Sunday, December 12, 2010

Basic Asset Protection Strategies

Today I am going to talk to you about Three Methods to Provide Asset Protection to Your Wealth.  This is not a complete list, but Three easy to implement common methods that any estate can take advantage of to shore up their Asset Protection planning.  But before I discuss why you need asset protection let’s first discuss what asset protection is.
            According to Jay Adkisson in his book Asset Protection, asset protection is pre-litigation planning to deter lawsuits and promote settlements.  The primary goal of asset protection is to bring closure to actual or potential litigation with as little disruption to the debtor’s business and with as little loss of wealth as possible.  What asset protection planners do is best described as Wealth Preservation.
                        When should Asset Protection be done?  The answer is simple – the earlier the better.  It is like buying insurance.  You cannot wait until after the accident to do the planning or purchase the insurance.  Then it is too late.  The same goes for asset protection planning.  The biggest hurdle for asset protection is the Fraudulent Transfer Laws.
            According to Adkisson, it is not the structure that is created for asset protection that should be given the greatest emphasis.  It is the method and timing of the transfer into the structure that is most important.  So what is a Fraudulent Transfer?  It is a transfer in derogation of the rights of a creditor to satisfy his judgment against the assets of the debtor.  What happens if the Court determines that a transaction is fraudulent?  The transaction is unwound as though it never happened.
            Why should we be concerned with Asset Protection?  According to SixWise.Com there are over 16 million lawsuits filed in the United States each year and this number is rising by about 12 percent each year.  The group Lawsuit Abuse indicates that of these 16 million lawsuits 1.4 million lawsuits are filed in California each year.  That is almost 7000 lawsuits filed each day the courts are open.  Therefore, the question has become not if you will be sued in your lifetime, but when.  And if you are a person of wealth you have a 100 percent chance of being suit once if not multiple times in you life.
            According to, many of these lawsuits are filed against doctors and other professionals.  With the economy that we are in and the ease of filing lawsuits many lawsuits are being filed with the “I have nothing to lose mentality” with the hope of winning the lawsuit lottery.
            So what can you do to protect yourself?  Here are three Methods to Provide Asset Protection to Your Wealth:
1)                  Protecting Your Home – Your home should not be held in your name or in the name of a living trust if you have any equity that your want to protect.  It is a myth that a living trust provides any type of protection.  Instead the home should be transferred to an irrevocable trust such as a Qualified Personal Residence Trust or an Irrevocable Defective Grantor Trust.  Both of these vehicles will add substantial asset protection.  A cheap and easy protection is filing a homestead exemption on your home. 
2)                  Protecting Your Retirement Assets – Many people believe that the assets they have in an IRA are protected from creditors.  Nothing could be further from the truth.  Only qualified pension plans such as 401K’s and Defined Benefit plans that have multiple common law employees in the plan are protected by ERISA – the federal law that protects pension assets.  If you have a significant sum in an IRA you should consider transferring the assets to an ERISA plan for the great asset protection benefits that they offer.  This may be the single best Asset Protection devise that exists.  If you remember, the Goldman’s have been unable to reach O.J. Simpsons pensions assets even though they have a $38 Million judgment against him.  This is how strong ERISA Protection can be.
3)                  Other Protections – Equity Stripping – This is an effective technique to remove equity from property by borrowing against the property.  The cash is either spent or protected with asset protection vehicles such as asset protection trusts.
The bottom line is that we should all practice some form of asset protection.  Most of us already do without realizing it.  For instance, when we buy insurance we are practicing asset protection.  The difference is whether we have a comprehensive plan to protect our assets and whether we use any of the techniques mentioned above or various other techniques that are available.  The greater your wealth the more asset protection you may need, and even this will depend on your aversion to risk and the cost benefit of the plan you design.  However, I think that in this litigious society we live in all of us should engage in asset protection based on the amount of wealth we possess.

Sunday, August 22, 2010

Sale of Closely Held Businesses to Defective Grantor Trusts

Owners of closely held businesses can benefit for tax purposes with the sale of the business to an intentionally defective grantor trust.  This is one of the most effective techniques to freeze the value of the business owner's estate and transfer the future appreciation of the business to future generations of heirs of the taxpayer. 

