Thursday, July 15, 2010

Another reason to Beware of LLC’s

Still getting advice to form an LLC?

Lawyers accountants and business advisors still routinely suggest most small start-ups form an LLC and they even fill out the forms to do it. LLC’s and S-corps almost never give the benefits of a C-Corp in tax deductions, withholding of assets, employment plans for health, education and retirement, Etc.!!! I have already blogged against the “llc one size fits all” practice below and will not repeat all that here. But there is MORE. An LLC may be even worse than a sole proprietorship or family partnership business!

Hiring Family Members in a Family Business

In today’s tough job market a family business may be the only place for some family members to find work. Rather than supporting them you can hire them and pay them with tax-deductible dollars for legitimate work with pay reasonably commensurate with the hours and job.

If you employ a child(ren) under the age of 19 or a student under age 24 who is claimed as a dependent of the parent, his earned income is taxed at the child’s marginal rate, and the earned income is reduced by the lesser of the earned income plus $300 or the regular standard deduction, $5,700 in 2010. Assuming that a child has no other income, the child could be paid $5,700 and incur no income tax. If paid more, the next $8,375 earned by the child is taxed at only10% . This is almost always far less than the parent’s rate if you simply paid the child an allowance, college fund or other savings after paying your own taxes on the same money! Plus you could put even more earned and currently untaxed money in the child’s deductible IRA and any qualifying, deductible College fund from the child’s earned income. Make the tax man subsidize your child rearing budget even more!

Remember, a child’s investment income can still be taxed at the same rate as the parent’s top marginal rate using a lower $950 standard deduction. Most would be better off putting their money in a business and hiring the kids rather than creating trusts or gifting then Investing for them and paying a high marginal rate.

All of the above is available whether you incorporate or not, use an S-Corp, C-Corp or LLC. Here is the kicker and why an LLC can be worse than no corporate business entity at all: FICA and FUTA!

If the business is unincorporated and the wages are paid to a child under age 18, he or she will not be subject to FICA – Social Security and Medicare taxes since employment for FICA tax purposes doesn’t include services performed by a child under the age of 18 while employed by a parent. Neither the employee’s (Child’s) share of the FICA taxes or the business half need to be paid: roughly 18% of the total child’s income saved! In addition, by paying the child and reducing the business’s net income, both the parent’s Income Tax and FICA on net self-employment is also reduced.

An even more liberal exemption applies for FUTA, which exempts a child under age 21 from federal unemployment tax while employed by his or her parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of his parents.

These exemptions do not apply to businesses that are incorporated including LLCs or a partnership that includes non-parent partners. Did the guy who set up your LLC even ask if you would be hiring the kids????? I doubt it.

Land Trusts for the Real Estate Investor

I recently received an Ad concerning the 7 reasons to use a Land Trust from a real estate site. A land trust is a revocable, living trust used specifically for holding title to real estate and can be a powerful tool for holding investment real estate. The land trust is a very powerful tool for the savvy real estate investor. Each property is titled in a separate trust, affording maximum privacy and some protection. As a “revocable” trust, it is not a perfect Asset protection vehicle because it is still subject to seizure upon judgment against the person with the power to revoke. But there are benefits. I heartily agree with 5 of the seven ( watch out for the last 2).

1. Privacy. Privacy is extremely important to most people but anyone with an internet connection can look up your ownership of real estate. Land Trust ownership may make it harder for someone suing you or even city code enforcement to find who the owner is, since the trust agreement is not a public record.

2. Protection from Liens. Real estate titled in a trust name is not subject to liens against the beneficiary of the trust. Personal judgments or liens of the seller may not attach to the property effectively separating the owner or seller from the property.

3. Protection from Title Claims. If you sign a warranty deed in your own name, you are subject to potential title claims against you if there is a problem with title to the property (Indian Claims in CT for example). You warrant and agree to Defend the title in a warranty Deed. A land trust as seller will protect you personally against many types of title claims because the claim will be limited to the trust. If the trust already sold the property, well, no assets either!

4. Discouraging Litigation. People tend to only sue those who appear to have money. Attorneys who work on contingency need to collect. If your investment properties are hard to find, you will appear less worthy of suing

5. Protection from HOA Claims. When you take title to a property in a homeowner’s association (HOA), you become personally liable for all dues and assessments. With a condo in your own name the association can lien the property and/or sue you PERSONALLY! With a land trust, the trust is the sole recourse for the homeowner’s association’s assessments and debts.

6. Making Contracts Assignable. The ownership of a land trust (called the "beneficial interest") is assignable, similar to the way stock in a corporation is assignable. Once property is titled in trust, the beneficiary of the trust can be changed without changing title to the property. This can be very advantageous in the case of a real estate contract that is non-assignable, such as in the case of a bank-owned or HUD property. Instead of making your offer in your own name, make the offer in the name of a land trust, then assign your interest in the land trust to a third party. BUT There is always the danger of being charged with a conspiracy to defraud, especially if this becomes a regular practice.

AND be very careful about this one!!!!

7. Making Loans "Assumable". A non-assumable loan can become effectively assumed by using a land trust. The seller transfers title into a land trust, with himself as a beneficiary. This transfer usually does not trigger the due-on-sale clause of the mortgage. After the fact, he transfers his beneficial interest to you. This latter transaction does trigger the due-on-sale, but such transfer does not come to the attention of the lender because it is not recorded anywhere in public records. This effectively makes a non-assumable loan "assumable". CAREFUL!!! THIS CAN BE, at least, CLOSE TO (bank) FRAUD, also, if you are the seller of a property with a mortgage, remember YOU SIGNED THE NOTE. If the buyer, your assignee, takes out a big 2nd mortgage or big insurance policy and the house “accidentally” burns down; he goes to Brazil while the bank sues you on the note.

