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Asset Protection Planning Part 3 of 3

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Published: 28Mar2009
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VI. Equity Stripping

Real property assets should have at least two layers of protection. First, property should be placed into an asset protected structured that features charging order protection. Second, the property should be debt financed so that little equity in the asset remains for creditors. The combination of the property being in an asset protected structure and having no, or very little, equity, acts to deter creditors from attempting to pierce the protective structure in the first place, since there would be no equity left for even a successful creditor.

It normally does not make much sense from a business standpoint to place a residence in an entity structure. Therefore, the client can utilize the home equity line of credit technique to substantially encumber the residence and make it more unattractive to creditors. There are other planning steps that can be taken, but one has to be very judicious in dealing with the protection of residences.

VII. Exemptions

A. Homestead Exemptions

Generally, homestead exemptions vary from state to state. Florida, Texas, Kansas and Minnesota have very favorable and generous homestead exemptions. The Texas homestead exemption includes an unlimited amount on up to 200 acres of land if the residence is not in town or up to 1 acre of land if the residence is in town. In Florida, the exemption includes an unlimited amount up to 160 acres if the residence is not in town or up to one-half acre if the residence is in town. In California, the homestead exemption is $50,000 for a single person, $75,000 for families and $125,000 if over 65 or disabled. In California, the creditor can force the property to be sold to satisfy his debt with the debtor of being awarded the homestead exemption amount out of the sales proceeds. In may be then that asset protection planning includes changing domicile to a more favorable homestead exemption state. In a reasonably recent Florida Supreme Court Case, the Court held that the debtor's residence is protected under Florida's homestead exemption even if the debtor purchased the residence with the intent to protect the value of the residence from his pre-existing creditor. See Havoco v. Hill 790 So. 2nd 1018 (Fla. 2001).

B. Other Exemptions

Florida law exempts the entire cash value of the life insurance policy and most annuities from creditor's claims. California, on the other hand, has a very limited life insurance and annuity exemption. The Bankruptcy Code specifically excludes from the bankruptcy estate property that is deemed to be subject to a restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable non bankruptcy law. In this regard, the anti alienation provisions required by ERISA in retirement plans is such a restriction on transfer. Moreover, since federal law preempts state law, where state law might otherwise subject an ERISA retirement plan to creditor's claims in a state court judgment enforcement proceeding, the protection afforded by ERISA supersedes state law and, arguably, the ERISA retirement plan assets are protected. The plan must be within the purview of ERISA, however, and its anti alienation provisions.

VIII. Sophisticated Asset Protection Planning Methods

A. Introduction

In the right context and for the right client with sufficient property to warrant in depth planning, more sophisticated planning steps are available. It should be kept in mind that it is good practice to fragmentize the risk management process so that not all of the client's eggs are in one basket.

B. The Modular Concept

Often times it is appropriate to plan an asset protection program that is modular in nature. For example, a domestic asset protection trust or offshore trust can be formed by the client's parents or a relative for the benefit of the client's heirs. The trust would then not be a self settled trust and the client would really have no outright interest in the trust. This control trust can then be the owner of some management type entities (LLCs) that can be utilized to provide management services for other types of charging order protected entities. The client can then set up a self settled trust which, in turn, would establish charging order limited entities in which to place the client's assets. The management entity owned by the control trust would be the manager of these other entities.

C. Private Annuity

In the appropriate circumstances one of the most effective estate and risk management planning techniques is the private annuity. Simply stated, a private annuity is a legally binding agreement between two parties (neither of whom has to be in the business of selling annuities) under which one party transfers property to the other party in exchange for an unsecured promise to make periodic payments in a fixed amount for the transferor's life or term of the years. The annuity can really be considered a sale wherein the transferor sells the property to another individual or entity known as the obligor in exchange for the transferee's unsecured promise to make periodic payments to the transferor for the balance of his or her lifetime. The amount of the annuity is computed upon the fair market value of the property conveyed, the annuitant's life expectancy and the applicable federal fund rate at the time of the sale. The annuity transaction can also be structured to provide for the life of the individual and his or her spouse. A private annuity is something like an installment sale except that instead of specifying an exact number of payments, the obligor promises to make payments to the transferor for the rest of his or her life. The annuity payments may begin immediately or they may be deferred for some period of months or years.

D. Other Techniques

There are a multitude of other techniques that can be utilized including advanced life insurance and annuity strategies, collateralization and structured financial products. These techniques should only be implemented under the guidance of an experienced and qualified attorney who practices in these areas.

Jeffrey R. Matsen helps his clients structure their business and personal assets in the best way possible to preserve, protect and transfer them in the most efficient and tax saving manner. For further information go to => http://www.wealthstrategiescounsel.com

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