In the July edition of FJY’s Quarterly Newsletter, asset protection was defined and the need for asset protection by those of modest wealth – not just high rollers and bankrupt deadbeats – was discussed. Despite claims to the contrary, asset protection strategies can not guarantee that all of one’s property will be completely removed from the reach of creditors. Rather, the goal of asset protection is to create as much distance as is reasonably (and legally) possible between one’s assets and his or her creditors or potential creditors. The importance of timing in structuring and implementing an asset protection plan was also addressed. We will now explore several fundamental considerations of effective asset protection.
Appropriate asset protection planning depends on a number of factors, including marital status, the nature and extent of the individual’s assets, financial and legal exposure and risk tolerance and estate and tax planning needs and goals.
The first step is to ensure that assets are titled and liabilities incurred so as to minimize or eliminate exposure to creditors’ claims. For (happily) married couples, this typically means that assets should be held jointly and liabilities should be incurred individually. In states that recognize the Tenants by the Entireties form of ownership (commonly referred to as “T by E” or “T/E”), spouses should title and hold as many assets as possible as T by E. It is generally understood that real estate – including homes, vacation properties, rental units and other investment properties – may be held as Tenants by the Entireties property. However, many states now allow personal property, such as bank accounts, automobiles, antiques and other valuable collections,as well as stock and other intangible assets, to be owned and protected as T by E property. Assets so titled are generally not subject to claims of individual creditors of either spouse. Hence,a judgment creditor with a claim against only one spouse is not able to reach or attach the marital home, bank accounts or any other T by E assets. Tenants by the Entireties properties can, however, be reached by joint creditors, and (not surprisingly) the IRS, even when the tax liability is that of only one spouse.
As with all aspects of asset protection, timing is everything when titling or re-titling properties and should be accomplished before asset protection is deemed “necessary.” Transfers of property from one spouse to both (by re-titling as T by E), are subject to the fraudulent conveyance rules and potential avoidance if undertaken after a particular liability is incurred. However, even if the timing is less than ideal and the re-titling does not create a bullet-proof shield, it may provide the some protection and the time necessary to negotiate a settlement of a claim, to the extent such ever becomes necessary. At the same time, a clearly fraudulent transfer can serve as a basis for the denial of a discharge in a subsequent bankruptcy, and should therefore be carefully considered.
Unintended liabilities, such as those arising out of auto accidents or other personal injury claims, are generally unanticipated and, therefore, difficult to plan for or around. Contract and other business obligations, on the other hand, can and should be more carefully structured so as to prevent joint liability wherever possible. For example, a spouse who is not involved in the operation or management of the business should not be included on bank loans, vendor guarantees or other liabilities of the business. In addition, while the equity of the business may (and in most cases should) be held jointly by both spouses,the businessperson’s spouse should not serve as an officer or director of the business. Likewise, personal debts and obligations, such as credit cards, auto loans, etc., should be incurred in the individual spouse’s name where joint credit is not absolutely required.
For those in business, asset protection initially focuses on the need to separate business debts and obligations from one’s personal assets and portfolio. Establishing a corporation or limited liability company is the first and most critical component of ensuring that such separation is accomplished. By incorporating or forming an LLC, a separate legal entity is created – an entity capable of transacting business, incurring debt, suing and being sued, all independent from the company’s owners. Principals (including shareholders, officers and directors) of a properly formed and maintained company are generally not liable for the debt sand obligations of the company (as opposed to partners in a general partnership and sole proprietors who are personally liable for the debts of the business). However, the protection offered by a corporation or LLC can be undermined through the execution of personal guarantees and through other conduct that allows creditors of the company to “pierce the corporate veil” and pursue the principals directly. The protection can also be lost if the corporate standing of the entity is not properly maintained, or the company conducts business in a state other than the state(s) in which it is organized or authorized to transact business.
Asset protection must also take into consideration various other aspects of an individual’s personal and legal situation, including tax, estate planning and matrimonial goals. While it may be possible to satisfy all competing objectives, more often than not, the individual will be required to identify priorities that will then inform the asset protection, tax and estate plans and the interrelationship between such plans. In other words, the individual will need to decide whether assets protection is more or less important than his or her estate planning goals and/or the minimization of tax liabilities. For example, from an estate planning perspective, it may not be the most advantageous approach for a couple to hold all assets as Tenants by the Entireties, especially where trusts have been established and must be funded in a particular manner to maximize estate tax exemptions. Although in Virginia, T by E property may be conveyed into a revocable trust for estate planning purposes and still maintain the T by E status and protection, as discussed above, the property is not exempt from the claims of joint creditors. To the extent the couple wishes to achieve a greater level of asset protection, they could convey the property into an irrevocable family trust. However, with the increased level of protection comes a significant loss of control over the transferred asset and may affect other estate planning goals and tax attributes.
Finally, asset protection, like estate and tax planning, can not be effectively accomplished through the application of a one-size-fits-all formula. Instead, whether you are a high-roller or a bankrupt deadbeat, or gratefully find yourself somewhere in between, asset protection is something that should be carefully considered and tailored to your personal situation and needs. And, just as with the best estate and tax plans, asset protection plans should be reviewed and updated as appropriate to account for changes in one’s life and goals and applicable law.
Christopher L. Rogan, Esq. is an attorney with the law firm of Campbell Miller Zimmerman, P.C., located in Leesburg, Virginia. The information provided in this article is general in nature and is not intended nor provided as legal advice and should not be relied upon as such or utilized as a substitute for professional service and advice in specific situations.