There you have it, Real estate trusts can be very useful if you know their limits. An Irrevocable trust made to your Family Limited Partnership can be even more effective from an asset protection viewpoint.

Thursday, May 13, 2010

How is your Long Term Care getting Paid?

Long Term Care Trap

Experts say anyone 80 and over has a 100% chance of requiring long term care in the next five years. Long Term care is not just for the elderly either. Anyone at any age can get sick or have an accident and be laid up for months or more.

People assume the State will help. It may. Medicare, Medicaid and private insurance may be available at least for a while but only private insurance and Medicaid pay for long term care. Very importantly, your private medical or “medigap” insurance will generally not cover long term care so don’t assume you are protected just because you have insurance. You have to buy a specific Long Term care Insurance policy or a rider to have it!

No insurance? I’ll just apply for Title 19 (Medicare-Medicaid) right?

Yes, after you’ve spent everything and had your home (were your spouse still lives) liened. Spend everything, You qualify.

The asset protection trap in long term care comes when you pass assets on to the family either through irrevocable trusts, family limited partnerships, simple gifts and even transfers of that $13,000 per person per year the IRS allows. I have an eighty two year old client. We set up an FLP. He has two homes and some other assets probably worth just about $750,000 total in the FLP. With 16 children, grandchildren and great-grandchildren and $13,000 each year from himself and his wife, It took just two years to transfer all the assets, avoid probate, assume much greater asset protection for the whole family and do it absolutely income and estate tax free. Best part, from his point of view, he remained in control of the assets as general partner and continued to live in the two homes “caretaking” them for the partnership.

Sounds good? So where is the long term care trap?

Title 19 doesn’t recognize the $13,000 per person, per year exemption of the IRS. It has different rules entirely. ANY gift or transfer for less than value within five years of needing long term care (receipt or even pre-application) creates a long term care penalty

equal to the amount of the gift(s). So, keeping it simple, for this example he transfers $750,000 to his heirs. He cannot receive Medicaid until he has paid $750,000, for his long term care. But he doesn’t have that money any more its been given away! Catch 22: needs care now! Has no money! Can’t get state aid!

There are several solutions. Connecticut was one of the first four states in the USA to offer the Long Term Care Partnership. Buy LTC Insurance and the policy payments for LTC will cancel out prior gifts dollar for dollar. Insurance is Too expensive? It may be, especially if you’re 82!

Another option is to make all gifts conditional upon a five year, third party lien in favor of the as yet unknown long term care provider. Gifts must be irrevocable and not have a reversionary possibility (be revocable or otherwise go back to the donor) to achieve asset protection goals. Gifts do not have to be unconditional so Make ‘conditional gifts.’ How about Trusts for the proceeds to donees which have a contingent benefit to third parties (LTC providers of the donor). If care isn’t needed, the trust(s) expire after five years and a day when the gifts become unchallengeable and Title 19 becomes available. Simple and non-public contracts between donor and donees may accomplish the same effect though there is not much direct case law.

Best yet, if you’re still young and have a business, how about a post retirement long term care benefit package while you can still afford it? It may even be tax deductible to the business!

Long term care must be fitted into a complete estate and asset protection plan. EARLIER THE BETTER!

The State of Connecticut has a Long Term Care Ombudsman program to advocate for the needs of residents in assisted living facilities, nursing homes and residential care homes.

State Ombudsman: 1-866-388-1888 or 860-424-5200. He won’t give you a plan though!

Thursday, May 6, 2010

Philosophical questioning

Deep philiosophical thoughts don't normally enter into asset protection issues but I received two such questions at a civic club talk today.

Advantages of Raising onseself up by the bootstrap

First a doctor asked if, like Warren Buffet, we wouldn't be better off as society if we just cut our kids loose to fend for themselves, in effect what's the point of protecting our assets for them, They and society would be better off and more productive by letting them do it (life) for themselves.

I certainly have to agree that Fear of starvation can be a great motivator. Even so, Warren Buffet's sons probably have a leg up on most kids; best schools, training, experience of living with a successful man, name recognition in a job hunt, things most kids probably will not have, even if denied a few billions in inheritance.

I answered that when my dad needed more money he took a second job. In the 1950s a second job could pay the rent. Today, do something menial for an extra 20 hours and you probably wouldn't pay for the electric. New College grads are taking jobs for $25,000 despite being $20, $40 or even $100k in debt for education loans for training seldom translating into job specific readiness. In 1950, $2,000 a year prepped many to buy a starter house for $6 to $10k. In 1960 my aunt's employer was an 80 year old who invented the automatic gas pump handle. He made a fortune worth $200,000! When I met him he had two homes, one in Bridgeport, Ct and the other in Seattle and had spent 20 years traveling the globe, Probably on less than $4,000 a year. We grew up in a different age, before the dollar was worth less than a nickle.

Can kids be cut loose to earn a career? Some certainly. Most, I think, will never be able to acquire our standard of living. God willing, we won't go back to the hopelessness of the 1930s, the last time a generation earned less than its parents, but I think protecting my assets for my kids to have a better life makes so much more sense than letting the tax man or some sue happy lawyer take it all. I'll still have some left over for charity. Just a thought.

It's Unfair to our "Victims" to protect our assets

I have never seen this complaint before. One man asked about the morality of protecting one's wealth from someone we injured. Putting aside the kinds of frivolous suits that might keep one up at night for years and then take away everything you've worked for, Is there a moral imperative against protecting ones's family from a "Valid claim"?

