Asset Protection FAQ

 

1. What is asset protection?
2. How can asset protection be accomplished?
3. When should asset protection be considered?
4. Should anything be done before considering various asset protection strategies?
5. Will asset protection protect my assets from a current creditor or claimant?
6. What is a tenancy by the entirety?
7. Can personal property be held as tenants by the entirety?
8. Why hold property as tenants by the entirety?
9. Are there any Federal gift tax consequences in transferring property from one spouse to both spouses or from both spouses to one spouse?
10. Will a revocable living (inter vivos) trust protect my assets?
11. Are transfers into a revocable living trust taxable?
12. What is an irrevocable trust?
13. Are there any tax consequences for a transfer into a irrevocable trust?
14. What is a family limited partnership?
15. Are transfer of money or property you make into your family limited partnership taxable?
16. What are some of the advantages and disadvantages of a family limited partnership?
17. What is a family limited liability company?
18. How does creating a corporation or limited liability company help protect my assets?
19. Why is it important to keep appropriate books and records in your corporations and limited liability companies?
20. What can happen if one forms a corporation or limited liability company in order to secret one’s assets from one’s pre-existing creditors?
21. Can your creditors get to your qualified pension, profit-sharing, and stock bonus plans?
22. Can your creditors get to your IRAs?
23. When must you begin taking money out of your IRA?
24. When may you begin to take money out of your IRA without incurring the 10% early withdrawal penalty?


 

1. What is asset protection?

Asset protection is the placing of your assets beyond the reach of your future potential creditors or claimants and as much as possible beyond future estate taxes.

2. How can asset protection be accomplished?

Generally speaking, asset protection can be accomplished by:

  1. limiting the number of contracts and loans you yourself enter into and you enter into with your spouse;
  2. refusing to personally guarantee loans for your businesses, friends, or relatives;
  3. making gifts of certain property within the annual gift tax exclusion amount;
  4. purchasing of appropriate kinds of liability insurance in sufficient policy amounts which cover the risks faced;
  5. re-titling or holding your real and personal property with your spouse as tenants by the entirety or by putting it into a husband’s and wife’s joint revocable trust or separate revocable trusts made pursuant to Va. Code § 55-20.2;
  6. re-negotiating contracts so that you are no longer personally liable;
  7. taking advantage of available exemptions from creditors’ claims;
  8. forming corporations or limited liability companies for your businesses to separate the assets of your businesses from your personal assets and protect those personal assets;
  9. making sure that the corporations and limited liability companies you set up maintain appropriate books and records and do not commingle funds; and
  10. using planning techniques, such as irrevocable trusts, family limited partnerships, family limited liability companies, and offshore trusts to place your assets beyond the reach of future creditors and claimants.

3. When should asset protection be considered?

You should consider asset protection as early as possible, before the liability you are concerned about arises, or at least before it "ripens."

4. Should anything be done before considering various asset protection strategies?

Yes. You should

  1. determine your assets and liabilities,
  2. review the various agreements, loans, or guarantees you have signed to determine the ones for which you or you and your spouse are personally liable and what the terms of the agreements require (for example, some guarantees prohibit you from transferring assets), and
  3. ascertain what lawsuits or claims can be made against you.

5. Will asset protection protect my assets from a current creditor or claimant?

It depends upon the value of your assets compared to the extent of your liabilities and the terms of the various agreements you have signed (for example, some guarantees prohibit you from transferring assets).

Transfers to others -- the object of which is to defraud a creditor or to put property beyond his reach -- is a fraudulent conveyance.

Such conveyances can be set aside if you fail to receive adequate compensation and they make you insolvent.

6. What is a tenancy by the entirety?

Generally speaking, tenancy by the entirety is defined by the following characteristics:

  1. each spouse has an undivided one-half interest in the asset;
  2. neither spouse may sever the tenancy unilaterally (both must sign on any conveyance); and
  3. the property automatically passes outright at the death of the first spouse to the surviving spouse.

7. Can personal property be held as tenants by the entirety?

You may hold personal property, including intangible personal property (e.g., bank and brokerage accounts, securities and partnership interests) as tenants by the entirety. Va. Code § 55-20.2.

When one deals with personal property, it is often difficult to prevent one spouse from doing something with the property.

With respect to an entireties account in intangible personal property, the safest practice is to require both parties to evidence their consent to withdrawals or redemptions. But it is far from clear whether that is always required.

Hence, the requirement that neither spouse may sever may not always be true.

Unfortunately many bank personnel do not know what a tenancy by the entirety is and some banks do not let you open an account in this manner. There are apparently two banks which now permit tenancy by the entireties accounts.

For example, many signature cards for opening a bank account only provide for an account between husband and wife to be opened as a joint account either with or without the right of survivorship.

A joint account with the right of survivorship without more is probably not a tenancy by the entirety account.

I recommend that to achieve a tenancy by the entirety bank account, when you sign the signature card you identify both yourself and your spouse respectively as "husband" or "wife" and that you either add the initials "TBE" or write out "tenants by the entirety."

