Wealth/Asset Protection Strategies When you're out at your vacation property, out of the country or just at relaxing at home, you'll want to know that your entire asset holdings are protected from any unknown creditor threats. The key is unknown and we will discuss what asset protection is and what it is not. What Is Asset Protection Planning? Today's heightened concern about asset protection results from the devastation caused to those members of the medical profession who have accumulated wealth but lose it as a result of a judgment in excess of their policy limits or other claims. Notwithstanding the medical community, business owners also have exposure in their businesses during tenure and after a disposition as well. Asset and wealth protection planning simply means taking steps to preserve your wealth before there is a threat to it. That is, it means planning now to reduce or eliminate adverse economic consequences from lawsuits or other claims which may arise in the future.An asset protection plan has two goals: (1) to make the enforcement of judgments against protected assets difficult, if not impossible; and, (2) to allow you input into who will have the beneficial enjoyment of the protected assets. Implementing an asset and wealth protection plan is a result of understanding the benefits of instituting a plan in order to protect and preserve assets before a problem arise. The concept of lifetime protection of assets from risks associated with professional practice, vocational and occupational hazards, activity with higher than average risk or, frankly, daily life is an attractive concept worthy of inclusion and exploration in every estate and financial planning discussion. Use of family limited partnerships and corporations with more contemporary limited liability partnerships, limited liability companies, private annuities, irrevocable or foreign situs asset protection trusts, captive insurance companies, protecting business/practice receivables or perhaps some combination or multiple structure of these, in concert with an integrated overall estate plan can offer a tremendous amount of protection and potentially, additional estate tax savings as well. What Asset Protection Is Not! It is not a way to avoid accountability for criminal acts. There are several laws to prevent this misuse of asset protection planning.It is not a way to escape liability for your past actions. The same laws that stop criminals from misusing asset protection planning also apply to attempts to transfer assets to friendly parties in the face of pending or threatened litigation. Why Has Asset Protection Planning Become Important To Members of The Medical Profession? Over the past several years the number of lawsuits filed in the United States against members of the medical profession has increased dramatically. It is estimated that 80 million lawsuits are filed in the United States each year ó an average of 152 each minute. A study completed at the end of 1999 revealed that filing a lawsuit is viewed as the second fastest way to strike it rich today behind winning the lottery and ahead of receiving an inheritance. It seems that almost each and every activity, transaction, confrontation, dissolution of relationship or interaction with another carries with it an ever increasing chance that litigation will result. Larger jury awards have caused medical professionals to be more aware of potential threats to preserving their assets, in part because anyone can be sued for almost any reason. Although not all lawsuits are filed against members of the medical profession, that group has increasingly become a targeted segment by an increasingly larger group of claimants. Claimantsí and lawyersí aggressive behavior directed toward members of the medical profession is based in significant part upon the increasingly productive results of either threatening or filing a lawsuit against a doctor or other high net worth individual. Many lawsuits are filed by lawyers willing to pursue a claim against a medical professional on a contingency basis. Lawyers choose which claims they are willing to pursue under this arrangement based in part on the likelihood of a reward - that there will be enough assets to pay a significant settlement or a judgment. This is not important if you have adequate insurance to cover the extent of the claim made against you. But, it can be threatening if a claim is not covered by your policy or the claim exceeds your policy limits. Most lawyers will undertake a review of every potential defendant's assets at the same time as they perform due diligence on the validity of their potential client's claim. They will do a 'cost-benefit' analysis and will more likely be deterred and not pursue a case against someone if there doesn't appear to be enough assets to make the case worthwhile, or if it will be too time consuming or too difficult. Potential Threats To The Preservation Of Your Assets Some of the threats to your assets include:Bankruptcy of your insurance company or cancellation of your insurance policy due to too many claims or a change in underwriting policies by your insurance company,An accident with an uninsured motorist where damages exceed your policy limits,Divorce,A lawsuit for personal injuries suffered by someone visiting your property,Sexual harassment or other related claims,Negligence claims filed against you claiming you improperly performed medical services.Asset protection can be used to avoid claimants that you do not already know about and whose claims you could not anticipate. Defensible asset protection planning is done before a claim is known and must not run afoul of the ìfraudulent conveyance rule.