This is an interesting question. In areas of the far east and some ancient cultures taking one's life meant you owed yours in service in return. Saving a life might mean taking responsibility for that life, for life. The American legal system doesn't require that of course, just "just compensation." Certainly, maintaing adequate insurance to provide such compensation is a requirement mentioned many times in this blog. Indeed failure to maintain adequate insurance opens the door for a court to undo asset protection entities upon finding of undercapitalization, ultra vires and/or various theories of equity. But what about the idea that our assets, above and beyond insurance, should be held for payment to our victims should such an dark eventuality arise?

Good question and one I can only answer like this: Isn't our first responsibility to our own families? Even if we agree to live in car to make good on a valid judgment, do we, and our families, have to assume such risks for bogus claims too? And If, for moral reasons, we believe we should pay everything for our mistakes, doesn't it make sense for that to be our decision rather than the system's. If you have an asset protection plan the decision becomes yours. Like Warren Buffet and his idea of the "underpaid" Tax Man, Warren can volunteer extra money to the IRS any time he wants (Notice that he doesn't). Guilt or "fairness" may lead people to help those who we've hurt and to me it means even more if voluntary, meaning from protected assets.

I understand the fairness concept. My neighbor once prayed that God stop a rival welder from taking unfair advantage of her business by parking his mobile unit across the street from her shop and taking business and food from the family table. When his truck went into a ditch and he was injured she felt so guilty she visited him daily in the hospital and helped pay his expenses. They became good friends and went on to work together.

I have never seen that result from a lawsuit, meritorious or not, but have seen runaway jury awards, predatory even extortionate claims, claimants who view the "no cost" aspect of suing like a free lottery ticket, and the high cost of defense leading some to settle even when "right."

Protect your assets. You can always pay voluntarily if you think that's fair.

Tuesday, April 13, 2010

Professional Corp: just a piece of the Plan

I had an interesting discussion about Professional corporations today. It appeared to me that a young professional had been steered into a PC without much thought or planning. This assumption, which I hope is unfair, is partly from experience. Tell your lawyer you’re starting a business and he will pull out an LLC filing form. You’re a professional, it will be a PC form. That’s it. You have your company, The lawyer, accountant or adviser act like they have blinders on. Were you asked or advised on the following:

· Where will your income come from, just professional services or will you be selling anything else, such as books, guides, gear, tools, any specialized non-professional reports?
o The IRS function test requires that substantially all (95 percent) of the business activities involve services within specific occupations
· Where will you put business assets for the best tax results?
o You don’t have to keep it in the PC
· Which type of organization costs the less to form and operate?
o Must it even be a PC in this state
· Will you have multi-state operations?
o The other state may be better
· How will you get the most tax deductions?
o You are not in a box do not limit thinking to the PC
· Who else will you employ and how?
o All owners must be professionals, retired professionals or heirs
o Address avoiding often overlooked potential employee claims
· Will your personal and family assets be safe?
o Don’t have any yet? What’s the plan for when you do?
· Will you buy or rent your office? From whom?

And those are just a handful of the things that should be thoroughly thought through.
Sadly, the typical answer is often NO and not just in the creation of legal entities. Back in 1983, a house builder acquaintance of mine ran out of money. He went to one of the most respected lawyers in town. He heard the tale and pulled out a bankruptcy questionnaire. No real advice. No assessment of other options. Maybe lawyers are held in such disrepute because they just fill out the forms, sometimes doing no more than the client asks, as though the client already knows all his legal options.
That client went to another lawyer got refinanced and went on to create a multi-million dollar home building company, got greedy then lost everything in the economic downturn of 1989. If the first lawyer had made a personal instead of legal assessment of the client he was prescient. Most likely, and all too common, he just didn’t do his job.

Back to the young lady professional I met and what I think should have been done (and mostly still can be). I’ll keep it generic because I have not examined her situation.

Back in the olden days professionals could not incorporate at all. Their services were special and personal. They were expected to stand behind their work and remain personally liable. When Professional Corporations, PCs, were introduced they retained this personal liability component but allowed the benefits of continuity and a few tax and accounting benefits.

In a PC, Individual liability may be somewhat less than Partnerships and may protect against personal liability for purely business, not professional, claims but, as a practical matter, there is very little liability protection. Like a sole member LLC, the PC will be sued, the professional who did the wrong will be sued and most everybody else will be sued on such theories as failure to supervise, failure to train, wrongful hiring (he did the same thing at the last five companies where he worked, Oh Yes, and He’s a felon), etc., and that’s not even addressing the many ways your employees could sue you.

The PC offers very little liability protection. Was this explained? Maybe, but then were her assets discussed? What kinds of assets are held in the PC or in her own equally vulnerable name? It better be NONE.

If there are few liability benefits, what about tax deductions of business expenses in a PC? Unlike a sole proprietorship or S-Corp or most LLCs, PC income is not passed through to the professional and can be double taxed. Most PCs , like many C-Corps pay everything “left over” as salary or bonuses. Most C-Corporate deductions and medical, retirement and other advantages are also available except for retained earnings. A C-Corp (2009) tax on the first $50,000 net profit is just 15% and the next $25,000 is just 25%. Over time, significant money can be put aside at these lower tax rates. You can then fund many things, training junkets, Insurance, retirement benefits such as a 419e plan, etc. The PC is taxed at a flat 35% from the first Dollar so don’t keep money there. Legitimately move income to your C-Corp by leases or other service agreements and pay much less tax than a PC (35%) or the individual rate (39%).

