The October 15 Lakeshore Lawyer program featured a full-length interview with Roccy DeFrancesco, the Founder of The Wealth Preservation Institute and Co-Founder of The Asset Protection Society.
Roccy began by emphasizing that asset protection is a specialized area of financial planning and legal practice that most practitioners, even highly experienced ones, know relatively little about.
He also emphasized that revocable trusts including land trusts provide no asset protection whatsoever against the claims of creditors of the persons who set them up, as noted in the previous month’s program. However, a large measure of asset protection can nevertheless be achieved relatively easily, he contended, by the use of limited liability companies or limited partnerships that limit the remedies of judgment creditors of their members to “charging orders” imposed by the courts.
Here, I took partial exception to Roccy’s remarks, pointing out as I had in my general discussion of asset protection on July 16 that no one can limit liability for his own negligent actions by committing them through a limited liability entity. (Thus, an officer of a company would be personally liable for an accident that he caused by negligently driving the company’s car on company business even though his liability might be covered by liability insurance or indemnified by the company.) I also pointed out that the limited liability company and limited partnership statutes of Indiana and Illinois expressly authorize a judgment creditor of a member to foreclose upon the member’s economic interest in the entity as part of the relief available under a charging order, although such a foreclosure right is not expressly available under the statutes of Nevada and certain other states. Thus, Nevada’s LLCs and limited partnerships, which may easily be organized and then qualified to do business in other states, are somewhat more asset-protective that Indiana’s or Illinois’.
Nevertheless, Indiana or Illinois limited liability entities provide so much more asset protection for their members than sole proprietorships or partnerships, so inexpensively, that it is a wonder that so many people continue to conduct their business without such important protection.
Roccy and I next discussed the critical importance of devising and implementing an asset protection plan in advance of incurring legal liabilities. Under the law of fraudulent transfers, any transfers except for “reasonably equivalent” new value that leave the transferors unable to pay their debts as they mature are voidable regardless of the intent of the transferors. Also, even more importantly, any transfers except for adequate new value that are made with the actual intent of hindering creditors - - even future creditors which are contemplated at the time of the transfers - - are also deemed “fraudulent.” Such intent may be, and usually is, inferred from the circumstances of the transfers if those circumstances reveal a preponderance of the “badges of fraud” (such as, for merely one example, concealment of the transfers from possible creditors).
I noted that fraudulent transfer law is thus a major constraint on giving assets away through irrevocable trusts or limited liability entities even though those are, especially in combination, the best means of controlling assets after a gift and minimizing estate and gift taxes for those for whom such taxes are a concern. Irrevocable trusts that are frequently used for these purposes include ILITs (Irrevocable Life Insurance Trusts), GRATs (Grantor Retained Annuity Trusts), QPRTs (Qualified Personal Residence Trusts), CRTs (Charitable Remainder Trusts), and CLTs (Charitable Lead Trusts). Other irrevocable trusts are often used for the purpose of purchasing assets belonging to the grantors who established them. One particularly effective technique of selling assets while in effect giving away all their future appreciation, and reducing estate and gift taxes to the absolute minimum, is a sale to an irrevocable trust of which the grantor is not a beneficiary but retains some control right sufficient to make the income of that trust taxable to him even though the trust is outside of his estate for estate tax purposes: a sale to a so-called IDGT (Intentionally Defective Grantor Trust).
Another major constraint on giving assets away in trust as part of an asset protection program, while retaining a beneficial interest in the trust, is the “self-settled trust” rule that applies in most states including Indiana and Illinois. Under that rule, any creditor of the settlor of a trust - - even a future creditor - - may execute a judgment upon the trust’s assets to the maximum extent that the settlor could possibly benefit from that trust. In a few states, including Nevada (again), there are special statutes authorizing so-called Domestic Asset Protection Trusts, irrevocable trusts of a particular sort that are declared by those statutes to override the general rule concerning self-settled trusts. However, Roccy and I both agreed that the effect of these statutes is questionable given the full faith and credit that all states are constitutionally required to accord to the judgments of other states of the United States.
Ultimately, we agreed, the safest asset protection trusts are foreign trusts formed in such jurisdictions as the Cook Islands, where U.S. judgments are not recognized and a creditor has only a short period to bring a fraudulent transfer action before it becomes time-barred. (In Indiana and Illinois, by contrast, the statute of limitations for such actions is four years. Moreover, under Section 548 of the United States Bankruptcy Code, a bankruptcy trustee may “avoid” any transfer made within the ten years preceding the transferor’s bankruptcy petition if that transfer was made to a “self-settled trust or similar device” with “actual intent to hinder, delay, or defraud any entity to which the debtor was or became…indebted.”)
In this connection, I noted that one of the most important developments in United States trust law over the last twenty or thirty years has been incorporated from foreign trust law: the use of third-party trust “protectors” to modify various provisions of irrevocable trusts. Such provisions can make irrevocable trusts far more flexible than they would otherwise be, thus enhancing their value across the board for estate planning purposes.
I concluded by remarking that there is no opposition between the use of trusts and the use of limited liability entities (Roccy’s favorite) in estate and asset protection planning. They are, in fact, complementary techniques, best used together.
The featured guest for the upcoming November program will be Jocelyn Hibshman, an expert on long-term care insurance planning. The subject of the program, as previously announced will be Medicaid Planning, Special Needs Trusts, and Long-Term Care Insurance. Stay tuned, and keep your questions coming to thelakeshorelawyer@lakeshoreptv.com.
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