î The Uniform Fraudulent Transfer Act was enacted to prevent people from trying to escape liability from the claims of creditors by transferring assets out of their control after they became aware of a claim. That is, to avoid the fraudulent conveyance rules, a transfer of property cannot be made with actual intent to hinder creditors.The first consideration in determining whether or not a transfer was made ìwith actual intent to hinder creditorsî is whether or not the transferor knew of the claim at the time of the transfer. The cases interpreting this Act point out the distinction between potential and known claimants and potential but unknown claimants. The difference between these two groups is not always clear, but a good general rule is: potential and known claimants are those that you donít yet owe money to, but to whom it is reasonably foreseeable that you could owe money in the future; and, potential but unknown claimants are simply those that you do not owe any money to, and to whom it is not reasonably foreseeable that you could owe anything in the future. Other considerations as to whether a transfer will withstand fraudulent conveyance review include:Was the transfer to an 'insider'?Was the transfer concealed?Was the transfer of all or substantially all of the available assets?Was there retention of 'control' over the assets transferred?It is important to understand the 'control' element: To avoid the fraudulent conveyance rule the property must leave your 'control'. If you continue to own or you can reach the property, your creditors can take it away from you. In addition, all of your actions following any transfer must be consistent with the transferee being a bona fide new owner. But, relinquishment of control does not mean that you must give up either possession or the beneficial enjoyment of the assets.It is easier to support a transfer into an asset protection structure if it was made for a recognizably legitimate business purpose, estate planning purpose or other financial planning purpose and is completed before any claimants make themselves known. The Uniform Fraudulent Transfer Act only applies to asset transfers which result in potential and known claimants being defrauded but it doesnít apply to asset transfers which are designed to and have the effect of protecting assets from the claims of potential but unknown claimants or creditors. There is nothing immoral, illegal, or improper about using asset protection planning to preserve and protect your assets from your unknown claimants. If asset protection planning is done properly you can protect your assets from the claims of potential but unknown claimants. When Should You Start Your Asset Protection Planning? The best time to consider asset protection planning is before you need it. Asset protection planning is like getting a bank loan; you can't get it when you need it, but it's easy to get it if you don't. If a lawsuit or other claim has already been threatened or filed, your asset protection planning options are extremely limited. On the other hand, if you begin your planning and create an asset protection structure before any claims are made, then your options are very broad. How We Work There are several aspects to the answer to the question "How much asset protection is enough?"You should have enough protection in place so that your assets are safe from any unreasonable claims that may be made against you.You should have enough protection in place so that you can be the one to decide whether or not you wish to make any payment of any part of any future claim made against you.You should only create an asset protection structure that you fully understand and that you can follow on a continuing basis. How Much Wealth Can Be Protected? Most, if not all, of us have current debts and other obligations. As a general rule you should leave enough assets outside of your asset protection structure to cover both current and reasonably foreseeable debts and expenses. The test most often used by the courts to determine whether you have crossed the line between permissible asset protection planning and fraudulent asset transfers is to determine whether or not you need any or all of the assets transferred into your asset protection structure in order to meet your monthly debt service. Those assets you donët need to meet monthly obligations can be made a part of your asset protection structure, thus removing them from the pool available to future claimants.Before establishing any asset protection structure you should prepare and certify a statement of solvency. You should be able to state that you will be financially solvent after any transfers. This is essential in order to establish that you are not creating an asset protection structure to defraud creditors. That statement of solvency should also be required by the attorney assisting you, so that they will not be attacked on the basis that they were co-conspirators in a fraudulent scheme. Should An Asset Protection Plan Be Related To An Estate Plan? A coordinated, integrated approach to both the protection of your assets during your life and long-term estate planning should be considered. Estate planning is the process of analyzing the assets accumulated during life and formulating a plan of distribution so that heirs and beneficiaries will get the largest portion of the estate after death. One of the primary goals of estate planning is to protect estate assets at death for the benefit of others: the heirs, beneficiaries, and the ìobjects of the ownerís bountyî. In addition, our concern with ëisolatedí traditional estate planning is that it requires a death of the estate owner before the extensive and protective planning put in place becomes effective. However, while the overall estate plan is an important, if you use an integrated plan you can maximize the wealth protection and benefit of your assets during your lifetime as well as maximize the amount you ultimately can transfer after your death.The implementation of an integrated asset protection and estate plan strategy looks beyond traditional post-mortem planning. It looks at how you