Estate Planning with Retirement Accounts

CassandraOne estate planning nuance is “beneficiary designation assets.”  These are assets that are distributed at death to the person named on a beneficiary designation form, and do not follow the direction of the will.  These assets may be life insurance, joint or pay-on-death bank accounts, joint or pay-on-death investment accounts and retirement accounts.  During the initial meeting, it is important to discuss the client’s assets and these accounts in particular.  If family dynamic has changed, be it from a divorce, death in the family or simply the fact that once small children are now adults, these beneficiary designations may need to be updated.  These assets pass outside of probate.  Essentially when the account holder dies, upon confirmation of death, the entity which holds the account simply distributes the assets to the named beneficiary.

Retirement accounts (IRAs, 401k plans and the like) are special, however, because they typically allow beneficiaries to prolong withdrawal if properly handled.  If the plan allows, beneficiaries may elect to use their own life expectancy in calculating the minimum amount of money which must be distributed each year (this is also called “minimum required distributions”).  This is beneficial because it allows a beneficiary to prolong to amount of time the money is in the retirement account, allowing additional potentially tax free growth.

While many individuals choose to leave their retirement accounts to an individual beneficiary, i.e. their spouse or children, there may be good reason to leave such assets in trust.  Trusts offer many benefits, including asset protection, especially with the recent Supreme Court decision in Clark v. Rameker, 134 S. Ct. 2242 (2014), in which the Court found that a non-spouse beneficiary’s inherited IRA was not exempt from the beneficiary’s creditors in his bankruptcy estate.

In order to fully take advantage of both the protection a trust offers and the beneficiary’s life expectancy, the trust must be carefully drafted.  Such trusts are referred to as “see-through” trusts because the language directs the retirement plan to look through the trust at the beneficiary individually to determine life expectancy.  If the trust runs afoul of the rules, however, the consequences are harsh.  The trust and its beneficiary’s life expectancy are disregarded and the “5-year rule” applies, requiring a full distribution of the retirement plan assets within 5 year.

This is one of the many reasons it is important to have an attorney who is familiar with these rules to assist you with carefully drafting your estate plan.  We would be happy to work with you and your family to craft an estate plan which achieves your goals.

For more information regarding this or any other estate planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

Revocable Living Trust

hoffmankimcolorAs Georgia based attorneys, we are very comfortable with the Will-based Estate plan.  Georgia probate courts are friendly and easy to work with, and Georgia law allows a Testator to waive the requirements of a bond, inventory and reporting to the court.  We cannot overlook the importance of a Revocable Living Trust, however, for those clients with out of state assets or where avoidance of probate is simply a desirable goal.

A Revocable Living Trust is, as its name implies, revocable or amendable at will by the Grantor, and living, which means it is funded and used during the lifetime of the Grantor as opposed to solely at death like a Will.  Generally, the Grantor funds the Living Trust with all of his or her assets, and the Grantor is generally the sole Trustee and the primary beneficiary of the Trust.  Though this all sounds somewhat circular, the Trust provides a very legitimate legal solution:  having the trust own all of your assets means you do not need a legal process to change title to those assets upon your passing.

For states like Florida, the Revocable Living Trust is a common estate planning document simply to avoid the probate process.  There, unlike Georgia, courts require the Personal Representative to post a bond, an inventory of the decedent’s assets must be provided to the court, and various accountings are also required to be filed.  The result is a generally a significantly more expensive and time-consuming probate process than in Georgia.   The Living Trust is not just for Florida residents though.  A Georgia resident owning a vacation condo in Florida will be subject to Florida’s probate process at death.  Thus, not only will the Estate be subject to Georgia probate proceedings, but it will need to file ancillary probate proceedings in Florida too.  This rule is applicable to ownership of assets in any other state, not just Florida, as each individual state has their own laws about transferring title at death.  Having a Living Trust own your out of state assets forecloses the necessity of multiple probate proceedings.

Another significant advantage to the Living Trust based Estate Plan is privacy.  Despite Georgia’s ‘friendly’ probate laws, the original Will must still be filed with the Court and it becomes public record.  This means anyone can review the terms of your Will at death.  In addition, all of your heirs at law are entitled to notice of the filing of the Will and a copy thereof.  For those that prefer their bequests remain private, or who perhaps have made an uneven distribution among their beneficiaries, the Living Trust may be a better choice.  A Living Trust can even help avoid a Will contest where certain heirs may be left out of an inheritance.

