What is Asset-Protection Planning?
Asset-protection planning is about organizing your affairs so that the risks of possible future claims by third parties are properly managed and minimized. By organizing one’s affairs thoughtfully, a client can significantly reduce exposure to catastrophic claims.
Who is a typical asset protection client?
The typical asset protection client is a relatively high net-worth individual—oftentimes a business owner or physician—the nature of whose business or profession exposes them to significant, if rare, claims.
Will Asset Protection Planning protect me from claims of existing creditors?
Generally speaking, no. You cannot shelter assets from the claims of existing creditors and, indeed, transfers to thwart creditor claims can be undone by the courts. (In the context of a bankruptcy filing, however, the Ohio exemptions do protect a certain amount property—such as equity in your residence up $132,900 and equity in a car up to $3,675.) Asset protection planning is, thus, about sheltering that portion of your assets which present claims and obligations would not reach.
What will asset protection planning accomplish?
By correctly organizing your affairs and using proper asset protection tools, you can protect a meaningful portion of your family’s assets.
What are some simple steps that I can take to protect my assets?
- Maintaining adequate insurance. The first line of asset defense is to carry adequate insurance. At a minimum, insure against catastrophic losses. Consider carrying large polices with high deductibles to keep the costs down. For your house, make sure you have signed up for “replacement cost” homeowners insurance, as opposed to a policy that pays you the fair market value. Again, a high deductible might be wise. Clients might also consider carrying a large “personal umbrella” of liability insurance through the home owner’s policy. Think of umbrella coverage as an extension to whatever other insurances you carry.
- Segregating assets. Married clients should not maintain assets in joint names. When property is titled jointly, a claim against either spouse may reach the entire assets of the couple. Each spouse should have his or her own individually-titled, financial accounts and vehicle. Where several parcels of real estate are owned, put the first parcel in the name of the husband and the second in the name of the wife. The assets of husband and wife should be roughly balanced. In this way a creditor of the husband cannot reach the separate property of the wife. (To avoid the Probate process on the death of a spouse, assets can be titled so that the surviving spouse receives the property by means of a “transfer-on-death” designation. Or, separate living trusts for each spouse can be set up to hold assets. On death assets remaining in trust will pass to beneficiaries outside of Probate.)
- Using appropriate business entities. To achieve limited liability, business owners should operate using the limited liability company format. Ohio laws have recently been changed to make it more difficult for a creditor to reach assets within an LLC. For instance, if the owner of an LLC were successfully sued, the creditor would only be able to obtain a “charging order” against the client-Member’s Interest in the LLC. This would entitle the creditor to reach the client’s share of any distributions from the LLC, but not the assets within the LLC. Again, the ownership interest in an LLC cannot be attached by a creditor, as can be the shares of stock in a corporation. Because of the greater protection afforded limited liability companies, owners of corporations should consider converting to LLC’s. (A new Ohio statute facilitates such a conversion.) Additionally, business owners might consider using multiple LLC’s within a single business structure. For instance, an owner of a number of rental properties might consider using more than one LLC so that a claim against the first LLC would not reach property in the second LLC. Similarly, the owner of a manufacturing company may have the company building in one LLC, with the machinery in another LLC.
- Maximally funding qualified retirement plans. One must understand the difference between creditor claims in the context of bankruptcy and creditor claims outside of bankruptcy. ERISA-qualified retirement plans, such as a profit-sharing plans, 401(k’s) or 403(b’s), are protected from creditors in both contexts. In Ohio traditional IRA’s are similarly protected, as are Roth IRA’s and Education IRA’s. [However, according to a 2014 U.S. Supreme Court case, an “inherited” IRA is not protected.] SIMPLE IRA’s, owner-established IRA’s and Simplified Employee Pension Plans (SEP’s) are protected only in the context of a bankruptcy filing and then up to a limit of $1 million, as adjusted for inflation. Where you have not filed bankruptcy, a creditor with a judgment against you can attach a SEP account. In sum, as a general matter, fully funding qualified retirement or profit-sharing plans every year places the funds contributed beyond the claims of creditors.
What is the new Ohio asset protection trust statute?
Recently, Ohio passed legislation authorizing a sophisticated asset protection vehicle, called an “Ohio Legacy Trust” (OLT). The act allows a person to set up and fund an irrevocable trust, the assets of which are exempt from the claims of creditors. The person setting up the trust can be a beneficiary of the trust, as can be his or her spouse and family members.