You want a PC or already have one, what do you as a young professional do? Fully review your options. When you fully understand your situation and options, Go ahead, create the PC, if it is better than a partnership or sole proprietorship for you, then:

1. Have as little money as possible in the PC. Move as much income as possible into your C-Corp where you can retain earnings, gain more and better audit proof deductibility. Buy Insurance and Protect business assets from suits by moving them to the C-Corp then lease them back to the PC achieving a lower tax rate AND asset protection..

2. Set up a family limited partnership (FLP) to hold all your safe assets and some mildly “dangerous” assets like a real estate trust for your house. This is where your closely held C-Corp stock goes too. Never keep the C-Corp stock in your name, a claimant can take it from you as easily as they could raid your bank account.
3. Don’t EVER own the building in a PC. Real estate owned by a PC are particularly vulnerable to suit. Worse, when you are ready to retire and sell the depreciated Real Estate from the PC it may be taxed as regular income not capital gain, AND likely be double taxed to the PC and then to you as a dividend. Never, Never, Never waste an appreciating asset like realty on taxes. Put it in an LLC under the C-Corp and let the PC lease it back adding corporate income and taking it out of the tax inflexible PC.

4. Never get caught in bad legal advice. You are a professional, yes you may be restricted in what you can do with your business entity, but do not let your advisor box you in because he has a form to fill out. You are also a person, you have a family, you can have other businesses, you can create family holding companies, FLPs, LLCs, special purpose Trusts, retirement plans (401(k), 419(e), etc.). You can isolate liabilities, firewall assets, shift income, use tax code advantages. Review your whole situation and PLAN.

Monday, April 12, 2010

Sue Happy

Just met someone, I don’t really like her very much, her name is Sue Happy. She wants a relationship that will last for years. I don’t think it will be a close relationship though, after all, most of our conversations are through legal counsel. She must be old fashioned because she expects me, the “man,” to pay for everything. I understand she belongs to a growing minority: people suing. There are 70,000 new Sue Happy people nationwide every day that the courts are open. She’s no beauty but really keeps my attention. I can’t sleep without thinking about her, my stomach constantly churns like a first love, and I wake up in cold sweats throughout the night. It must be an emotional attachment. My insurance company wrote me advising I get my own attorney as her claim exceeds the policy limit. Sure hope my wife doesn’t find out about her.

Foreign Asset Protection Trusts

Beware of Greeks bearing gifts. Troy might still be with us if they had turned down that damned horse. Some good, but perhaps a little greedy, people might have avoided an IRS "Perp Walk" if they had followed comparable advice when it came to tax and so called "asset protection" scams to hide assets oversees. Not that most of those scams came cheap. Some "put your money in a Cook Islands trust or Republic of Tonga ("where???!") account" scam cost tens of thousands of dollars. The guarantees of safety and maybe even pre-paid legal representation at any audit offered by such promoters disappeared with them. I will list some of the scams and scammers in a future post but for now here's what to look out for:

Forget promises that foreign accounts, corporations, Limited partnerships or trusts, or most anything else are free of US taxes. THEY ARE NOT. As USA residents all global income is taxable. There are a few jobs, like for the United Nations overseas, where no US income taxes are due, but even if you work for the UN the interest on your bank account in say, Saudi Arabia, IS fully taxable. Even some very sophisticated people got caught in this convenient mistake. "I didn't know I had to pay on that, I was working for the UN!" Whoops--Perp Walk.

Hiding assets overseas? Forget Secrecy laws. They may work in old spy movies but not today. Caribbean nations such as the Cayman Islands, Nevis and the Bahamas were the first to give up bank secrecy in the war against drug money laundering. The rest of the world, including secretive Switzerland, joined international conventions and treaties of full reciprocal disclosure as the Tax men caught up with the drug warriors. Last hold-out Austria is folding its secrecy tent. Don't count on your trusted banker-broker to protect your either; Swiss banker UBS located in Stamford, Connecticut turned over 4,450 client names to the IRS. Connecticut Attorney General Blumenthal is curious if any of them ducked Connecticut taxes too.

Promises that hiding assets in a "Safe" place overseas don't cut it. Even if that scam somebody is selling can place enough false names or fraudulent entities between yourself and your overseas money to make bank disclosure problematic, ALWAYS remember the first rule of asset protection, PROTECT YOUR ASS. You will be questioned under oath about any foreign assets by your creditor, the tax man, your tort victim's attorney, etc. Unless your name is William Jefferson Clinton, lying under oath is a felony that will bring serious criminal trouble.

Forget schemes that involve putting your money here or abroad with anyone who tells you that the IRS has no constitutional right to tax you. There are several theories used. They are wrong! You will lose more than just money, your reputation and maybe even your freedom.

Lastly, do you want to risk your wealth in some corrupt, backwater, half-baked country that is a dictatorship, was a dictatorship and/or may be a dictatorship tomorrow afternoon? Do you want to trust a bank with no depository insurance, a broker with no oversight, some guy on the phone with a strange accent, or perhaps, Alan Stanford, with your wealth? Still unsure? Will you be happy to have to fight in their courts, in their country and under their laws with their lawyers if anything ever does go wrong? Probably not- SO STAY HOME ALREADY!

Now that we are over the Caveat Emptor part of the post, GOOD NEWS, foreign asset protection entities generally are not illegal if you follow all the rules, pay all the Taxes and don't act to defraud and can be a marvelous asset protection vehicle for certain high net worth folks.

Let me give you an example. You are concerned about an out of control Washington, the debt, the deficits and a looming default with a potential collapse of the US economy and the US Dollar. You are rich why should you just wait and see your assets blow up with the country?