Revocable Living Trusts can also be significantly beneficial to a Grantor who becomes incapacitated.  Incapacity proceedings are becoming some of the most common probate court proceedings as people live longer but do not necessarily have all of their faculties.  When you form and fund a Living Trust, you name a successor Trustee to take over management of the Trust assets upon either your death or incapacity, again, entirely skipping the court process for doing so.  This provides a seamless, and immediate, transition of control from you to someone else in the event you can no longer manage your affairs.  And, it is a person of your choosing.  Your Trust document can even be very specific as to who and how you are determined to be incapacitated, thus giving you a great amount of control even where you would no longer have the ability to have such control.

The key to an effective Living Trust is fully funding the trust.  Funding the trust is legally transferring title to all of your assets to the Trustee of the Trust.  There are no tax consequences to such transfer as the trust is revocable, the IRS ‘looks through’ the trust and treats the assets as though they were still yours for income and transfer tax purposes.  Funding is accomplished by changing the title on bank accounts and investment accounts and recording deeds to real property.  Your attorney should go through specific funding instructions with you after a detailed analysis of your assets.

Finally,  a Living Trust will contain all of the testamentary decisions and dispositions of a Will, including trusts as needed for the surviving spouse and descendants, charitable bequests and other gifts you want made upon your passing.

For more information regarding this or any other estate planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

Why YOU should have a BDIT

Ian 1As a business owner, does anything sound better than having your business protected from creditors and having it grow completely outside of your estate while still having full control over it? The Beneficiary Defective Inheritor’s Trust (the “BDIT”) technique allows all of that. Essentially, a trust beneficiary, the business owner, YOU, can grow your business in a trust established for you by someone else.

The biggest advantage of this strategy is that the BDIT will be for the benefit of the business owner and will be completely discretionary, so there will be no problem getting money out of the company if needed. Some other benefits of this trust are that the beneficiary/business owner has significant control over the trust property and it is a grantor trust with respect to the beneficiary, so that will further remove assets from the beneficiary’s estate while the assets grow tax free. One other advantage is that a BDIT is more flexible than a defective grantor trust as far as changing beneficiaries of the trust, so it might be a good option if a parent is not sure if their child can handle a business or a similar situation.

The mechanics of the BDIT are as follows:

  1. A Parent (or other third party, hereinafter the “Parent”) forms the trust (in a favorable jurisdiction for asset protection) for the benefit of the business owner;
  2.  The Parent contributes $5,000 cash to the trust and allocates $5,000 of GST exemption to it;
  3.  The Parent grants the beneficiary a Crummey power of withdrawal over the $5,000 for 30 days and it lapses;
  4.  The Parent retains no powers that could trigger the grantor trust rules for the Parent;
  5.  The Parent grants full discretion over distributions of income and principal to a third-party trustee;
  6.  The child is granted the power to remove and replace the independent trustee with another independent trustee;
  7.  The Parent grants a broad special power of appointment to the child, exercisable during life or at death;
  8.  The beneficiary will be the Investment Trustee and control all managerial decisions; and
  9.  A formula clause will be used to shift any unintended gifted assets to a non-GST tax exempt BDIT.

However, because the BDIT is a very complex strategy, it must be documented, implemented, and administered very carefully.  If all the proper procedures are followed, this transaction is legitimate despite the IRS not liking it.  Anyone with a growing business should look into a BDIT

For more information regarding this or any other estate planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

Musings from the CEO – Summer 2014

Mike HoffmanI saw a headline the other day that declared “Why You Should Update Your Estate Plan”. Now, there is a topic that I could write a book about!

I have heard statistics that up to 80% of Americans either have no Will, or some attempt at a Last Will and Testament that is sorely inadequate. The basic core documents that everyone needs are a Will, a General Power of Attorney (that kicks-in upon disability or incapacity), and a Health Care Directive. Once these documents are in place, they need to be reviewed periodically. Obviously, tax laws and family circumstances change. Also, more and more people move because of job changes, they retire to another part of the country, or they move closer to their kids and grandchildren.

