we examine and review exemptions such as ERISA Plans, homesteads, insurance and annuities. Many of these exemptions are state law driven and have to be analyzed on the state of residence basis. Marital planning can be very important with respect to the division of assets between the working and non-working spouse and in some states it is critical as to the manner of how property title is held with respect to the married couple.

Level Four: Liability Protected Entities for Investment Assets: It is especially critical that real estate be protected from claims that may well be either beyond the limits or outside the coverage of insurance and the limited liability company seems to be the best vehicle for this purpose. Other types of investments can also be placed in LLCs for additional protection.

Level Five: Domestic Modular Planning with Asset Protection Trusts: As we are all aware, many states have now adopted favorable Asset Protection Trust legislation such as Nevada, Delaware and Alaska. This means that the Domestic Asset Protection Trust can be utilized to hold title to the member interests of LLCs that hold the underlying investment assets.

Level Six: Offshore Modular Planning with Foreign Asset Protection Trusts: For those clients who have sufficient liquidity and preferably some international connections or attributes, the Offshore Asset Protection Trust can be utilized as the owner of offshore LLCs into which investments and capital can be placed. Because of the jurisdictional limitations involved, this approach maximizes the Asset Protection potential for the client.

Level Seven: Advance Estate Planning Techniques: This level examines more advanced Estate and Asset Protection Planning techniques such as GRATS, Private Annuities and QPRTS as well as certain types of insurance vehicles. In conclusion, by addressing the concerns of professional and business owner clients in this tiered analysis program, the Preservation, Protection and Processing of Estate and Asset Protection Planning can all be accomplished.

Asset Protection Planning; Why Go Offshore

August 2nd, 2009 at 06:42am Under copyright protection

Copyright (c) 2009 Jeffrey Matsen

A major goal of asset protection planning is to substantially diminish and reduce your financial profile. If you can restructure your assets in such a way so as to place them beyond the reach of future potential creditors, while at the same time maintaining a beneficial interest in those assets, you have succeeded in substantially reducing your financial profile. Accordingly, you are a far less attractive target for litigation because of issues of doubt of collectability, thusly reducing the likelihood that you will be sued; or if you are sued, increasing the likelihood of a favorable settlement.

A trust can be an effective foundation for your asset protection planning. Trusts have been utilized for centuries as a means of conserving and protecting property for the beneficiaries of the trust. However, most domestic trusts do not provide protection from creditors. The typical revocable living trust, wherein the trustors are the lifetime beneficiaries and retain the power to revoke, amend and invade the principal of the trust, provides no protection whatsoever against the creditors of the trustors. Accordingly, absent specific legislation to the contrary, self created or self settled trusts are ineffective for asset protection planning purposes.

As was stated previously, most self settled trusts are not protected from creditors. However, recently, several states have provided various degrees of asset protection legislation for a self settled trust. The trust legislation in Alaska, Delaware, Missouri, Oklahoma, Nevada, Utah and Rhode Island is similar in many respects to the asset protection trust legislation found in several offshore jurisdictions. It should be noted, however, that the courts have not had an opportunity to pass muster on this type of legislation because of its recent enactment and because the statute of limitations in most cases has not expired. Depending on the timeline involved with respect to when the claim has arisen, these trusts can be and should be considered in appropriate circumstances, but only by an attorney who understands all of the ramifications.

Offshore asset protection planning normally involves the utilization of offshore trusts and other entities. Offshore planning generally raises justifiable concerns with respect to asset security and tax issues. The most efficacious manner to address these concerns is to make certain that you are receiving the best advice and counsel from a qualified expert in the area. You must be sure that the attorney with whom you are dealing has expertise in the field and is recognized in this regard by his peers.

A FAPT is a trust that is set up in an offshore jurisdiction which has enabling trust legislation providing for substantial protection against creditors of the trustor. One of the greatest advantages of the FAPT is the fact that by its very nature any legal attacks against its assets are transferred abroad to a different legal system. The FAPT is generally much more expensive to set up and create than a domestic trust and requires a certain willingness on the part of the Trustor to deal with offshore jurisdictions and trust entities. The FAPTs’ greatest value is for asset protection planning well in advance of any potential creditor problem. Moreover, many times FAPTs are only used when the client already has some international connections and networking. Recent cases have emphasized the need for careful planning in the structuring of the FAPT if it is to be legally efficacious and successful in meeting the purposes and objectives of the trustor.

Most foreign jurisdictions do not recognize US judgments. This may force a trial de novo on the merits under the laws of foreign situs in order for the creditor to impose liability on the trustor and reach the assets of the FAPT. Obviously, the fees and expenses of this trial de novo and the burden of having to select offshore counsel can be substantial. Moreover, the FAPT jurisdiction, generally, requires plaintiffs to employ attorneys who are licensed in that jurisdiction.

Most foreign situs jurisdictions require that the burden of proof in challenging asset transfers to a FAPT is on the creditor and does not shift to the trustor. Moreover, many foreign jurisdictions impose a higher standard of proof upon civil litigation plaintiffs such as the “beyond the reasonable doubt” standard. This is in sharp contrast to the “preponderance of the evidence” principle utilized in US domestic civil cases.

The FAPT legislation of many jurisdictions establishes a statute of limitations for challenging asset transfers to a FAPT that begins to run on the date of transfer. This is contrary to US law where the statute may begin to run the date the transfer is “discovered” by someone with a claim against the trustor. Additionally, the statute of limitations of many FAPT jurisdictions is much shorter than the typical four year statute found under US law.

