T AX AND E STATE P LANNING

1. Asset Protection Planning TAXAND ESTATE PLANNING

2. Reasons for Asset Protection Planning • Unpredictable legal system • Result-oriented judges and juries • Expanding legal theories of liability • Explosion of litigation • Excessive jury awards • Cost and availability of insurance • Exclusions from insurance coverage

3. Candidates for Asset Protection Planning: • Professionals • Officers and directors • Investors • Real estate owners exposed to environmental and landlord-tenant claims • Business owners • Individuals exposed to potential lawsuits (harassment, wrongful termination, libel and slander, etc.) • Alternative to prenuptial agreements

4. Goals of Asset Protection Planning • Deter litigation • Incentives for settlement • Simplicity • Avoid loss of control

5. Asset Protection – Part of an Integrated Estate and Business Plan • Access to property until death • Retain rights to income • Retain management control • Protection from creditors • Save income taxes • Reduce estate taxes

6. Effective Asset Protection Planning • Complements existing liability insurance (homeowners liability, business liability, malpractice and umbrella insurance) • Is undertaken before problems arise • Is comprehensive throughout one’s financial affairs and estate planning • Provides options and alternatives when problems arise • Does not involve excessive complexity

7. Effective Asset Protection Planning is not • a tax avoidance scheme; • based upon secrecy or hiding assets; • a means of defrauding creditors; or • a substitute for liability insurance

8. Legal Considerations/Fraudulent Conveyance Statutes • Based upon the Statue of Elizabeth (1573) • A transfer that is made with the actual intent to hinder, delay or defraud creditors is a fraudulent transfer. Note: The debtor’s intent is the key. • Also, a transfer that is made without adequate consideration is deemed to be fraudulent if: (1) The debtor was left with unreasonably small capital for the debtor’s business; or (2) The debtor intended to incur, or believed he would incur, more debts that the debtor would be able to pay; or (3) The debtor was insolvent at the time of the transfer or as a result of the transfer. Note: Lack of adequate consideration is the key.

9. Types of Creditors Present Creditor: Contract has been signed or cause of action has accrued. Note:Present creditors are protected by the uniform fraudulent transfers act. Subsequent Creditors: Narrow group of creditors who can establish a harm caused by the transfer. Note:Requires actual fraudulent intent. Future Potential Creditors: Unidentifiable persons who may happen to become creditors of the transferor in the future. Note: Asset protection is most effective against this type of creditor.

10. A Well-Designed Asset Protection Plan • Is part of the overall estate plan • Is undertaken after a cost-benefit analysis • Maintains flexibility • Does not result in loss of control • Maintains rights to income • Provides protection from unjust obligations • Combines effective asset protection strategies where appropriate • Avoids unnecessary complexity

11. Types of Asset Protection Plans: • Outright gifts • Use of exemptions • Liability insurance • Limited partnership • Nevada asset protection trust • Offshore asset protection trust • Expatriation of assets

12. Outright Gifts Example: Doctor gives all of his assets to his wife and children to protect assets from potential future lawsuits. • Frequently inconsistent with personal and retirement goals • Results in loss of control of assets • Can easily backfire: • Divorce (of either the transferor or the transferee) • Change in nature of relationship (hostile transferee) • Transferee’s financial difficulty • Death of transferee: “People have a way of dying in the wrong order.” • Often has unintended consequences: • estate and gift tax considerations • legal problems of transferee • May not work in any event (consider community property laws)

13. Use of Exemptions • Federal ERISA protection Note: Does not protect benefits in pay status • State retirement exemptions (Nevada exempts $500,000 total IRA balances) • Homestead exemption ($125,000 in Nevada) Note: Homestead exemption does not prevent loss of home if equity exceeds $125,000. • Life insurance (exemption limited to the coverage that is purchased with $1,000 premium) • Other state exemptions (limited exemptions exist for books, tools of trade, vehicles, personal and household possessions) • Can play a role where advance planning is inadequate • Protection is limited, particularly for those with large estates • Exemptions change as transferor’s residence changes