A little over two years ago, the $5,000,000 estate tax exemption became “permanent”. This does not mean that it won’t change, and in fact, it does change by going up a little bit each year. Going from $600,000 (the exemption in the ‘90’s) to $5,000,000 took most of us off the estate tax paying rolls and did change the focus of a lot of estate planners. We generally pay more attention to income tax matters than we did before. For instance, if a married couple has over $10,000,000 of exemption available, rather than trying to get everything out of their taxable estates, we would like for at least that much property to go to their heirs from their estates (after death), therefore, with a brand new income tax basis.

I read that one commentator expressed that an estate plan is not meant to be put in a time capsule and to be opened and dissected at death. An estate plan will change and evolve. There are many things that can be accomplished with a comprehensive estate plan. Not only are we saving estate taxes, income taxes, and probate costs, we are protecting assets, providing sound management of assets, and taking care of other responsibilities.

How are we leaving assets to our spouse and descendants? Can we be better stewards of our wealth by considering appropriate planning techniques, such as trusts?

It is important to periodically check the ownership and beneficiary designations of life insurance policies to make sure that these liquid assets will be handled appropriately. It is extremely important to review beneficiary designations on IRA accounts and other retirement plan assets. Not only do you want to make sure the assets go where you intend, but you want to maximize potential tax savings.

The ownership of all assets ought to be reviewed periodically. There are several types of joint ownership that have different consequences for estate planning and tax purposes. It is not just deeds for real property that should be checked, but it’s also important to understand how the titling of your investment accounts can affect the treatment of your assets at death.

If you own property in other jurisdictions, such as a house at the beach or in the mountains, this can complicate probate matters for the family. It is a relatively simple matter to use one of several techniques to remove that particular asset from your probate estate, potentially saving a great deal of time, money and aggravation for your spouse and descendants.

Most family/closely-held businesses do not have a succession plan or an exit strategy. This is particularly concerning when it is that family business that created the wealth. Will the business suffer a potential loss of value to the family when the patriarch or matriarch is no longer in the picture?

There are countless reasons why you should update your estate plan. First and foremost, make sure you have an estate plan. A failure to plan is a plan to fail.

 

For more information regarding this or any other estate planning concern, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com, call us at 404-255-7400 or send us an email.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose. The information contained herein is provided “as is” for general guidance on matters of interest only. Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services. Before making any decision or taking any action, you should consult a competent professional advisor.

Legal Matters in Starting Your Business

Mike_Hoffman_17Join Mike Hoffman in this 74 minute audio as he hosts the 11th session of the 24 hour MBA in discussing how to get your business off the ground.  There are many different legal options in starting a business, and in this audio session, you will understand the best way to start your business and keep it successful for future generations.  24hrmba-11.mp3

 

Russ Thornton Interviews Kim Hoipkemier

Kim New

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Estate Planning for Women

Women are a powerful financial force in today’s economy as they independently earn, manage, and distribute more wealth than ever before.  That’s why at Hoffman & Associates we  feel it’s important for women to take control of their long term financial security and develop a proper estate plan.  A successful estate plan is one that helps protect and preserve your wealth, gives you control over financial matters, ensures children and elders are taken care of, and honors your strong charitable passions.

Today, women face many challenges whether married, divorced, single or widowed, including a possible lack of financial know-how, lower lifetime wages and compensation, and greater responsibility for caretaking of children and elders.  Why are women unique when it comes to estate planning?  First, because women generally outlive men by five to seven years, and the average age of a widow is merely 56 years young.  Some of these single women are faced with managing thousands and even millions in assets without ever balancing a checkbook.  For single working women, compensation is also a major obstacle as women tend to earn less over their lifetime as compared to men and many take time off during child-bearing years, which may affect social security and pension benefits.   Another challenge unique to women is their tendancy to be the main caregivers in the family, making it critical to develop a comprehensive plan for the care of minor and special needs children, as well as elderly parents.  Finally, women generally harbor more charitable inclinations than men making it a priority for them to consider philanthropy and giving as part of their estate plan.