First of All, "you are such a pessimist." Having said that, I can't say you are wrong. What can you do? You could leave the country, give up US citizenship and hope the place you go to is better than what you expect for the good old US of A. But here is one thing that I could do:

First, take not more than 1/3 of your wealth, any more and it will look like a fraudulent conveyance, depletion of assets, etc and may (likely) trigger a 30% exit/withholding tax. Place it in a Switzerland account denominated in Swiss Francs. Near term Swiss Franc futures are today at $.9433 to the Dollar. The Swissey, as its called, has been over parity to the Dollar several times in the past couple of years for a potential 8% profit plus interest if nothing at all happens. If the US economy implodes its value Vis a vis the greenback could run up a lot. Note: A Swiss bank account is no longer secret and gives nearly no asset protection (It will be a pain for a creditor to go there to claim it, but he certainly can as with any other account(s) in your name).

You can add an asset protection component by creating a Bahamian trust or Family Limited partnership which would own the bank account. Bahamas law protects against most any claim (not the IRS), including a claim of fraudulent conveyance unless made within two years of creation. This is a very powerful legal protection. The money isn't subject to whims of the Bahamian Government (though by offshore standards they are close to golden) since the money is in Switzerland, one of the most secure places on earth. Alternatives would be Singapore, Japan, Australia and New Zealand currency denominated accounts in a safe country. Spreading some money around may protect you a bit more from a global economic disaster.

Is it safe? As safe as anything can be if the US collapses. Is it legal? Yes, IF you document the lawful purpose of the transfer, currency hedging is certainly lawful, foreign accounts are lawful, a Bahamian (or most any other place) legal entity is OK too if done for a legal purpose. Do all the paperwork. Document the transfer of funds. Report the interest or any other income and pay all foreign and US taxes. File the proper forms with the IRS and the US Treasury Department showing your interest in any foreign entity and account(s). Keep all records for the audit.

See, it's Simple. Its not for everyone but if you're rich and paranoid it is doable (and someone MAY really be out to get you). The cost of doing it is $10,000 to $20,000 plus nominal annual trustee fees in the Bahamas and possibly Switzerland. Using a corporate trust department of a bank with branches in both Switzerland and the Bahamas (USA too) is recommended.

Poor house to MegaMansions in 20 years

Arnold Schwarzenegger arrived in New York from Austria to star in a film entitled "Hercules in New York" (1970). You should see the film with your grandkids. In my book it is the worst movie ever made. Arnold being dubbed is hilarious. Edward D, Wood's 1959 "Plan 9 From Outer Space" is a masterpiece by comparison. I am not a film critic. I point out this trivial bit of history to illustrate a point.

Arnold had little more than the money in his pocket when he arrived here in 1970. By the 1990s he was worth over $600 MILLION. Not bad for a guy with a bad accent. Someone asked his financial advisor how did he do it, probably expecting something along the lines of "America is the land of opportunity," or "Hollywood is big business," or like some supermodel "He worked really, really hard," Etc. The actual answer surprised him: "Arnold has a sophisticated understanding of Legal Entities..."

WHAT?!?!! What does that mean??? "sophisticated understanding?" "Legal entities?" What does that have to do with making money. Isn't hard work, who you know, and lucky breaks the way to wealth?

It means a lot. It means Arnold, the Terminator, Governator, oversized guy next door, was hiding behind that muscular facade a rare intelligence that allowed him to ride far ahead of the curve in acquiring and preserving his wealth. That is not to say he was a corporation law, tax law, asset protection specialist who knew it all. He didn't and few people could. He did understand and appreciate what conservative legal, tax, business and personal planning could do for him and hired the best people to plan and do it.

What were some of the things that he did? Incorporate! Tax laws allowed deductions for work related expenses. Room, board and expenses, all first class, were deductible to "Arnold, Inc." when he was sent him away from home to film. It was like the Government paying 60% (the tax rate) of his living expenses. Today you can still do it but would have to exclude the fair value of what you would have spent for some things, like food, back at home. Still a great idea.

Arnold's companies, partnerships, corporations in lower tax states or internationally took advantage of lower taxes and moved some expenses off the books. Don't take a vacation, promote a Movie in Cannes, London Tokyo. Its business and mostly, if not all, deductible.

His different corporations and LLCs also served as an asset protection. The company was responsible, not Arnold, for much of what might go wrong. They hired the servants, drivers, boats, helicopters, not Arnold. And, while I would never say the big guy ever failed to pay his debts, if a creditor failed to get his bill paid before the company expired, well he lost out because Arnold wasn't personally liable. Expensive Cars, planes, boats: lease them through the company since they have a business purpose. Buy stuff? Get the business depreciation write off. Keep it honest and follow the rules and many things you have to do anyway gets subsidized by the tax man. Benefit your business, save money to make money and live better too!

You or I would probably never have that body or $600 Million Dollars. No body builders, and few people in any profession, have ever made that kind of wealth before or since! We can though, use conservative asset protection and business tools to accomplish the same goals. That's Arnold's real lesson for us.

Insurance: Not what its cracked up to be

Ever go to your lawyer, accountant or insurance agent and say "I have a lot of stuff. What should I do to protect it?"

What is their typical Response? "BUY MORE INSURANCE."

I say wrong, wrong, wrong, wrong, wrong! Why do you get that advice? They just don't know any better.

You need adequate insurance to be sure! Failure to properly insure yourself, and any legal entities we create for you, can go to the issue of undercapitalization, piercing the corporate veil, fraudulent conveyance, or just make the judge mad at you. None of which you want. Typically a $300,000 policy is plenty, $100,000 may be enough. Umbrella policies can be cheap and boost coverage to $1 million or more very cost effectively. You choose, but don't get too much or rely just on insurance for your corporate or family's financial safety.

