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Update your beneficiary designations

February 6, 2014, by

When you get a new job, you have to fill out a lot of forms. There are a lot of choices to make. Often, one of those is picking a beneficiary designation for your 401(k).

Or perhaps years ago you started a retirement account with a lovely small investment firm. You may not even remember, but you probably picked a beneficiary. And an alternate beneficiary.

What about your life insurance policy? Or work-provided life insurance? If you have them, you've picked a beneficiary.

Here's today's to-do item: Check those beneficiary designations. Update them.

Those funds don't pass through your Will unless your Will is specifically drafted to override them (and even then, sometimes that "Superwill" provision doesn't work). Your retirement plan and life insurance pass directly to your designated beneficiaries.

In several situations we've had recently, a parent designated one child as a beneficiary for an account - rather than dividing it between all the children. Legally, the beneficiary doesn't have to share. The money is his or hers.

It may seem logical to designate the most responsible child as the sole beneficiary, assuming they'll handle distributing the money to their family members. But that doesn't always happen.

Worse, we've had situations where family relationships changed - but the beneficiary designations didn't. Family members left funds to exactly the wrong people.

So, go change your beneficiaries. While you're at it, it's best not to designate minors. Chances are they'll turn 18 before your death, but you never know. Financial institutions won't give funds to minors, so if something happened to you, there would have to be a court action to distribute the funds to a trustee or a custodian. A better plan: Draft a will with a trust or custodian provision for minors, and designate that as the beneficiary on behalf of your minor.

Avoid elder exploitation with proper planning

January 2, 2014, by

Shortly before Christmas a Lake Tapps woman was sentenced to two years in prison for stealing more than $200,000 from her elderly father, who has dementia. The woman said she was addicted to gambling and had convinced herself her father thought it was OK. It's a sad and all-too-common scenario. It's one that families can plan ahead to try their best to avoid.

The thefts were accomplished easily because her father had made her a co-signer on his bank account. While making a loved one a co-signer on a bank account can be helpful, a better solution is to execute a Durable Power of Attorney document to allow a trusted family member or friend to manage your assets if you become incapacitated. Your trusted friend could then manage your money, spend it on your mortgage or rent, your retirement home fees or nursing home care, your food and transportation, and even make gifts for you if you had an established pattern of doing so.

With a Durable Power of Attorney, family members or other interested parties have the right to request that the person managing your money - called your Attorney in Fact -provide a regular accounting. They also can ask the Court to order them to provide an accounting. The Attorney in Fact must keep careful records of how the money is managed so they can show other parties, or a judge, how the money was spent. If the Court finds problems, they may remove the Attorney in Fact and put the alternate in his place.

A Durable Power of Attorney has another benefit: You can nominate your choice of guardian, if one is needed; and often a DPOA saves you from needing a guardianship altogether.

Sharing a bank account with a loved one is problematic for a couple of reasons. For one, there's no accounting requirement. If your family members or friends think someone is stealing from you, there's no way to request an accounting; their only solution may be to call 911 or Adult Protective Services. Additionally, after you die, the contents of the joint bank account generally goes to the surviving account holder - not to your beneficiaries under your Will.

In sum, we recommend using a Power of Attorney document because of its flexibility and accountability. If you are using a Durable Power of Attorney to manage a loved one's money, contact your attorney if you have any concerns about your decision-making.

Is the owner of your property the insured?

October 17, 2013, by

title ins policy.pngOf course the owner of my property (me by definition, right?) is the insured on our property and casualty policy. Duh!

Well come to think of it, maybe not. At the advice of my lawyer and accountant, I put the apartment holding into an LLC, for liability protection. Am I still the insured? And if so, what if the place burned down, with the LLC as the owner but not the insured. Could the insurance company repudiate coverage? Yikes!

Note to self: contact my agent Monday and get the LLC at least added as an insured. (Editor's note: the insurance company's initial reaction is sometimes to charge a higher commercial rate for an LLC owner. We have found this can usually be avoided.)

