Florida Estate Planning, Probate and Asset Protection

Charging Order Challenges

Doubtless a large motivation behind the formation of many LLCs, as with Limited Partnerships (“LPs”) is that an LLC has so-called “charging order protection”… The charging order is widely misunderstood, so let me try to explain it.

Choosing the structure of your business is about more than just taxation. You want a structure that protects you from liabilities of the business itself. In fact, the very structure of your business is a means to protect both you and your business, so it’s worth understanding and maintaining.

Have you heard of charging orders? These are legal wedges creditors use to try and drive a wedge between you and your business. If your business is an LLC (Limited Liability Company) or an LP (Limited Partnership), then there is more you should know about charging orders, as detailed in a recent Forbes article titled “The Misunderstood Charging Order.”

While this is a complex subject, basically a charging order is a creditor’s first and last tool to extract your interests and capital from your business (assuming they don’t try to pierce the veil). In a corporation, a charging order can allow a creditor to actually gain a debtor’s stock interests in the business. This can be disastrous. “Limited” company structures are specifically designed with charging order protection, something that could be important to you as a business owner.  

The original article goes into greater detail, but essentially the charging order protection means that while a creditor can place a lien on your LLC membership interests and claim any distributions, a creditor cannot claim the membership interest itself and sabotage the business.

Certainly there is much more to know on the subject of asset protection, to include the subject of company structure. Although some of this discussion can become tediously academic, it’s important to understand where and how your asset protection vulnerabilities can arise.

Reference: Forbes (April 30, 2013) “The Misunderstood Charging Order”

IRA Asset Protection Increases

As of April 1, 2013, the maximum bankruptcy exemption amount for IRAs increased from $1,171,650 to $1,245,475. This exemption amount is subject to cost-of-living adjustments (COLAs).

The more you have, the more you have to lose. That’s a cardinal rule of asset protection planning. If you have accumulated savings in an IRA, then you should be aware of the asset protection legally afforded your IRA.

As recently reported by the Slott Report, the IRA bankruptcy exemption has just increased. The article is titled “IRA Bankruptcy Exemption Amount Increases.” Background: the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) cleared the way and exempted the first $1 million of IRA funds (including Roth IRAs) in the event of bankruptcy.

Fortunately, this amount is subject to cost of living adjustments. Accordingly, the new number as of April 1, 2013, is $1,245,475. This is great news for most American savers, since the average IRA is less than $1 million. Still, it’s also a figure worth knowing for larger IRAs given the important function they serve in many retirement and/or estate plans.

Caveat: what is just as important as the exemption are the limitations to the exemption. The safety of the exemption is only afforded in the case of filed bankruptcy, and might be voided in certain instances even then, but other events like divorce may easily trigger a levy on the IRA.

The important lesson to remember is that there are existing IRA protections to be understood, but they need to be considered as part of a comprehensive asset protection strategy. Such a strategy will necessarily involve considerations of state law protections, asset titling and insurance coverage.

Be sure to engage competent legal counsel, as proper asset protection planning is not a do-it-yourself project.

Reference: The Slott Report (April 9, 2013) “IRA Bankruptcy Exemption Amount Increases”

Planning Prenuptial Priorities Properly

Long ago, having a prenuptial agreement was considered stodgy or even insulting, but these days, “prenups” are becoming increasingly common for high net worth couples. Simply put, a prenup formalizes the understanding between spouses-to-be as to which of their assets will become marital property.

The air is still heavy from another tax season. However, if you lift your ears to the gentle spring breezes, you may hear distant bells announcing this year’s wedding season. With many of these weddings will come financial complications that require attention, well before the vows are exchanged.

Marriage is not just “tying the knot,” so to speak. No, marriage by its legal nature includes tying together all of your financial resources and interests. Unfortunately, these days marriage also has a dark side too: divorce.