Have too much insurance? You may, here's an example: I spoke with a man about asset protection. He didn't need it! He had $1.5 million in insurance, he said. WOW, he really bought into the "good hands theory" big time. What happens if he gets sued? Most cases would be covered by much less insurance, $100K is often plenty, so, first off, he's overpaying a lot for coverage that's not needed. But what if that rare case comes along where liability could be substantial: a traumatic brain injury, Paraplegia, Quadriplegia or death case? Do you think $1.5 Million will be enough? No way! In fact, the $1.5 Million may only whet the lawyer's appetite, and pay for more of his legal services to go after everything else you have, even things you thought to set aside like the revocable trust fund for Little Johnny's college. Big policies may not only not save you, they may encourage suits!

It could be worse: Will the insurance you paid so dearly for even be there??? Insurance companies increasingly look for any loopholes in the policy to deny Any payment on a claim. The "wash their hands of you" Insurance company will make even more money for their shareholders, not to mention bonuses for their employees, if they pay nothing and leave you on your own.
That can't happen? Oh yea? Most policies won't cover intentional acts. Remember the socialite who in a drunken tiff drove her Mercedes into a line of people waiting to enter a Hampton's NY night spot. No insurance for her. Lawyers, even in more conventional auto cases, may cite laws allowing for double or triple damages if the accident involved certain violations of traffic rules. Sure, your Insurance pays the $100,000 in damages, but pay the punitive damages? You are on your own. Good bye house, good bye college fund, good bye lifestyle and all the years of work to accumulate it all wasted, all gone in a courtroom. There are more Exclusions in everbody's insurance policy every year. It is amazing, just read through yours today.

The REAL Answer: Buy reasonable insurance to be sure, but then get the best possible assurance, a proper Asset Protection Plan.

Live Free ... like a Kennedy

On July 18, 1969 on the Little Massachusetts Island of Chappaquiddick a married man ending a night of partying most likely boozed up and transporting a sngle youg woman. Clearly driving too fast and going the wrong way, he drove off a bridge killing the young woman. Her family sued of course. There was negligence to be sure and maybe more than just that.

Most people would loose everything under the circumstances, but it wasn't just anybody being sued. The family settled for the insurance money.

Some years later this man's very stoic wife decided to call it quits. Years of his self centered lifestyle and philandering, alleged or documented, had driven her to her own crisis with the bottle. She got her divorce but next to nothing of the "family assets." A couple of sisters in law were widows of brothers of the Chappaquiddick driver. They had gotten little more than the insurance money and nothing of the family estate as well. One of the desperate widows subsequently married some Greek fellow for his money.

How could this be? Regular folk would have lost most of everything they had under similar circumstances. You already know who these people are, they are Kennedy's. Were Kennedy's above the law? Some think so, maybe even some Kennedys. Actually they benefitted from some of the most astute asset protection strategies ever produced, paid for by their father, family Patriarch Joseph Kennedy.

The trust Kennedy set up is still a "secret" but some aspects have been made known either by leaks, investigation or deduction. Since I have done none of those things I can only repeat some public understandings of the Kennedy approach. Its been alleged that the scheme cost Papa Joe over a Hundred Thousand Dollars in 1930's money. I wouldn't be surprised. From best information, the plan consisted of Spendthrift trusts for all Kennedy descendants. A spendthrift trust allows a trustee to distribute funds he deems appropriate for the beneficiary. He can make or reject claims for payment as he sees fit as all funds are held not by the Kennedy heirs but inside the trust for their "benefit."

According to what is known, Young Kennedy's have trustees appointed for them and thus little or no control of the underlying asset. After they reach a certain age they may choose one of the trustees gaining some influence over the spending. Older descendants would receive greater control of their "share" of the assets through the trustees. Homes, investments, businesses, accounts would all be inside the trust beyond the reach of creditors or even disgruntled wives.

Are all Kennedy assets truly safe? Hard to say. Theoretically having effective control over the trustee can result in an order by the court to the beneficiary (lawsuit looser)under threat of contempt to order his trustee(s) to distribute funds to pay the debt. Could the trustee then still refuse? Maybe, the trust documents and rules of equity would control. In any event, as far as we know, nobody has ever gotten so far either because they failed to win or just gave up because fighting was too complicated and costly.

That is the real lesson that anyone can take from living like a Kennedy. Everyone can make what you have much more complicated and costly to take away. It has been alleged that you could not create a Kennedy style trust today. Too expensive, perhaps, Illegal, maybe, but I don't think so. 2010 is the golden age of asset protection (Except as to taxes!). Delaware, Alaska, Nevada, Wyoming are bringing asset protection laws that rival those of foreign island havens like Nevis, the Bahamas, Isle of Mann, Cook Islands and the Republic of Tonga! Just one or two techniques will stop most claimants in their tracks the way Insurance won't. Everyone, even people not named Kennedy, can protect his family by using tried and true legal entities if you act long before a claim is brought against you. Being nice doesn't help. PREPARE!

Conservatively follow the rules. Reduce and isolate risks that can destroy your family's welbeing; and NEVER, EVER, EVER break the first rule of asset protection: PROTECT YOUR ASS. Do not fraudulently conceal assets, do not lie about what you have (perjury), always pay your taxes (but don't throw away deductions along the way!), Do not fall for tax avoidance and asset protection scams (Howard Schiff finally went to jail!) and always file the proper paperwork. Saving money can never justify a jail term for committing a felony. You can do more than you imagine to secure your family, legally and conservatively.