Asset Protection Part 2
December 12, 2008
By: Christopher L. Rogan, Esq.
www.cmzlaw.com
In the July edition of FJY’s Quarterly Newsletter, asset protection was defined and the need for asset protection by those of modest wealth – not just high rollers and bankrupt deadbeats – was discussed. Despite claims to the contrary, asset protection strategies can not guarantee that all of one’s property will be completely removed from the reach of creditors. Rather, the goal of asset protection is to create as much distance as is reasonably (and legally) possible between one’s assets and his or her creditors or potential creditors. The importance of timing in structuring and implementing an asset protection plan was also addressed. We will now explore several fundamental considerations of effective asset protection.
Appropriate asset protection planning depends on a number of factors, including marital status, the nature and extent of the individual’s assets, financial and legal exposure and risk tolerance and estate and tax planning needs and goals.
The first step is to ensure that assets are titled and liabilities incurred so as to minimize or eliminate exposure to creditors’ claims. For (happily) married couples, this typically means that assets should be held jointly and liabilities should be incurred individually. In states that recognize the Tenants by the Entireties form of ownership (commonly referred to as “T by E” or “T/E”), spouses should title and hold as many assets as possible as T by E. It is generally understood that real estate – including homes, vacation properties, rental units and other investment properties – may be held as Tenants by the Entireties property. However, many states now allow personal property, such as bank accounts, automobiles, antiques and other valuable collections,as well as stock and other intangible assets, to be owned and protected as T by E property. Assets so titled are generally not subject to claims of individual creditors of either spouse. Hence,a judgment creditor with a claim against only one spouse is not able to reach or attach the marital home, bank accounts or any other T by E assets. Tenants by the Entireties properties can, however, be reached by joint creditors, and (not surprisingly) the IRS, even when the tax liability is that of only one spouse.
As with all aspects of asset protection, timing is everything when titling or re-titling properties and should be accomplished before asset protection is deemed “necessary.” Transfers of property from one spouse to both (by re-titling as T by E), are subject to the fraudulent conveyance rules and potential avoidance if undertaken after a particular liability is incurred. However, even if the timing is less than ideal and the re-titling does not create a bullet-proof shield, it may provide the some protection and the time necessary to negotiate a settlement of a claim, to the extent such ever becomes necessary. At the same time, a clearly fraudulent transfer can serve as a basis for the denial of a discharge in a subsequent bankruptcy, and should therefore be carefully considered.
Unintended liabilities, such as those arising out of auto accidents or other personal injury claims, are generally unanticipated and, therefore, difficult to plan for or around. Contract and other business obligations, on the other hand, can and should be more carefully structured so as to prevent joint liability wherever possible. For example, a spouse who is not involved in the operation or management of the business should not be included on bank loans, vendor guarantees or other liabilities of the business. In addition, while the equity of the business may (and in most cases should) be held jointly by both spouses,the businessperson’s spouse should not serve as an officer or director of the business. Likewise, personal debts and obligations, such as credit cards, auto loans, etc., should be incurred in the individual spouse’s name where joint credit is not absolutely required.
For those in business, asset protection initially focuses on the need to separate business debts and obligations from one’s personal assets and portfolio. Establishing a corporation or limited liability company is the first and most critical component of ensuring that such separation is accomplished. By incorporating or forming an LLC, a separate legal entity is created – an entity capable of transacting business, incurring debt, suing and being sued, all independent from the company’s owners. Principals (including shareholders, officers and directors) of a properly formed and maintained company are generally not liable for the debt sand obligations of the company (as opposed to partners in a general partnership and sole proprietors who are personally liable for the debts of the business). However, the protection offered by a corporation or LLC can be undermined through the execution of personal guarantees and through other conduct that allows creditors of the company to “pierce the corporate veil” and pursue the principals directly. The protection can also be lost if the corporate standing of the entity is not properly maintained, or the company conducts business in a state other than the state(s) in which it is organized or authorized to transact business.
Asset protection must also take into consideration various other aspects of an individual’s personal and legal situation, including tax, estate planning and matrimonial goals. While it may be possible to satisfy all competing objectives, more often than not, the individual will be required to identify priorities that will then inform the asset protection, tax and estate plans and the interrelationship between such plans. In other words, the individual will need to decide whether assets protection is more or less important than his or her estate planning goals and/or the minimization of tax liabilities. For example, from an estate planning perspective, it may not be the most advantageous approach for a couple to hold all assets as Tenants by the Entireties, especially where trusts have been established and must be funded in a particular manner to maximize estate tax exemptions. Although in Virginia, T by E property may be conveyed into a revocable trust for estate planning purposes and still maintain the T by E status and protection, as discussed above, the property is not exempt from the claims of joint creditors. To the extent the couple wishes to achieve a greater level of asset protection, they could convey the property into an irrevocable family trust. However, with the increased level of protection comes a significant loss of control over the transferred asset and may affect other estate planning goals and tax attributes.
Finally, asset protection, like estate and tax planning, can not be effectively accomplished through the application of a one-size-fits-all formula. Instead, whether you are a high-roller or a bankrupt deadbeat, or gratefully find yourself somewhere in between, asset protection is something that should be carefully considered and tailored to your personal situation and needs. And, just as with the best estate and tax plans, asset protection plans should be reviewed and updated as appropriate to account for changes in one’s life and goals and applicable law.
Christopher L. Rogan, Esq. is an attorney with the law firm of Campbell Miller Zimmerman, P.C., located in Leesburg, Virginia. The information provided in this article is general in nature and is not intended nor provided as legal advice and should not be relied upon as such or utilized as a substitute for professional service and advice in specific situations.