Continue reading "Is the owner of your property the insured?" »

Should you give some of your LLC away?

October 10, 2013, by

father walking daughter.jpgCPA Lars got rich uncle Nils's real estate into family partnerships in the early days of that device's popularity. Being in the financial business with a lot of wealthy clients, Lars got exposed to the advantages. Even the early limited partnerships offered asset protection, at least for those limited partners who weren't also the general partner. When limited liability companies were authorized they offered even the general partner (now to be called the manager) a shield. Lars has helped Nils to convert his LPs to LLCs with little cost or tax effect.

LLCs also offer a good way of making gifts to save estate taxes. The founder is usually a manager, and can keep control of the investment despite having given away shares of ownership. Part of the appeal is in the valuation of the gifts. A 5% interest in an LLC with a $2 million building would seem to be worth $100,000. But you couldn't sell it for that, because a new 5% owner would have little control over the fate of his investment, and a scant market for unloading it. So an appraiser might say it's a $70,000 gift, thus saving $30,000 of the donor's gift tax exemption. Some call this a "discount," but it's just the reality of the value of the interest given.

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Should your investment real estate be in an LLC?

October 3, 2013, by

bank closure.jpgExecutive summary: Yes.

Lars's Uncle Nils is a very rich guy who owns several investment properties. Technically he doesn't own the properties; he owns limited liability companies (LLCs) that own the properties. Why?

Think inside and outside liabilities. Let's say there was an explosion in one of Nils's apartment buildings, that was found to be caused by negligence (say the failure to attend to a heating system he had reason to believe was shaky). Let's say there were death claims coming out of the incident, that exceeded the amount of Nils's insurance. If he owned the apartments outright, all his assets would be exposed. If instead they were in an LLC that was operated properly, the loss would likely be limited to that single investment. This is protection from inside liabilities.

Continue reading "Should your investment real estate be in an LLC?" »

Are you doing homeowners' insurance right?

September 5, 2013, by

house fallen down in earthquake.jpgLars is paying his homeowners' insurance bill for the year. The company allows installment payments but Lars always just does it all up front. He does the same with property taxes in April, even though he could put off half 'til October without even any interest charge. He knows this makes him an old soul.

Ever the diligent professional, Lars tries to get a little thought going on the seeming non-subject of homeowners' insurance, hoping he might come up with a helpful occasional tip for clients. Plus a little diligence could make a big difference for Lars's family in a future problem situation; it's part of his role to look out for such things. The topic feels boring, but there are probably as many insurance people as there are CPAs and maybe they think their work is as interesting and useful as Lars's.

Lars tries to come up with a short list of questions. First, OK, how about amount of coverage? What's my house worth (remembering the building could burn down but the land couldn't)? And what if I guess wrong? Isn't there some sort of guaranteed replacement coverage, and if so do I have it?

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The Huber case: do self-settled asset protection trusts work? (3 of 3).

June 27, 2013, by

cook islands.bmpOur CPA friend Lars is thinking about his three clients who have Alaska asset protection trusts. After the Huber case, the fear is that such a thing works to protect the assets in it, as long as you don't need it badly. A Bankruptcy Court in Washington has applied the law of that state, that does not favor self-settled trusts, to invalidate one formed under Alaska law, with an Alaska trustee and holding mostly Alaska LLCs and corporations. This is justified because of a stronger tie to Washington, where the founder of the trust lives and most of the assets owned by the LLCs and corporations lie.

Under this reasoning, a trust formed under Delaware or South Dakota law would fare no better. Lars has heard that offshore (non-U.S.) trusts in places like the Cook Islands offer greater protection. But if the assets or the founder is in the U.S. the courts here still have a remedy, seizure of the holdings or contempt of the trustor. A guy could spend some time in jail, for trying to stand by his trust.