manage your assets today, and how that management can be structured and coordinated to maximize ease of use and flexibility in the event of unforeseen events and minimize estate taxes. Implementing an appropriate and comprehensive asset protection and estate structure necessarily involves the use of several legal disciplines, including the law of corporations, partnerships, trusts, and estate planning. More appropriately, the financial consultant should also be concerned with your living requirements of cash flow and capital needs, today and also in the future. What Legal or Financial Strategies Are Available To Create An Effective Asset Protection Structure? The underlying principal of asset protection planning is the separation of asset ownership from control. Several entities can be used to accomplish this separation. The ownership of personal assets can be structured in such a way that future creditors will have a very difficult time attaching and applying those assets in satisfaction of a judgment. All asset protection strategies have one thing in common ó to make it more difficult for a claimant to either find or take your assets. The intended effect of a properly designed asset protection structure is the reduction of incentive to pursue litigation against you. An effectively designed and implemented structure reduces the size of the target seen by the plaintiffís attorney. The construction of a domestic asset protection structure usually begins with the formation of a domestic entity. In general, the strategies most commonly used by members of the medical profession to create an asset protection structure include family limited partnerships, corporations, limited liability companies, and trusts. The assets to be protected are transferred into the entity of choice in exchange for a corresponding interest in the entity. The entity selected should have all the protections and disincentives afforded by state law against the seizure of assets by third parties or potential creditors. Debt Shields The debt shield concept is a + 5 on the asset protection scale (-2 to +5 is the abbreviated scale range). The debt shield is an adjunct to the titleing of a residence in ítenancy by the entiretyí. This is a useful and financially beneficial strategy to the client that remains concerned regarding protecting the primary residence. Tenancy by the entirety can be penetrated by a future lien on the property under the following events: 1) Death of spouse; 2) Divorse; 3) Re-finance and 4) Sale of the property. A judgement and lien from a claimant locks the property owner to the residence. Otherwise, if one of the events (listed above) takes place, equity to the extent of the claim will be lost.The firm provides a comprehensive analysis for our clients to determine where the debt shield will be beneficial according to their objectives, risk tolerance and overall financial outlook. We normally do not implement the debt shield if the client does not have a net worth exceeding $1,000,000 and or income in excess of 250,000, per year. Family Limited Partnerships (FLP): In a FLP, the general partner(s) run the partnership and there are limited partners who have an ownership interest. Those limited partners have virtually no say about operation or management of the partnership. The general partner(s) is personally liable for partnership debts; and, the limited partnersí liability is limited to their investment in the limited partnership. Corporations may be the general partner if the lack of limited liability is an issue.A typical FLP will see the husband and/or wife as the general partner(s), retaining management of the assets, and the child(ren) as limited partners. The ownership of FLP interests is usually structured so that only a very small proportion of the partnership is owned by the general partner(s). The general partner(s) usually own l%-2% of the FLP, with the limited partners owning the remaining 98%-99%. Of the limited partner-owned interests, a trust generally owns 90%, with other family members owning the remaining percentage in their individual names.In a FLP a creditor of one partner can't seize partnership assets to satisfy a claim against that partner. Instead, the creditor must get a 'charging order' against that partner's interest in the partnership. A 'charging order' is a notice to the partnership of the creditor's claim against the partner. The asset protection value of this structure is that chances are good that the FLP will never make a distribution to the family member with the creditor problem, so the creditor's claim may never be satisfied from the assets held in the FLP. Corporations: Domestic Corporations - The chief value of a domestic corporation is its ability to insulate personal assets against liabilities. The domestic corporation is not always the ideal vehicle to safely hold personal assets. The two major drawbacks of the corporation as an asset protection structure are (1) transfers of assets to and from the corporation carries tax implications, and (2) creditors of a stockholder can claim the shares you own or any obligations due you from the corporation.Foreign Corporations - Over the past few years, the foreign corporation has enjoyed increasing popularity as an asset protection tool. The main reason for this is that foreign corporations are outside the jurisdiction of the U.S. courts, and many foreign countries do not recognize judgments obtained against them in a U.S. court. This means that creditors may find it extremely difficult to collect and enforce judgments they obtain against a foreign corporation that has no connections to the United States beyond ownership by United States shareholders.If a foreign corporation is a part of an asset protection structure, it should be only one facet of a multi-faceted plan. It should be integrated to work in conjunction with the other strategies. Using a layering