Due to current economic conditions and the lowest interest rates we have seen in a long time, now is the time to consider the technique of selling assets to an intentionally defective grantor trust, and take advantage of a tremendous wealth transfer opportunity.  It is almost a certainty that the estate tax will come back in some form next year.  If current law does not change, we will have a maximum estate tax rate of 55% and a life-time exclusion of $1,000,000.  If this comes to pass, this will be the highest estate tax rate we have had in ten years.  

To properly utilize this technique the deal must be structured properly.  The trust document created must intentionally violate one or more of the grantor trust rules, the grantor must not retain any powers that would cause inclusion in their estate, and the document must ensure that the dispositive scheme created by the grantor is successfully created paying particular attention to extending the duration of the trust to as many future generations as possible.

The end result will be a trust that is treated as owned by the grantor for income tax purposes, but not for estate tax purposes.  Thus, removing the business from the estate of the Grantor and transferring future appreciation in the business to future generations.

If you will have a taxable estate in 2011 and own a business, you should give this technique some consideration this year.  It is one of many methods we can use to lower your estate tax bill with the coming return of the estate tax in 2011.  Remember, the estate tax is a tax that we can completely eliminate with proper and timely planning.  Leaving more of your legacy to your family.  

Thursday, June 17, 2010

Disabled Beneficiaries Will Benefit From A Special Needs Trust

If you are the parent of a disabled child you must consider how to leave property to your child, and whether you can provide sufficient assets to provide for your child for their lifetime.  This is not as easy as it first may seem.  A disabled child may never have the mental capacity to manage their own financial affairs, you may not have assets that can fund the needs of the child for the rest of their life, and if your child receives assets directly they may lose access to essential government benefits.

Fortunately, there is a solution to this dilemma that is relatively straight forward and cost effective.  A Supplemental Needs Trust, or more commonly called a Special Needs Trust, can be created for the benefit of the Special Needs Child.  A properly drafted Special Needs Trust will solve the above mentioned problems, and more.  The trust can provide for an advocate to make sure your child receives proper care and the services that he or she needs when you are no longer there to do so.  The trust can pay for your child's personal items, vacations, and social events. 

There are occasions where Medicaid will not pay for certain medical care or treatments that you would have provided for if you were there to make the decision.  The trustee for the trust, your child's advocate, can then step in and provide for these services if necessary.  The trust is drafted such that the trustee can pay for items in their discretion so that the means test for essential government benefits is not violated.

If you do not have the wealth necessary to fund the Special Needs Trust, the trust can be funded with Life Insurance.  A very cost effective strategy is to fund the trust with a second to die policy that pays out the benefit to the trust when the second parent dies.  Since the policy is based on two lives, the cost is substantially less than a policy based on a single life.

A Special Needs Trust requires specific language to accomplish its goal. For example, it must state that it is intended to provide supplemental and extra care over and above what government benefits may provide.  It also must state that it is not intended to be a basic support trust.  It should also reference the various relevant government codes and statutes that authorize the creation of this type of trust.

It is a good idea to create a Special Needs Trust early in a child's life as a long-term means to hold assets for the child benefit, and provide for the child in the event of the untimely and early death of the parents.  The trust can be created as part of the parent's estate plan.  The trust can be established at any time before the child's 65th birthday.

Who should prepare your Special Needs Trust?  An estate planning or tax attorney that is familiar with the special issues and provisions of this type of trust.  A poorly written Special Needs Trust can cause loss of government benefits, and other financial assets.  An attorney that specializes in this area knows the special concerns of this type of trust, and drafts special language into the trust document to preserve and protect the assets for the benefit of the special needs child. 


Sunday, June 6, 2010

Do You Need a Tax Lawyer That is A Certified Tax Specialist?

Why would you need a tax lawyer that you hire to be a Certified Tax Specialist?  The State Bar of California certifies attorneys as Tax Specialists who have demonstrated proficiency in the specialized field of tax law.  The specialist program with the State Bar for tax law encourages the maintenance and improvement of attorney competence in the field of tax law.