Continue reading "The Huber case: do self-settled asset protection trusts work? (3 of 3). " »

The Huber case: do self-settled asset protection trusts work? (2 of 3).

June 20, 2013, by

bank vault opened.jpgThe Federal Bankruptcy Court in Tacoma made two main holdings pertinent to our discussion. First, it found that under either Federal or State law, the transfers to Don Huber's self-settled Alaska asset protection trust were fraudulent conveyances and thus ineffective to protect the transferred assets from Don's creditors. This is not greatly surprising in retrospect; Don seemed to have reason to fear financial disaster by the time the Alaska trust was established, and that turned out to be the case.

The Court made another ruling that wasn't really necessary since it had already invalidated the transfers to the Alaska trust. This other holding surprises some. It considered whether the trust would have been legally valid even if the transfers to it had been upheld. It first had to decide whether Alaska law applied to the question, as the trust documents stated, or whether the law of Don's home state (Washington) should instead be governing. The law of Washington does not authorize self-settled asset protection trusts; it says that if such a trust falls under its laws, it may be reached by creditors of the person who established it.

Continue reading "The Huber case: do self-settled asset protection trusts work? (2 of 3). " »

The Huber case: do self-settled asset protection trusts work? (1 of 3).

June 13, 2013, by

alaska map.jpgDon Huber was a land developer from Tacoma who used leverage (borrowing) to enhance his returns. His son got an MBA and came into the business. What had been a great business went terribly wrong in 2008. The land wasn't developing but the loans remained.

In September of 2008, Don and his son arranged with Seattle counsel to form a "self-settled" asset protection trust to be governed by the law of the State of Alaska. These arrangements are described in our November 29, 2012 blog, linked here. Don was both the person establishing the trust, and its primary beneficiary. Alaska law says that one who does this can keep the trust assets out of the reach of creditors, if the transfers to it aren't "fraudulent conveyances" to evade present or threatened claims.

Continue reading "The Huber case: do self-settled asset protection trusts work? (1 of 3). " »

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

TE BLOG. Scales of justice. 11.2012.iStock_000015782295XSmall[1].jpg
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

TE BLOG. students on campus. 11.2012.iStock_000014102676XSmall[1].jpg
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

TE BLOG. Country woods paths. 11.2012.iStock_000016650751XSmall[1].jpg
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

TE BLOG. Football tv. 11.2012.iStock_000009954069XSmall[1].jpg
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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Asset protection for Bernie (cont'd), and the fraudulent conveyance rule.

October 25, 2012, by

TE BLOG. House Construction. 10.2012. iStock_000004421180XSmall[1].jpgWe're back to the meeting of CPA Lars, lawyer Duncan, and real estate developer Bernie, on asset protection for Bernie and his wife Liza. Duncan has just wrapped up the insurance discussion by calling for overall review by a good broker. Duncan will move now to the subject of fraudulent conveyances, the second in what he indicated were 6-8 topics for today that are supposed to take a couple hours. He's good at taking charge of agendas and meetings. Then Duncan will write a letter, then the three will meet again to start applying the ideas to Bernie's situation.

The insurance discussion had gone quickly, about ten minutes. Even though he finds the subject interesting, Lars is doing an over/under thing in his mind about the length of the meeting, and making marks on it indecipherable to others. Duncan offers a recent local case that went to the State Supreme Court, to give the basic notion of fraudulent conveyances: Thompson v. Hanson. The plaintiffs had a judgment for about $70,000 against a development company. Seemingly unfortunate for the plaintiffs, the company was insolvent (had no net value) by the time the judgment was obtained, partly because it had distributed some of its remaining real estate to the individual owner of the company. The plaintiffs then sued the owner on the notion he had received a fraudulent conveyance from the company, and won in Superior Court and the Court of Appeals, but then the owner appealed the case to the Supreme Court.

Continue reading "Asset protection for Bernie (cont'd), and the fraudulent conveyance rule. " »