Here is a  checklist women can use in developing a successful estate plan:

  • Become educated in the importance of tax planning, know the current tax laws, become familiar with exclusions and how to take advantage of them, investigate advanced estate planning tools and techniques, including trusts, gifting, and college savings plans.
  •  Create an itemized list of all property and debts, including, but not limited to, insurance policies, securities, bank accounts, real estate, jewelry and artwork, business interests, pension plans, IRAs, and other retirement benefits.
  •  Consult with appropriate advisors (estate planning attorney, CPA, financial advisor) and execute a Will to direct the disposition of your estate, designate who should be in charge, simplify probate, and name guardians for minor children.
  •  Consider a Trust for the protection of children and assets and to reduce the tax liability (income, gift and estate).
  •  Get general powers of attorney and advanced directives for healthcare in place.
  •  Create a viable plan to manage and preserve your estate, keeping in mind the changing exemption limits for passing assets.  Currently the permanent estate and gift tax exemption is $5,250,000.
  •  Consider having adequate life insurance in place to pay taxes if necessary and to help preserve your family’s lifestyle by paying for children’s education, mortgage expenses, taxes or other needs after your death.
  •  Record where a safe deposit box is located and maintain all important documents in an organized manner.  Maintain a written list of all current advisors and keep it with your  list of property and debts.
  •  Provide instructions regarding your funeral wishes and any prepaid funeral plans to whomever may be involved in making such arrangements.
  •  Consider charitable transfers to accomplish your estate planning goals. A charitable remainder trust, charitable lead trust, charitable gift annuity or outright gifts to any number of charities.
  •  If you are a business owner, plan for your business’ succession, so you are deciding who will manage your entity during illness, disability, or after death.

 

Although some women feel uncomfortable taking on financial responsibility for their  future and that of their heirs, we strongly urge every woman, whether married, single, divorced or widowed to take a careful look at their financial situation and plan accordingly. Married women should ensure their estate plan coincides with that of their husbands to adequately take advantage of tax considerations.  And since married women are more likely to outlive their husbands, they must be prepared to ultimately be responsible for the protection and distribution of all assets.  For many working women, their main concerns include retirement planning and long term financial security, guardianship for minor children, caretaking for elderly parents, lowering tax liability, and ensuring assets remain in the family bloodline. We encourage all women to consult with professional advisors to ensure adequate financial and estate plans are in place while also incorporating lifetime goals and wishes.  Hoffman & Associates has created specialized estate planning services  for women designed to address these specific needs.  For more information on our targeted services, please visit www.hoffmanestatelaw.com.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.  The information contained herein is provided “as is” for general guidance on matters of interest only.  Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services.  Before making any decision or taking any action, you should consult a competent professional advisor.

The New Tax Law: Does Your Estate Plan Need to be Updated?

Congress passed the American Taxpayer Relief Act of 2012 (the 2012 Tax Act) in the final hours of 2012.  The 2012 Tax Act means big changes for gifts, trusts and estates tax laws from what was scheduled to occur without any congressional action – something better known as the Fiscal Cliff.

We now have a permanent estate and gift tax exemption amount of $5,000,000, adjusted for inflation annually beginning in 2010.  We also have permanent portability, or the availability of a surviving spouse to use the deceased spouse’s estate tax exemption in certain circumstances.  The estate tax rate is set at 40%, and our annual gift tax exemption amount was raised to $14,000.  In addition, there were a number of changes to the taxation of trusts.

With the new changes in the tax law in place, and some of them “permanent,” does your estate plan need to be revisited?

The most popular estate plan for decades for married couples has been the bypass trust/marital trust or A/B trust combination to ensure the most advantageous tax situation.  With more than $10 million in assets exempt from estate tax, the concern over estate taxes has been all but taken off the table.  These trusts are still fantastic vehicles in an estate plan for reasons other than just tax savings, but it may be a good time to revisit your documents and make sure the trusts or other planning techniques fit your situation.

Dig out the copies of your current estate plan, and review these questions below.  If anything is of concern or may just need a second glance, give us a call.