How do I create a Legacy Trust?
Setting up the trust and funding it with the appropriate amount of assets is a bit complicated, but the result is that, once properly established and funded, the trust can hold an important “nest egg” for you and your family. Here are the steps:
- Solvency analysis. Because an OLT is funded with “excess” assets, (those that are not needed to take care of existing obligations and those that are not “already-protected”) a solvency analysis must be made. First, present assets are listed, then several years worth of probable net earnings are calculated and added. Finally, debts and actual and contingent liabilities are subtracted. Next, are subtracted assets that are already protected from creditor claims (such as money in qualified retirement plans). What remains is the amount with the Legacy Trust can be properly funded.
- Solvency affidavit. Having done a careful financial analysis, the second step is to prepare a “solvency affidavit,” which must attest:
o (1) The property being transferred to the trust was not derived from unlawful activities.
o (2) The transferor is the rightful owner of the property.
o (3) The transferor will not be rendered insolvent by the transfer.
o (4) The transferor does not intend to defraud any creditor by the transfer.
o (5) There are no pending or threatened court actions against the transferor, except as disclosed.
o (6) The transferor is not involved in any administrative proceeding, except as disclosed.
o (7) The transferor does not contemplate filing for Bankruptcy relief.
The affidavit is then recorded in the courthouse.
Can creditors reach assets in the OLT?
Generally speaking, no.Eighteen months after a particular asset is transferred to the OLT (where creditors are placed on notice of the transfer by the solvency affidavit) the trust becomes essentially “bullet-proof” with respect to the transferred asset.
Who can be the Trustee of an OLT?
Under the statute a “qualified trustee” cannot be the Client who sets up the trust. The Trustee must be a resident of Ohio, or a financial institution, such as a bank. It is highly desirable that the Trustee not be a person under the control of the Settlor.
What rights can I retain over the trust?
Here are some of the rights you may retain:
- The right to receive trust income
- The right to annually receive up to 5% of the principal of the trust
- The ability in your Last Will and Testament to say who will receive trust assets when you are gone (except that you may not leave assets to your estate or your creditors).
- Where there are multiple beneficiaries of the trust, the right to veto distributions to a particular beneficiary
- The right to remove the existing Trustee and appoint a new one
Example of how a Legacy Trust might work:
Assume Client is a businessman/woman that owns a small manufacturing company. His/her assets are these:
Acme Manufacturing, LLC $1,000,000
Cash value of life insurance $50,000
Stocks and bonds $300,000
Miscellaneous personal property $50,000
Assume Client can reasonably expect to save $200,000 over the next four years from earnings.
Assume Client has the following debts and obligations:
Mortgage on residence $100,000
Business debt $300,000
Guarantee as co-signer on son’s loan $50,000
Assume also Client has been sued for $250,000, although he/she believes the lawsuit is without merit.
To calculate the amount that might be transferred to a Legacy Trust:
Present assets …………………………………………. $2,500,000
4 years anticipated savings ………..……………. + $200,000
Less debts and obligations ……………………… ($450,000)
Less 401(k) ……………………………………………… ($250,000)
Less amount of lawsuit …………………………… ($250,000)
“Excess”/”unprotected” assets ………….……. $1,750,000
Thus, the client would have the ability in this example to safely transfer $1,750,000 to the OLT.
In the example just given, what specific assets would be appropriate to move into the OLT?
The client might consider moving to trust the business ($1,000,000), half the cash ($300,000), half the stocks and bonds ($150,000), the residence ($250,000) and the life insurance policy ($50,000).
In the example just given would the business owner necessarily want to transfer the business to the OLT?
In the example the only remedy to a creditor of Acme would be a charging order. Thus, the LLC form of business operation in and of itself would provide some protection for the client without placing Acme into the OLT. Because the Trustee of a Legacy Trust cannot be either the Settlor or those under his or her control, a business owner would understandably be reluctant to transfer a functioning company to an OLT. In fact, the Client can maintain operational control over the business and still transfer Acme to the OLT. Prior to transferring the ownership interest to the OLT, the Client can become sole Manager of Acme. A long-term employment agreement can be put in place. With the Membership Interest in Acme held by the Trustee of the OLT, the Client can nonetheless continue to manage Acme.