Manifestly, it is going to be much more expensive and inconvenient to prosecute a claim offshore. Think of the inconvenience of having to pursue a claim out of state and then multiply that by two to three times the cost to pursue the matter in a foreign jurisdiction. Many foreign jurisdictions prohibit contingency fee arrangements forcing the claimant to finance a litigation process entirely on his/her own. Creditors may think twice about having to deal with a completely different legal system out of the country. This unfamiliarity, plus the additional expenses and costs, and the entire uncertainty with respect to the process, adds a substantial element of protection to the FAPT.

The FAPT may assist the trustor in achieving several other objectives and planning goals independent of asset protection planning. Traditional estate planning issues such as the orderly transfer of property at death, the avoidance of probate, the strengthening of spendthrift provisions, greater privacy w, the management of offshore assets and businesses and premarital planning can all be addressed by the FAPT.

The easiest way to understand how a FAPT protects cash and securities is to focus on the process by which a claimant would try to reach trust assets. A claimant must either bring his case in a court that has jurisdiction over the trustee so that the court can order the trustee to give up the assets or initiate litigation in the court that has jurisdiction over the assets themselves so that the court can attach or seize the assets. However, if the client’s offshore planning strategy is properly structured and implemented, no domestic court can successfully attack the plan because it would not have the ability to force the offshore trustee to expatriate or return the assets nor would it have the ability to levy on assets properly held outside of the United States.

Protecting non liquid assets like real estate, accounts receivable and business equipment involves the process of equity stripping. Although some of these assets can be put in charging order protected entities that may provide some limited protection, the most effective strategy available to protect a domestic illiquid asset is to strip that asset of its value by encumbering it as collateral for a loan and protecting the loan proceeds with your other liquid assets in the FAPT. Creditors are going to be very discouraged attempting to levy on an asset that may have substantial value, but has very little equity because of a loan encumbrance or lien.

Generally speaking, the establishment of the offshore asset protection plan will be tax neutral. The FAPT will either be a US grantor trust or a foreign grantor trust with a US grantor for US income tax purposes. It will be necessary to file various forms with the Internal Revenue Service in either case, but these forms will only demonstrate that the taxpayer is a responsible and law abiding citizen.

One very typical arrangement with respect to a possible offshore strategy would be for the client to establish the offshore asset protection trust utilizing an offshore trustee. The trust would then set up an offshore limited liability company which would be entirely owned by the offshore trust. You could be the manager of the LLC with direct signature control over bank accounts and securities accounts. In the event of a crisis, you would obviously resign as a manager and appoint a trusted friend, relative or a management company. There are modular variations to this strategy that can be worked out with your professional advisors.

The proliferation of plaintiff lawsuits and the expanding concept of liability that has become second nature in our court system have engendered much concern and anxiety about the preservation of wealth in the United States. Many professionals like doctors and lawyers as well as business owners, corporate executives, real estate developers and investors, contractors and others operate in an environment of high risk. Many such people lack confidence that they will be treated fairly by the US legal system and are desirous of reducing their financial profile and eliminating their liability potential. For these individuals, the offshore planning alternative may very well be the best planning device available for maximum comfort and piece of mind.

Intellectual Property And Estate Taxes

July 16th, 2009 at 06:41am Under intellectual property

Nowadays many people have their wealth in both tangible and intangible assets. These intangible assets are also known as intellectual property. It includes patents, copyrights, trademarks and even trade secrets. Many a times the value people are in possession of thus is much higher than the physical assets.
The commercialization and widespread use of the Internet provides everyone the chance to create intellectual property. This is no longer restricted to the large Multi National Corporations or the affluent few. Everyone has the right and the capability to develop such property with the help of copyrights, trademarks or inventions that can be patented. Although the intellectual property grows as a wealth-creating tool, it is added to your estate taxes. You will also be faced with the task of determining the value of this property so that it can be added to your estate to calculate the taxes.
A person’s intellectual property, especially copyrights, make a lot of difference while estimating the estate taxes. It is necessary to know the value of all the assets including the intellectual property to be able to find out the value of the estate. When calculating the value of the gross estate, it will also include retirement accounts, joint property etc. As of now, the maximum limit up to which the estate tax is exempt is $2 million. In 2009, this limit is said to be increased to a sum of $3.5 million.
The valuation of the intellectual property is based on the fair market value of the property on the day of the person’s death. Different intellectual properties like copyrights, patents etc use different methods to decide the market value of the property. On the basis of these findings, the value of the intellectual property is added to the gross estate. The valuation analysis is subjective and so the ideal method to choose is the one that will give you the lowest value. Although this may not be the best method when valuation is done for other purposes, but it is highly recommended when the main objective is to calculate your tax liability.
Many a times the value of the intellectual property will be higher than the value of the liquid cash or assets that are available in hand. This means that you will not have sufficient cash to pay the taxes. If and when you are in such a situation, then you will be required to sell some part of your estate to meet the expenses. You also have the alternative to utilize the tax payment deferment that the Internal Revenue Code(IRS) allows the taxpayers. Code 6161 of the IRS allows a deferment of estate taxes for up to ten years as long as a reasonable cause is provided by you.
One of the causes that the IRS considers reasonable is proof showing that the taxes cannot be paid due to the illiquid intellectual assets that encompass your estate. You are given time to consider the other options available to you to make the payments and ensure that you do not take some hasty decision like selling property. Nevertheless, you will be entitled to pay interest on the differed payment.