technique you can obtain additional privacy and create more hoops for creditors to jump through before they have the potential of reaching any of your assets and you will discourage claimants from pursuing a claim. Limited Liability Companies (LLC): An LLC is a hybrid between a partnership and a corporation. An LLC has some of the best characteristics of corporations combined with some of the best characteristics of partnerships. From an asset protection standpoint, the LLC can provide protection from both business creditors and personal creditors. And, because it has the characteristics of a partnership, creditors will find it much more difficult to foreclose on the interest owned by a member of an LLC. Captive Insurance Company (CIC): The CIC is a legitimate insurance company, registered with the IRS. With the total combined elements of a captive insurance company, it is one of the most effective asset protection and tax planning vehicles available. Vital to the success of this strategy is the importance of having the CIC competently structured by a team of specialists in this area.The captive insurance company can be structured as tax exempt entities, including but not limited to, no tax liabilities on its premium income and tax free growth on its assets. Premiums paid, as a result of written contracts (the insurance) by the captive, are fully deductible to the business owners or physicians practice. Deductible premiums can well exceed $500,000 per year, depending on the type of captive. The captive can be structured to insure elements, such as, additional malpractice coverage, employee harassment, and wrongful termination. Other business risks can also be examined and then insured with the respect to the particular business activities and operations in mind.Drawbacks to the CIC are the expense associated with implementation and ongoing due diligence and compliance. Most of the mechanics are handled by the advisory team associated with your captive. Other than that, the strategy acts as a powerful play in the tax planning, estate and asset protection arena. Trusts: Common law trusts have been around in one form or another for hundreds of years and have been used for everything from simple probate avoidance to complex estate planning, asset protection and tax reduction strategies. A trust is nothing more than a contract between two or more people for the ownership, control, and management of property. Because a trust is a separate entity from you, it can own property in its own name. An asset protection trust is any trust used to insulate assets from creditors. Although title to any asset must be transferred to the trust, the asset remains with the person establishing the trust and they can direct who receives the beneficial enjoyment of that asset. When planning the use of trusts to shield assets, you must carefully consider the person(s) or institution to be named as the trustee, and the powers and rights given to the trustee.Revocable or Living Trusts (Foundational Estate Plan) - In order to receive the asset/wealth protection benefits of using a trust you should use an Irrevocable Trust. If you use a trust that you have the power to revoke, then your creditors are, under certain circumstances, allowed to reach into the trust and obtain its assets to satisfy claims against you. That is why a living trust, which is revocable during your life, is almost worthless as an asset protection structure. While you can insert the standard ìspendthriftî language into the living trust to protect your beneficiaries from the claim of their creditors until they are entitled to a distribution from the trust, you are generally not permitted to use this kind of provision to protect yourself.Domestic Asset Protection Trusts (DAPT). The Domestic Asset Protection Trust is a trust with trustees located in the United States and is subject to a host of federal and state regulations to assure the safety and integrity of the assets held. The domestic trustee manages and administers the trust property and any claimants or creditors must deal with the trustee.Foreign Asset Protection Trusts (FAPT). In establishing an FAPT, you transfer ownership of some of your assets into a trust that has only foreign trustees (with no offices or agents in the United States) who manage and administer the trust property from an off-shore site. Any claimants or creditors will have to deal with the foreign trustee. Summary Comments Because of the litigious nature of our society and larger jury awards, members of the medical profession should be informed of the benefits of instituting a plan to protect their assets before a problem arises. If done properly, doctors and other members of the profession can protect assets from the claims of potential but unknown claimants. Although several different strategies are available to create an effective asset protection structure, each personís circumstance is different ó so your priorities will dictate your individual strategy.We recommend that your financial consultant be well versed in the area of asset protection and perhaps, be able to discuss issues related to the same with your legal counsel. In effect, your overall financial plan should be developed with an asset protection overlay in order to address strategies that seek to "protect your assets and your family". How We Work Our first priority is helping you take care of yourself and your family. We want to learn more about your personal situation, identify your dreams and goals, and understand your tolerance for risk. Long-term relationships that encourage open and honest communication have been the cornerstone of my foundation of success. This information is not intended to be a substitute for specific individualized legal advice. We suggest that you discuss your specific situation with a qualified legal advisor. Legal services are not offered by LPL Financial or Baxa Advisors Inc.