  1. Is your estate large enough to trigger federal estate taxes?
  2. Does your plan distribute your property outright or in trust?  Do you know why?
  3. Does the plan name the appropriate individuals or entities to make distribution, investment or other important decisions?
  4. Is there a relationship among your beneficiaries that could cause a conflict with the decision maker you appoint?
  5. Are you recently married or divorced?
  6. Is either spouse a non-U.S. citizen?
  7. Are your charitable intentions, if any, properly reflected?
  8. Are your assets properly protected in the case of creditors, judgments or divorce?
  9. Do you have the proper powers of attorney in place in the event of disability or incapacity?  Does the document name your desired agent?
  10. Is your plan just out of date?

For more information regarding estate planning, business law or tax controversy and  compliance, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com or call us at 404-255-7400.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.  The information contained herein is provided “as is” for general guidance on matters of interest only.  Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services.  Before making any decision or taking any action, you should consult a competent professional advisor.

What the New Tax Law Means to You

As you probably know, Congress avoided the so-called fiscal cliff by passing – at the 12th hour –the American Taxpayer Relief Act of 2012 (the 2012 Tax Act), signed into law by the President on January 2, 2013. The 2012 Tax Act makes several important revisions to the tax code that will affect estate planning for the foreseeable future. What follows is a brief description of some of these revisions – and their impact:

  • The federal gift, estate and generation-skipping transfer tax provisions were made permanent as of December 31, 2012. This is great news for all Americans; for more than ten years, we have been planning with uncertainty under legislation that contained built in expiration dates. And while “permanent” in Washington only means that this is the law until Congress decides to change it, at least we now have more certainty with which to plan.
  • The federal gift and estate tax exemptions will remain at $5 million per person, adjusted annually for inflation. In 2012, the exemption (with the adjustment) was $5,120,000. The amount for 2013 is expected to be $5,250,000. This means that the opportunity to transfer large amounts during lifetime or at death remains. So if you did not take advantage of this in 2011 or 2012, you can still do so – and there are advantages to doing so sooner rather than later. Also, with the amount tied to inflation, you can expect to be able to transfer even more each year in the future.
  • The generation-skipping transfer (GST) tax exemption also remains at the same level as the gift and estate tax exemption ($5 million, adjusted for inflation). This tax, which is in addition to the federal estate tax, is imposed on amounts that are transferred (by gift or at your death) to grandchildren and others who are more than 37.5 years younger than you; in other words, transfers that “skip” a generation. Having this exemption be “permanent” allows you to take advantage of planning that will greatly benefit future generations.
  • Married couples can take advantage of these higher exemptions and, with proper planning, transfer up to $10+ million through lifetime gifting and at death.
  • The tax rate on estates larger than the exempt amounts increased from 35% to 40%.
  • The “portability” provision was also made permanent. This allows the unused exemption of the first spouse to die to transfer to the surviving spouse, without having to set up a trust specifically for this purpose. However, there are still many benefits to proper estate planning using trusts, especially for those who want to ensure that their estate tax exemption will be fully utilized by the surviving spouse.
  • Separate from the new tax law, the amount for annual tax-free gifts has increased from $13,000 to $14,000, meaning you can give up to $14,000 per beneficiary, per year ($28,000 for a married couple) free of federal gift,  estate and GST tax – in addition to the $5 million gift, estate, and GST tax exemptions. By making annual tax-free transfers while you are alive, you can transfer significant wealth to your children, grandchildren and other beneficiaries, thereby reducing your taxable estate and removing future appreciation on assets you transfer. And, you can significantly enhance this lifetime giving strategy by transferring interests in a limited liability company or similar entity because these assets have a reduced value for transfer tax purposes, allowing you to transfer more free of tax.  Gifting to Family Trusts allows the tremendous advantage of gifting to one destination, while using the annual gift exclusions for all of your descendants.

For most Americans, the 2012 Tax Act has removed the emphasis on planning for worst case scenarios and put it back on the real reasons we need to do estate planning: taking care of ourselves and our families the way we want. This includes:

  • Protecting you, your family, and your assets in the event of incapacity;
  • Ensuring your assets are distributed the way you want;
  • Protecting your legacy from irresponsible spending, a child’s creditors, and from being part of a child’s divorce proceedings;
  • Providing for a loved one with special needs without losing valuable government benefits; and
  • Helping protect assets from creditors and frivolous lawsuits; and from estate depletion to fund nursing home costs.