PLAN PLAN PLAN, Implement the plan, live secure and with peace of mind.

Sunday, April 11, 2010

The Power of Charging order Protection

Family Limited Partnerships, the power of

Start a sole proprietorship business and everything in the business and everything you personally own is at risk. Government created Business entities such as corporations and limited partnerships allow individuals to group together to invest money in new businesses. Investors in a corporation are shielded from the liabilities of the business and their risk is limited by the amount of the capital investment. The business creditor is limited to the assets of the business only, and he generally cannot pursue any other assets of the investor. The liabilities of the business are “inside liabilities,” and the creditors are “inside creditors”.

But what happens when the owner(s) are sued for non-corporate activity? Your son runs over somebody while driving to Church. As far as the corporation is concerned, this is “outside liability” having nothing to do with the corporation. But, the lawsuit can take away everything you own including your stock in the corporation. Under the law, creditors of an investor-owner are treated much differently than the creditors of the business itself. The law has no desire to protect a debtor’s interest in a business from personal creditors. On the contrary, if an owner has debts, then he or she should pay those debts even stock or partnerships interests in a company that otherwise did nothing wrong. Thus a closely held corporation can disappear into the void of lawsuit Hell nearly as easily as a sole proprietorship. This is why the common middle class "protection" of putting stock, company assets, etc. “in the wife’s name” only shifts risk, but never eliminates it.

A creditor may simply attach the corporation shares of the debtor’s stock to gain all the rights that the debtor had in the business, and may even bring derivative actions against errant corporate officers and directors. One Doctor put everything in his wife’s name. A patient sued. “Hah-Hah can’t touch me,” said he doctor. I guess he forgot, his medical practice listed the wife as secretary for the corporation. She was sued as an officer. They lost everything. She couldn’t even use his malpractice insurance, she wasn’t a doctor, just his ill conceived asset protection plan.

Everybody who has anything they don't want to loose needs a firewall between both business “inside liabilities” and their, general day to day “outside liability.” Setting up corporations and LLCs to limit, allocate and isolate risk is a must! Next build the first line of defense and a powerful firewall: the Family limited partnership.

A Family Limited Partnership (FLP) is different from a corporation. Invented in the second decade of the 20the Century, Limited Partnerships (LPs) have an established and judicially recognized history in both English and American Law. Family Limited Partnerships are a type of Limited partnership just allowing family members as partners. Interests in LPs can be sold and negotiated implicating state and federal securities laws. There can be significant business benefits to making interests tradable but most family asset planning doesn't need to get so involved in the expense, paperwork and legal requirements. FLP can do most everything you need.

The most remarkable benefit of a limited partnership stems from the relationship of partners. Limited partners have no liability for the actions of the partnership beyond their actual investment. A limited partners investment in the partnership is only at risk if the partnership does something wrong. Wrongful acts by the partnership or caused by a partnership asset (a car crash by someone using the partnership vehicle for instance) can lead to liability and loss of investment. This “inside liability” can never reach the limited partners other assets.

That may seem simple enough, So where is the asset protection? If the partnership does something wrong then I could loose all the assets “inside” the FLP. Answer: Never have assets in the FLP which can cause a lawsuit loss. Stocks, bonds, bank accounts, ownership various trusts which themselves could contain potential “Inside liabilities” like real estate trusts can be kept safe inside the FLP.

But what about Outside liability. My son hits somebody can’t they take my interest in the FLP just like my stock in the closely held business. Sometimes, especially if all the general and limited partners are subject to the “family car doctrine” in this example. Additional firewalls and protections can be built against that eventuality and will be discussed in the future, but for now lets say no and here’s why: The law protects the innocent limited partners and will grant only a limited form of relief called a “charging order.”

A partnership interest is unlike holding shares in a corporation. A change in ownership may disrupt the operations of the partnership and force non-debtor partners into an involuntary partnership with the creditor. The partners have rights that includes the rights to distributions and the rights that are set out in the operating agreement. The partner may or may not be required to perform certain duties in order to receive the rights outlined in the partnership’s operation agreement.

The partner who has an “outside claim” against him passes just the rights to distributions, if any, from the FLP. Creditors cannot simply attach the partner’s interest as if they were shares in a corporation.

The comments to the Uniform Partnership Act and LLC Act describe the charging order as “in the nature of a garnishment.” Rather than allowing a seizure of the asset the creditor only gets an “assignment of income” equal to any distribution from the partnership to the person who lost the lawsuit or is otherwise deemed a debtor.

“Charging Order Protection” is somewhat of a misnomer. A charging order is a remedy that is affirmatively sought by a creditor. A better term may be “anti-invasion protection” because the benefit sought from a charging order protection is making any invasion by a creditor of the assets within the FLP very difficult indeed!

The beauty of the charging order in the FLP context is if there are no distributions, and a properly drafted asset protection plan can limit distributions, then the creditor gets nothing! BUT! {here’s the juicy part} the IRS requires all partnership income to be allocated! The creditor will get a K-1 ( partnership version of a “1099 like” IRS form) and have to pay tax on the income he didn’t receive. This surprise happens either at the Charging order stage or (more likely) upon foreclosure of the charging order. Pursuing a charging order, unlike a seizure, thus becomes a trap for a creditor. The tax liability (unaware creditors’ and their attorneys can get “K.O.’d by the K-1”). The winning client, and his lawyer now facing a possible malpractice claim, “no longer want the cheese; they just want out of the trap.” An empty handed departure or favorable settlement is much more likely.

An FLP is the legal entity that can offer great, affordable, asset protection to most every family even with much less than $500,000 in total assets. Think you’re too small to use this? What would a $100,000 lawsuit do to your family’s modest lifestyle? If you have Millions in assets, early planning becomes even more crucial.