For those couples with important financial resources and interests in the marital mix, they may elect to use a prenuptial agreement as sort of an “insurance” policy in the event the marriage doesn’t work out as planned.

Prenuptial agreements are nowhere as exotic as they are portrayed in the popular imagination. They can be, nevertheless, useful and important documents when produced through a spirit of full disclosure, careful deliberation, and independent legal representation. Otherwise, as pointed out in numerous articles these days, no prenuptial agreement is ironclad unless it is done correctly and, essentially, treated like the contractual understanding that it is.

Recently, Forbes provides some guidance to evaluate the effectiveness of your prenuptial agreement in an article titled “Five Reasons Your Prenup Might Be Invalid.” In addition, The Wall Street Journal offers some specific guidance to get your prenuptial agreement ship-shape in an article titled “Shoring Up Your Prenup.”

Used correctly, a prenuptial agreement, or even a post-nuptial agreement as the case may be, can help a couple frame their financial resources and interests in the context of their life together come what may.

That can provide great peace of mind, especially when blending families and the children from those families.

Reference: Forbes (April 2, 2013) “Five Reasons Your Prenup Might Be Invalid”

The Wall Street Journal (March 29, 2013) “Shoring Up Your Prenup”

Asset Protection – Substance Over Form

At the end of the day, Cohen’s elaborate scheme failed because when the Court took a step back it was obvious what he was trying to do — defraud his existing creditors.

Asset protection, for better or worse, is not a game of silver bullets or invincible armor. Unfortunately, this fact of life will never stop certain salesmen from marketing asset protection that way and certain debtors from buying into it.

A tale of gullibility, faked complexity, and predictable endings can be found in a recent Forbes article titled “Bill 'Bulletproof A$$et Protection' Reed's Complex Plan Pierced By Nominee And Alter Ego Theories.” The case of U.S. v. Cohen, C.D.Ill. Case No. 08-3282 (Mar. 8, 2013), chronicles an asset protection plan so frightfully poor it could only be described as the “Bulletproof A$$et Protection.” Just the label used to market this “asset protection” scheme should give pause to the prudent.

Asset protection is all about understanding the legal nature of your assets and the potential risks that may threaten your future use and enjoyment of those assets. Certainly state and federal laws offer varying degrees of protection, as do time-tested legal strategies. It’s as much art as science, but not magic.

This is not a do-it-yourself program. Seek qualified legal counsel for assistance.

Reference: Forbes (March 31, 2013) “Bill 'Bulletproof A$$et Protection' Reed's Complex Plan Pierced By Nominee And Alter Ego Theories”

To Prenup, or Not to Prenup?

I see just as many women seeking prenuptial agreements these days as men. I suggest a prenup for those who have sizeable wealth, own a business or are entering into a second marriage with significant personal assets.

Prenuptial agreements occupy a fairly exotic place in the public imagination. They are the tinder of celebrity gossip. But when and for whom is a prenup appropriate?

Naturally, there are too-numerous-to-print opinions on this question. In fact, the New York Times recently assembled its own collection of opinions regarding this debate in a blog post titled “The Power of the Prenup,” which shared the page with an opinion piece titled “Prenups for Some, Money Talk for All.”

Practically speaking, once emotions are set aside (if they can be), prenups have their place as part of a “process.” That process is called “communication.” Since money matters top many studies regarding the sources of marital strife, money matters are a logical issue to address before tying the knot. A full disclosure of assets – and liabilities – is a good place to start.

Truth be told, a marriage (or remarriage) is a blending of lives and a blending of assets. In many marriages, the assets are fairly simple. In others, they are extremely complex. For example, closely-held business interests or family trusts can carry with them the extended interests of extended family. Unless these complex assets are considered, their ownership recognized and their eventual disposition agreed upon, then marital strife is often waiting in the wings.

Before you say “I do,” be sure you fully understand and appreciate the consequences of your marriage when it comes to your assets. Accordingly, a well-drafted prenuptial agreement may be one of the tools to facilitate “communication” with your intended spouse and help prevent problems from spoiling your lives together.