14. Insurance and Asset Protection Planning • General Business Insurance • Often excludes acts outside employment, intentional acts, punitive damages, environmental liabilities, employment and discrimination claims, officer and director liability • Can also exclude service or voluntary boards of charitable organizations and homeowners associations • Usually excludes contract claims • Malpractice Insurance • Coverage is usually limited • Often excludes gross negligence, grossly negligent acts of subordinates, punitive damages, products liability, and acts of personal not specifically named on the policy • Gross negligence differs from ordinary negligence in manner or degress • Personal Liability Policies • Usually excludes liability arising out of business, trade or profession and intentional acts • May contain other exclusions, such as gross negligence, punitive damages, environmental liabilities, libel and slander • Possibility of Coverage Disputes with Insurance Carrier

15. A Well-Designed Asset Protection Plan • Is part of the overall estate plan • Is undertaken after a cost-benefit analysis • Maintains flexibility • Does not result in loss of control • Maintains rights to income • Provides protection from unjust obligations • Combines effective asset protection strategies where appropriate • Avoids unnecessary complexity

16. Limited Partnerships: (1) Transferor transfers investment assets to a limited partnership organized under Nevada law. (2) Transfer receives in exchange a partnership interest in the limited partnership. (3) Transferor and/or spouse can be the general partner(s); transferor and/or spouse (or others) can also be the limited partner(s). (4) As general partners, Husband and Wife are responsible for managing partnership assets and directing all partnership activities. (5) Limited partners have no management rights or authority. (6) General Partners make all decisions regarding partnership distributions. (7) The name of the partnership should not be readily identifiable with Husband and Wife. LIMITED PARTNERSHIP Husband Wife

17. Limited Partner Waits for Distribution from the General Partner:

18. Considerations: • Charging Order Protection • Phantom income to judgment creditor • Nature of assets held by partnership -- only “safe” assets should be transferred to the limited partnership. Note: Assets that present liability risks can be owned by single-member LLCs. • Liability of general partners • Control by general partners • Distributions from partnership • Not suitable for some assets: - S corporation stock - Annuities - Personal residence

19. A Limited Partnership Drafted for Asset Protection Purposes • Concentrates control in the general partner(s) • Provides for general partner(s) to remain in office notwithstanding the existence of judgment, garnishments, etc. • Provides for discretion in the general partner(s) to accumulate partnership assets, rather than make distributions, if the general partners so determine • Requires the consent of all general partners to dissolve or liquidate the partnership • Makes use of Nevada’s favorable partnership legislation

20. Nevada Asset Protection Trust • Trust must be irrevocable. • Trust must be discretionary as to the grantor’s interest. • The transfer to the trust must not be a fraudulent transfer. • Statute of limitations: A creditor in existence at the time the transfer is made must bring action within the later of: 1. two years after the transfer, or 2. six months after the creditor discovers or should have reasonably discovered the transfer A creditor whose claim arose after the transfer must bring action within two years after the transfer to the trust is made. • Trustee must be a Nevada resident or a bank or trust company that maintains an office in Nevada to transact business. • Grantor may retain the right to veto distributions from the trust. • Grantor may hold a testamentary special power of appointment.

21. A Nevada Asset Protection Trust • Provides flexibility to the grantor • Is part of the overall estate plan • Can incorporate flight causes • Can provide for a protector • Can be coupled with limited partnership provisions • Provides for duress

22. Considerations: • Selection of trustee • Office of the protector • Section of assets to be transferred to the trust: - S corporation stock - Personal residence - Other residences • Tax considerations • Choice of law issues

23. Offshore Asset Protection Trust • Certainty regarding nonrecognition of foreign judgments • Standard of proof required: Beyond a Reasonable Doubt • Statute of limitations • Burden of proof on creditor • Contingency fee litigation • Selection of trustee • Investment of trust assets

24. Nevada Asset Protection Plan: LLC LLC LLC 100% 100% 100% LIMITED PARTNERSHIP 1% General Partner 99% Limited Partner Individual Transferor Nevada Asset Protection Trust

25. Advantages of the Nevada Asset Protection Plan • Coordinates with overall estate plan • Provides multiple layers of protection • Adaptable as needs and circumstances change • Avoids loss of control for assets held in limited partnership • Makes use of Nevada’s favorable partnership and trust laws • Provides protection from unjust obligations • Does not complicate tax reporting; in some cases tax reporting burden is lessened • Avoids unnecessary complexity