Charging Order Protected Entity (COPE) is the term used to describe entities for which external creditors are usually limited to the charging order remedy, they may protect the back door (against outside creditors) not just to Limited Partnerships (LP) but Limited Liability Company (LLC), Limited Liability Partnerships (LLP), Limited Liability Limited Partnerships (LLLP), as well as the new series LLC from Delaware and Oklahoma. How these other entities may be used will be addressed in he future.

Protecting your company - Step One

Asset Protection for your Company

To be successful in business, as well as in life, you have to be able to take risks…but you can greatly reduce your risks by utilizing the right asset protection tools.

When you become a target for a lawsuit, the first thing an attorney will do is determine if you have anything worth taking. Most attorneys work on a contingency basis, which means they don’t get paid unless there is something to take. If there are no assets to take, then there would be no benefit for the attorney to take on the case.

“The only way to truly achieve asset protection is to remove the incentive for someone to sue you.”

The first step in developing an asset protection plan is to establish a protective barrier between your personal assets and your business assets. This can be accomplished through the use of a family limited partnership for your personal assets while your separate business entity such as a c-corporation, with or without limited liability company (LLCs), or trust(s) for holding assets, leasing assets, and performing business operations to maximize tax deductions and minimize liability.

Unlike a sole proprietorship where you as the owner are personally liable for the activities of the business, corporations are separate legal entities. Which means the owners and/or shareholders are protected from liability claims directed at the company. Additionally, s-corporations and most LLC are “pass through” entities for tax purposes; literally throwing away thousands of dollars in tax deductions annually).

Incorporating is a Powerful Step in Establishing Your Asset Protection Plan.

A layer of protection can be established by setting up a business entity to maximize tax deductions and minimize liability. A mixture of C-Corporation and LLC’s allow you to do both.

Divide Operations to Minimize Risk

There is a cab company with over 100 taxi cabs. Knowing that it is a high liability business, they have separated out every two cabs into their own LLC. If one LLC were to be sued, then the other revenue generating cabs are protected. A C-Corp oversees operations and leases the cabs to the LLC’s thereby obtaining the greatest tax benefits while limiting liability.

You too can separate your high risk assets from your wealth then split your revenue generating assets from each other, so when sued, your eggs are Never all in one basket. You can use very powerful, effective and legal asset protection entities that have proven effective for decades without falling for the kinds of gimmicks often sold as “asset protection” to the unwary, such as off shore accounts, tax dodges and straw men and corporate shells, “bearer” accounts and stock shares.

For example, you have multiple investment properties. Have them all in your name? You risk everything, BUT place each investment property in its own LLC and you effectively separate and reduce potential liability and Loss.


You’ve worked hard to grow your wealth. Don’t you think it’s a smart investment in your future to make sure you can keep it?

You must set up your asset protection plan when your legal seas are calm. You must take action now to move your assets onto safe ground before you are involved in a lawsuit. It’s cheaper, safer, and can be integrated with other goals such as tax reduction and estate planning.

Act before it’s too late. If you are named in a lawsuit, it’s too late to protect your assets. In fact, even if you merely suspect you’ve done something for which you can be sued the transfer of assets constitute a “fraudulent conveyance,” and everything you have can be subject to seizure.

Getting Started: WHAT'S Asset Protection

As a law professor once told me (and everyone else for that matter) “Paper’s Cheap!” For relatively low cost you can set up legal entities to protect everything you have. Novices when they first hear of the concepts of “asset protection,” “Tax reduction” and “estate planning” open saucer-like eyes as if meeting salvation only to then procrastinate and do nothing. There are many reasons given and needless fears that prevent action:

How can I get something to do everything when I can’t keep what I’ve got straight?

Isn’t part of the problem that you don’t have a plan now?

What if I fail to follow the plan in a material way;

You could loose the benefits of asset protection, but, Is having no plan better?

I’ll have to do the proper annual paperwork.

You already do the paperwork, are you benefiting the most from it?

I’ve heard all sorts of stories from my Barber, Bowling friend, Golf buddy, you know who!

Is that really the advice you really want to follow?

What happens when my needs change?

That’s exactly WHAT you need to Plan for!

Will I loose control of everything I’ve worked for to get some plan I don’t even understand?

You gain MORE control from an understandable and appropriate asset plan!

Then you think Geez, this will cost a fortune

Planning costs little next to just one lawsuit, business mistake or excessive estate tax!

Still, if you're like most, you do nothing until it is too late!! NOT one of these common justifications for dithering should stop you or even slow you down from exploring YOUR asset protection needs.

Does your company need to make and keep more money for you from business?

Do you protect yourself from frivolous claims at work, Employee suits for discrimination, ADA, and claims you may not even be aware? Well of course! Fail and you’re out of Business.

Do you want to protect your home, children’s college fund, retirement. Of course you do,

Do you want to cut costs, taxes, complexity, possible interference and public disclosure in passing assets down to your loved ones? You’d be foolish not to!

You can do this and more with a little preparation. A proper asset plan is understandable and appropriate for YOU. You control your costs of setup. You control what is done. You can create as many or as few legal protections as your circumstances require before lawsuits, medical emergencies and taxes take everything away from you. Once done, Your Asset Protection Plan will save money and provide peace of mind for the rest of your life. Few investments will ever be as worthwhile and long lasting.

All it takes to do all of this is thoughtful planning and guidance from an expert.

Joseph B. Barnes, Attorney at Law 203-877-6800 Thirty years of Service

E-mail me at or at