Reference: The New York Times (March 22, 2013) “Prenups for Some, Money Talk for All”

Asset Protection Planning – Plan Now, or Lose Later

Asset Protection is pre-claim planning for those who are concerned that someday they might become liable to creditors unknown for claims unknown — what are known as “future unknown creditors”. Asset Protection is not about protecting the assets of somebody who already has a claim pending; that is known as “defrauding creditors” unless a reserve is set aside to pay existing creditors.

There’s a time to be planning, and there’s a time to be putting that plan into action. However, whether it’s the battlefield, the sports field, or the legal field, you ought not to be planning when the fur begins to fly! It’s just too late.

A recent Forbes article is a good reminder that asset protection is like fire insurance – the best time to take out a policy (i.e., make proper asset protection plans) is before the fire department arrives. The article is appropriately titled “Existence Of Claim Renders Some Clients Seeking Asset Protection Effectively Dead On Arrival.”

Asset protection is about making sure matters are structured now to protect them if a legal claim may threaten them later. If there already is a claim, then any act to protect assets becomes suspect and reversible (or punishable).

If you have reason to protect your assets due to some future risk you can envision, then now is the time to plan. Courts do not look favorably on last minute plays to protect assets.

Reference: Forbes (January 31, 2013) “Existence Of Claim Renders Some Clients Seeking Asset Protection Effectively Dead On Arrival”

Asset Protection: A Myth or a Must?

While this may sound like the realm of just the truly wealthy, asset protection is something that people with a nice home and a couple of cars should consider, particularly if they can imagine being sued.

Sometimes it’s not the thought of transferring our assets that first moves us toward proper planning, but the thought of preserving our assets long enough to be transferred. So does asset protection really work?  And what exactly are you protecting your assets from?

The topic of asset protection was picked up not too long ago over at the New York Times, specifically from the point of view of a lawsuit in the like-titled article “Safeguarding Your Assets Against the Hazards of a Lawsuit.”

Up front it should be said that insurance can be your first line of defense, and there are as many types of insurance as there are risks. This is a product where one person literally buys piece of mind (assuming you trust your broker) and pays another to accept their uncommon liabilities and costs in exchange for common payments. But insurance only does so much since it simply transfers liabilities without eliminating them, and it doesn’t work proactively on its own; you need to structure your assets. This is precisely the activity that generally runs under the banner of “estate planning,” but it’s important not to pigeonhole one or the other. Proper planning is an ongoing activity in life to further your life goals.

If you have particular concerns or you’re prone to specific risks, asset protection planning for your estate can help ease your worries. You can learn a bit more from the original article, but in the end your individual circumstances and consequent risks will determine a suitable asset protection plan for you.

Reference: The New York Times (November 2, 2012) “Safeguarding Your Assets Against the Hazards of a Lawsuit”

Creditors Foiled by Revocable Trust

Revocable trusts do not provide any protection to the assets of the settlor, either before or after death.

However, it should not be overlooked that a revocable trust can provide near-absolute asset protection to the beneficiaries of the trust after the settlor dies…

Have you heard the notion that revocable trusts do not provide asset protection? Well, this isn’t entirely true. Consider the case of Frank and Geryl Pearl, as reported in a recent Forbes article titled “Pearl -- Transfers to Revocable Trusts Were Not Fraudulent Transfers As To Creditors Of The Settlor.”