For those with estates less than the $5.25 million exemption amount, trusts should still provide much valued asset protection.  However, those who are less concerned about asset protection may want to review options for unwinding previous transactions to the extent possible and, at a minimum, review their estate plan to ensure proper income tax planning (see below).

For those with larger estates, ample opportunities remain to transfer large amounts tax free to future generations, but it is critical that professional planning begins as soon as possible. With Congress looking for more ways to increase revenue, many reliable estate planning strategies may soon be restricted or eliminated.   REVENUE RAISING PROPOSALS INCLUDE 1) LIMITING THE BENEFITS OF GRANTOR TRUSTS, 2) LIMITING THE DURATION OF ALLOCATION OF GST EXEMPTION, 3) IMPOSING A MINIMUM 10 YEAR TERM FOR GRANTOR RETAINED ANNUITY TRUSTS (“GRATS”), AND 4) REDUCING THE AVAILABILITY OF ENTITY BASED VALUATION DISCOUNTS.  These are all tools that can reduce your estate tax exposure but that may not be available much longer.  Thus, it is best to put these strategies into place now so that they are more likely to be grandfathered from future law changes.

Further, as is well publicized, the 2012 Tax Act included several income tax rate increases on those earning more than $400,000 ($450,000 for married couples filing jointly).  Combined with the two additional income tax rate increases resulting from the healthcare bill, income tax planning for individuals is obviously now more important than ever.

What hasn’t been as publicized is that trusts (only those trusts not taxed as grantor trusts) and estates will be subject to these new taxes and higher tax rates on income above $11,950.   Proper income tax/distribution planning for trusts and estates will be essential going forward to minimize these burdensome tax increases.

Income tax basis planning will also be more important.  Many trusts hold highly appreciated, low tax basis assets. Reverse DGT transactions – purchasing low basis assets back from grantor trusts – can be used to obtain a step up in basis at death.  Trusts may be able to be amended and/or restated to allow a Trust Protector to identify low basis assets and take certain actions that would cause them to get a step up in tax basis at your death.   For assets not already in trust, Alaska Community Property Trusts can be utilized to get a double step up in tax basis at both spouse’s deaths.

The good news is that if you have been sitting on the sidelines, waiting to see what Congress would do, the wait is over.  We have increased certainty with “permanent” laws and you can have some comfort that the rules won’t drastically shift from year to year.  Unfortunately, for those of you with larger estates, planning techniques that can be utilized to reduce estate tax exposure are still on the chopping block – so don’t wait to plan.  For all clients, income tax planning, including income tax basis planning, should be a focus this year.  As always, the ultimate goals of estate planning, including protecting family assets and providing for loved ones, do not change.  Make sure you have a good plan to meet these goals. Schedule an appointment today by calling us at (404) 255-7400.

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.  The information contained herein is provided “as is” for general guidance on matters of interest only.  Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services.  Before making any decision or taking any action, you should consult a competent professional advisor.

Asset Protection: You Get What You Pay For

As estate planning, tax and business lawyers, we are always concerned with asset protection.  Whether we are talking in the context of trusts for surviving spouses or descendants, or protecting personal assets from business hiccups, asset protection is at the front of our minds when advising clients.

Asset protection comes in all shapes and sizes, from the simple to the ultra complex. Rules can vary significantly from state to state. Generally speaking, if you want to protect an asset, don’t own it!  Strategies can range from the simple professional who puts his or her home in their spouse’s name.  In debtor oriented states like Florida, it could mean owning that residence jointly as tenancy by the entirety, which protects the property from creditors of each spouse.  Titling property correctly is simple and inexpensive.  Of course, once you have transferred that property to your spouse, it may be difficult to get it back!

Traditionally, businesses have conducted themselves as corporations or similar entities, one reason being to isolate the business activity from other assets owned by the business owner.  For instance, if a corporation were to get a judgment against it, the creditor’s only recourse would be against the assets of the corporation.  The creditor would not be able to reach through the entity and get at the other assets of the owner.  This is one of the reasons that our clients traditionally do business as corporations, LLCs or limited partnerships.  All of these entities have the characteristic of limited liability.