What does the State Bar require to certify an attorney as a specialist?  A Certified Specialist is more taht an attorney who specializes in a particular area of law.  Technically, an attorney cannot refer to themself as a specialist unless they are certified by the State Bar.  A California attorney who is certified by the State Bar as a Taxation Law Specialist must have (pursuant to the State Bar of California Board of Legal Specialization):
  • Taken and passed a written examination in Taxation Law;
  • Demonstrated a high level of experience in Taxation Law;
  • Fulfilled ongoing education requirements;
  • Been favorably evaluated by other attorneys and judges familiar with her or his work.
What can a Certified Specialist do for you? 
  • Help you plan your personal and business activities to reduce income taxes, property taxes, and death taxes;
  • Protect your rights by representing you in tax controversies with the Internal Revenue Service, the Franchise Tax Board, or State Board of Equalization;
  • Reduce tax problems by planning your estate and advise you on  your retirement benefits and life insurance;
  • Show you how to make title to your home and how to transfer real estate or other property without unnecessary income or death taxes;
  • Assist you with complicated business transactions such as partnerships, corporate tax planning, and business sales.
"Whether your situation is simple or complex, you should consider hiring an attorney who specializes in Taxation Law and who is committed through certification to maintaining her or his proficiency through continual practice and continuing education." (The State Bar of California).

Wednesday, March 24, 2010

7 Tax Deductions You Don't Want to Forget This Year.

We are nearing the filing deadline for individual income tax returns once again on April 15, 2010.  It is time to start thinking about reducing your tax bill as much as possible.  Below are 8 often missed tax deductions that can give you big savings on your return.

1)  Contributions to IRA's - You can still make contributions to your 2009 IRA until the due date of your return. 

2)  Points on Mortgages - If you refinanced during the year and paid points on your mortgage you can amortize and deduct the points over the life of the loan.  More importantly, if you have old points that you are currently amortizing, you can now write the balance off in full since the mortgage was paid off.

3)  Non Cash Contributions - You can take a deduction for non-cash contributions that you made to charities.  This includes mileage on your car for charitable activities.

4)  Energy Savings Home Improvement Credit - If you purchased Energy Saving devices that are eligible for a tax credit, do not forget to take the credit this year.

5)  Investment and Tax Expenses - Fees that you pay for investment planning, tax planning, and tax preparation are tax deductible.

6)  Casualty Deduction - If you suffered any theft or had any damage to property due to acts of God, you may be able to take a casualty deduction.

7)  Educator Expenses - If you or your spouse are a qualified educator, you may be able to deduct a protion of your educator expenses.

Friday, January 1, 2010

Congress Lets 50 Tax Breaks Expire at the End of 2009

If you were not paying attention you would not have noticed, but congress along with doing nothing about the estate tax at the end of 2009 let 50 tax breaks expire.  These tax breaks are traditionally extended at the end of each year by congress.  However, this year the congress was so tied up in other issues like the health care bill that they did not bother to pass an extender bill.  This has happened before and when it did it took congress until October to pass an extender bill retroactive to January 1.  However, there is no certainty that this will happen again, and if it does it will most likely not extend all 50.  Congress is in a budget crisis year and they will be looking for areas to increase revenue, so watch out. 

Below is a list of items that were not extended that are most like to affect the most taxpayers:

  • The annual Alternative Minimum Tax patch.  If this is not extended, over 4 million additional taxpayers will be snagged by the Alternative Minimum Tax.
  • Research Tax Credit.
  • Deduction state and local sales tax for those that itemize.
  • The $1000 property tax deduction allowed for those that do not itemize.
  • The $4000 deduction for college tuition.
  • The $250 deduction for teachers that buy their own supplies for classrooms.
  • The provision that allows those 70 1/2 or older to transfer up to $100,000 from an IRA to a charity.

The uncertainty of these provisions being extended will make it difficult to determine estimated tax payments for 2010.  If taxpayers assume that the deductions will be extended and they are not, they could be subject to penalties for not paying enough estimated taxes.