Essentially, the Pearl case illustrates the magic of a revocable trust. Frank, upon a cancer diagnosis, moved his business assets under a revocable trust, which meant that he was still effectively accountable for everything because the “revocable” trust was still under his control for all intents and purposes. Frank arranged for the bank to name him personally as guarantor to the business loans. Geryl was named beneficiary to the trust. When Frank died, the assets in the trust that were otherwise entirely accessible to the bank and other creditors passed over to Geryl and were completely inaccessible to the creditors. Poof! How did this happen? As summarized by Forbes:

“It should not be overlooked that a revocable trust can provide near-absolute asset protection to the beneficiaries of the trust after the settlor dies, so long as the trust is well-drafted, has only discretionary distribution, and a solid spendthrift clause. What is no protection for the settlor almost magically turns into fantastic protection for beneficiaries after the settlor’s death. A beneficiary’s interest is simply not acceptable by creditors except in the most extreme cases, such as unpaid child support or if the beneficiary commits a violent crime, etc.”

To learn more you can consult the Forbes article on the Pearl case, but you should also consult with competent legal counsel before relying on this case in your own planning.

Reference: Forbes (September 30, 2012) “Pearl -- Transfers to Revocable Trusts Were Not Fraudulent Transfers As To Creditors Of The Settlor”

A Business “Break-Up” Between Co-Founders

Many Orlando people start businesses with partners, often so they can benefit from the others' expertise, connections and finances. But sometimes one founder concludes over time that the relationship is flawed and parting ways would be best.

Every beginning has an end, just as every business partnership will eventually expire.  Whether the conclusion of the partnership is by choice, health problems, or death, one should have a plan in place to keep things amicable.

As Stephen Covey noted so adroitly, one of the keys to effectiveness is to “begin with the end in mind.” Accordingly, the founders of a business should structure and run the business with a clear commitment to their shared ultimate goals for themselves and their business. In the vernacular of business planning, this oftentimes is called “exit planning.”

If you fail to “begin with the end in mind” and make legal plans to memorialize the end game for your personal and business relationships, then you likely will only enrich lawyers. So, when it comes time to part ways down the road, what steps should you be taking now?

The Wall Street Journal recently addressed this subject in an article titled “Breaking Up (With a Co-Founder) Is Hard to Do.”

One key takeaway from the article is the “when and how” of exit planning. The best time to address the issue is when the business is founded. Consequently, the best way to memorialize the exit strategy in the event of the disability, retirement or death of a founder is through various legal documents created when the business is founded. For example, an Limited Liability Company (LLC) can use the LLC Operating Agreement, while a corporation may use its Bylaws or various Shareholder Agreements.

Don’t delay this important aspect of planning, as every business with eventually need an “exit.”

Reference: The Wall Street Journal (September 22, 2012) “Breaking Up (With a Co-Founder) Is Hard to Do”

Asset Protection with Postnuptial Agreements

Fifty-one percent of divorce attorneys polled by the American Academy of Matrimonial Lawyers say they have seen an increase in postnuptial agreements over the last three years. These agreements are voluntary contracts between couples who have already married and usually cover issues involving finances, property, assets, children, support, and probate.

Move over ‘prenup’, there’s a new marriage document in town that can protect your assets even after you’ve said “I do.” That’s right, more and more married couples are opting to protect their assets with a postnuptial agreement.

Although the idea of marriage is to be together forever, many couples recognize that things can go wrong in a relationship. The stuff that can throw a monkey wrench into a marriage are things like children from a prior marriage, separate assets and estate plans, and, yes, even inheritances. So, even if you did not work out agreements regarding such stuff before exchanging vows, there’s always a cure after the fact. Enter the postnuptial agreement.

According to recent studies and an article in Private Wealth titled “Postnuptial Agreements On Rise, Lawyers Say,” you may never have considered a ‘postnup’, but an increasing number of people have and are. Across various incomes, married couples have found them to be valuable tools. There are many reasons to support this trend, even between spouses who otherwise would not ordinarily commit such agreements to paper.

Whether or not a postnuptial agreement is right for you, make note that these agreements can provide a practical pre-condition for an heir and spouse to adopt as part of your estate planning.

Reference: Private Wealth (September 12, 2012) “Postnuptial Agreements On Rise, Lawyers Say”