November 2012 Archives

Asset protection for Bernie (cont'd), and self-settled asset protection trusts.

November 29, 2012, by

TE BLOG. Grizzly bear. 11.2012.iStock_000012121603XSmall[1].jpgThe final topic in Duncan's mini-seminar to Lars and Bernie, on asset protection: self-settled trusts. This is something newish to Lars, and seemingly rather complicated in an intriguing sort of way, like a TV drama. So he's looking forward to clearing up his thoughts on the subject.

Duncan, as usual the good explainer, starts by saying the law is generally that, if Bernie sets up a trust and makes himself a beneficiary of it, the trust is available to Bernie's creditors. That's the law of Bernie's home State of Washington, for example. However, in recent years some enterprising states, looking for trust business, have changed their laws to give protection to such self-settled trusts. Thus, Bernie and Liza may put assets in a trust in Alaska or Delaware, and if done properly this will allow them to be beneficiaries and at the same time enjoy protection of the trust from their creditors.

A couple of the key elements of a self-settled trust are that the trustor or settlor (the person or couple who sets it up and funds it) may not be the trustee, and they may not be guaranteed distributions from the trust. They may, however, name a friendly party as trustee, who may distribute funds from the trust to them under a discretionary standard. In addition, the trust must have some Alaska (or Delaware) connection to take advantage of the favorable law. The connection might be an Alaska LLC or Alaska property contributed to the trust, and a meaningful account with an Alaska bank.

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Asset protection for Bernie (cont'd), and separate property.

November 22, 2012, by

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Lars's meeting with Duncan and Bernie resumes. Duncan says the effect of a married couple's liabilities on their community and separate property is a little tricky, but it's important in cases where the question arises. He gives an illustration. A woman from a wealthy family marries a guy who's a budding obstetrician. If she allows her separate property to become community property, either by agreement or by commingling, and a medical malpractice case arises against her husband, then her property is exposed to the case. If she keeps it segregated and makes no community property agreement, the claimant may not get at it.

Duncan lines out part of the theory. The income of a married person from work is community property. The idea is a married couple is like a partnership, with each performing a different part of the work, but with both contributing to the overall effort. So the income from work is community, but so are the liabilities. Not so with the wife's separate property. If the assets from her family were in trust for her, that would likely be even better protected than separate property.

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Asset protection for Bernie (cont'd), and transfers to children and charity.

November 15, 2012, by

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Duncan's next main point is that certain lifetime transfers, to children and charities, can be asset protection. Bernie has already done some of this, for example in creating 529 education accounts for his grandchildren. This move actually has protection of two sorts, partly because it is a transfer (the current topic) and partly because the funds have gone into an asset specially treated (the subject just before this).

Bernie could also give liquid assets or real estate LLC interests to his children or grandchildren, or to trusts for them, so long as there were none of the fraudulent conveyances Duncan had described. In Bernie's case there would be estate tax savings as well as asset protection achieved, because the balance of 2012 is an unusually good time to make tax-saving gifts.

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Asset protection for Bernie (cont'd), and certain assets specially treated.

November 8, 2012, by

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Lawyer Duncan, CPA Lars, and client and developer Bernie move on to the next topic in their meeting on asset protection for Bernie: certain assets with statutory protection from claims. The sun is just hitting the horizon out Lars's window. About halfway through the agenda.

Duncan says life insurance proceeds and retirement plans may not be taken by a creditor. These are among the most important exempt assets generally, but this isn't all that great for Bernie, who has skimped on life insurance and retirement plans, putting everything he has into real estate. He could take some of his liquidity now and invest it in a big life insurance policy, even one with a significant current cash value. Duncan says the statute actually only talks about proceeds of life insurance, not cash value, but he believes the investment element of a policy on a person still living, would have protection. This idea doesn't thrill Bernie or at least he doesn't respond to it. Lars guesses that Bernie is either uninsurable, or doesn't want to invest in life insurance (or both).

Bernie: "Isn't my house exempt? Isn't that what saved O. J. Simpson, at least for a while?" Duncan: "That's in Florida. In Washington only a certain amount of equity qualifies. I think it's $125,000."

There are other statutory exemptions, like 529 education accounts and GET college credits. Bernie does show a little interest in these. He has a lot of descendants.

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Asset protection for Bernie (cont'd), and the use of entities.

November 1, 2012, by

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The sun is almost setting in the window Lars is facing, at the meeting on asset protection ideas for Bernie. What a great time is fall, leaves and some blue sky, later daybreak for early Sunday walks at the beach. Football too, but the drama of too many important games wasn't doing it for Lars. Is he less of a guy now? Duncan moves on to the subject of entities as asset protection.

Duncan asks and Bernie tells him he has a mix of entities. He hasn't done any real estate development just in his own name. Good; that would bring full personal liability for all losses and claims. Much of the work was done in limited partnerships, with Bernie as general partner. Not much better for Bernie, says Duncan - a general partner has full liability. In more recent years Bernie used limited liability companies (LLCs). These are better - they can limit each participant's liability to his or her investment in the project. Except of course those who guarantee loans, but they are protected from other kinds of claims. And Duncan says now even a limited partnership in Washington can get LLC-like protection for all including the general partners, by electing limited liability limited partnership (LLLP) status.

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