However, if it is the owner who is the subject of a judgment creditor, he can lose his stock in his closely held business.  So, consider placing assets in a limited liability company.  Some jurisdictions (not Georgia) provide that a creditor’s sole remedy, with respect to the LLC ownership by a debtor, is to obtain a charging order.  This remedy permits the creditor to stand in line to receive any distributions from the LLC that would otherwise go to the LLC’s owner (the debtor);  but the creditor cannot take the owner’s membership units or foreclose on ownership interest.  This, of course, is not a popular remedy for creditors.  Creditors would prefer to control the ownership interest in the business, allowing them to sell assets or otherwise liquidate the business in order to satisfy the debt.  Charging orders as a sole remedy are a statutory rule in a number of jurisdictions including Florida (for multiple member LLCs) and Nevada (a jurisdiction we find ourselves using more and more for the clients whose primary motivation is asset protection).

Creating a corporation is more expensive than merely titling assets in the name of your spouse.  Forming an LLC is significantly more expensive than forming a corporation.  Forming an LLC in another state is somewhat more expensive on the front end and annually than forming a Georgia entity.  You get what you pay for.

The next level of asset protection brings us to the area of trusts.  Of course, you can form an irrevocable trust for the benefit of another, and if properly drafted, that trust can own property which is protected from the grantor’s creditors.  However, Georgia does not recognize what are referred to as “self-settled” trusts;  one cannot create a trust for his or her own benefit in Georgia and many other jurisdictions.  There are approximately a dozen states that do recognize some sort of self-settled asset protection trusts that can accommodate the grantor as a possible beneficiary of the trusts.  Again, of the dozen or so states that allow what are referred to as “domestic asset protection trusts”, Nevada would have to be at the top of the list.  Domestic asset protection trusts require an independent trustee, meaning that the grantor cannot be in total control of the trust assets, although total control would not have to be given to the third party. Significant management control could be retained by the grantor if the trust agreement is carefully drafted.  These arrangements are significantly more expensive than forming an LLC for asset protection purposes.  Generally speaking, the more protection one seeks, the more expensive it is to set up the structure and maintain it.

Other trusts provide asset protection characteristics.  For instance, it is possible to create a trust for the benefit of one’s spouse, and the assets in the trust would be protected from not only the grantor’s creditors, but also the spouse’s creditors.  The grantor is entitled, in essence, to control the disposition of the trust upon the demise of the spouse.  Again, this arrangement must be carefully drafted, particularly if husband and wife are creating trusts for each other.  Again, the grantor should not retain total control of the trust’s property, so a third party trustee is highly recommended.  These types of arrangements tend to be more expensive than the domestic asset protection trust.   There are numerous other trust arrangements that offer asset protection; the appropriate choice depends on the actual circumstances and objectives.

Trusts can also be established in foreign jurisdictions where the local laws with respect to taxes, statute of limitations and contracts are very favorable as deterrents to creditors.  Again, offshore trusts have been around for hundreds of years.  Popular jurisdictions include the Cook Islands, Nevis, Bahamas, Cayman Islands and a number of other Caribbean island countries.  These trusts have been romanticized for many years. They are most popular with liquid investment assets. These arrangements tend to be the most expensive types of asset protection devices, so they also tend to be rare.

Finally, no one arrangement is absolutely perfect.  Ownership transfers should occur prior to the time a liability or potential judgment appears.  Creditors’ lawyers can always argue that assets were transferred in an attempt to defraud particular creditors, therefore seeking court intervention or set-aside.  However, prudent and timely planning should always be better than no planning, even if the result is that creditors are more receptive to sitting down to negotiate more favorable terms with our clients.

 

For more information regarding estate planning, business law or tax controversy and  compliance, please visit the Hoffman & Associates website at www.hoffmanestatelaw.com or call us at 404-255-7400.

 

In accordance with IRS Circular 230, this article is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.  The information contained herein is provided “as is” for general guidance on matters of interest only.  Hoffman & Associates, Attorneys-at-Law, LLC is not herein engaged in rendering legal, accounting, tax, or other professional advice and services.  Before making any decision or taking any action, you should consult a competent professional advisor.