You should then ask for and keep in a safe place a copy of the signature card.

Since some banks won’t let you do this, it may not be worth titling a couple's basic checking account as a tenants by the entirety account, so long as the balance is kept to a relatively low level.

This requirement should not be a substantial imposition for accounts holding medium- and long-term investment assets.

8. Why hold property as tenants by the entirety?

Generally speaking, tenancy by the entirety property is immune from creditors of either owner, regardless of whether the liability is in contract or based on the tort liability of either.

However, it is not immune from creditors of both spouses.

And it is not immune from a claim by the Internal Revenue Service for back taxes owed by one spouse.

The advantage of holding property as tenants by the entirety is that typically it is more difficult for a creditor of only one spouse to get to it.

Thus, you often protect your spouse and the marital unit by holding property in this manner.

9. Are there any Federal gift tax consequences in transferring property from one spouse to both spouses or from both spouses to one spouse?

There is no Federal gift tax consequence when spouses transfer property, even previously separately-owned property, into tenancy by the entirety, or from tenancy by the entirety into separate ownership. I. R. C. § 2523.

10. Will a revocable living (inter vivos) trust protect my assets?

Generally speaking, no. A court can order you to revoke the trust and pay your creditor. There is an exception made for a husband’s and wife’s joint revocable trust or separate revocable trusts which are made pursuant to Va. Code § 55-20.2 while both spouses continue to be married to each other.

11. Are transfers into a revocable living trust taxable?

A revocable trust is not a taxable entity.

12. What is an irrevocable trust?

A trust you set up to benefit another which you cannot revoke or change without the consent of the beneficiaries for whom it is set up.

In other words, you typically give up your ability to control the assets you give to the trust.

For estate tax and asset protection purposes, you, as the grantor, should not retain any benefit from or control over the trust.

13. Are there any tax consequences for a transfer into a irrevocable trust?

There is no income tax consequences, but there may be gift tax that is owed.

14. What is a family limited partnership?

A family limited partnership is a limited partnership in which only family members make up all of the general and limited partners.

Upon formation, the assets are transferred to the limited partnership for ownership, management, and control.

The general partner or partners are vested with the management and control of the partnership’s affairs and can be liable for the partnership’s debts.

The limited partner or partners have neither any control nor management in the partnership’s affairs or assets, and thus they are not liable for the partnership’s debts.

15. Are transfer of money or property you make into your family limited partnership taxable?

Consistent with the pass-through model of taxation of partnerships, a partner’s contribution of money or property to a partnership is not ordinarily a taxable event.

26 U.S.C. § 721 provides "No gain or loss shall be recognized to a partnership or to any of its partners in the case of a contribution of property to the partnership in exchange for an interest in the partnership."

16. What are some of the advantages and disadvantages of a family limited partnership?

The advantages can include:

  1. the parents being able to gift to the children each year a small number of limited partnership shares based on the annual gift tax exclusion,
  2. the parents being able to shift income to the children and out of their higher tax bracket, and
  3. the parents being able to discount the value of the limited partnership shares being transferred below their underlying assets value thus effectively increasing the amount that can be given to the children each year.

This discounting can occur because the shares have no real market and thus they can be discounted in value.

The disadvantages can include:

  1. the cost of establishing the partnership,
  2. the cost of valuating the assets and the fractional share of the partnership interest that is being given away, and
  3. the yearly accounting costs for the partnership.

17. What is a family limited liability company?

A family limited liability company is a limited liability company in which only family members make up all of the members.

18. How does creating a corporation or limited liability company help protect my assets?

A corporation is an artificial entity created by law. It is a legal entity which is separate and distinct from its owners, the shareholders.

Generally speaking, a shareholder in a corporation risks only his or her investment in stock.

A limited liability company is also an artificial entity. Generally speaking, like a corporation, its members risk only their investment.

19. Why is it important to keep appropriate books and records in your corporations and limited liability companies?

Such considerations as gross undercapitalization of the corporation, siphoning of funds from the corporation, commingling of corporate and personal funds, failure to observe corporate formalities, and the absence of corporate records may in any given case weigh in favor of piercing the corporate veil.

When the corporate veil is pierced, the protection provided by the corporation is lost.

The corporation entity is ignored, and liability is imposed upon the owners of the corporation.

20. What can happen if one forms a corporation or limited liability company in order to secret one’s assets from one’s pre-existing creditors?

Corporations or limited liability companies formed or used to secrete assets and thereby avoid pre-existing personal liability can be held liable for the individual shareholders’ pre-existing debts under a doctrine sometimes referred to as reverse piercing of the corporate veil.

21. Can your creditors get to your qualified pension, profit-sharing, and stock bonus plans?

No. A qualified retirement plan under U.S. Code 26 U.S.C. § 401 cannot be gotten to by your creditors.

22. Can your creditors get to your IRAs?

The bankruptcy act provides no protection for IRAs.

Virginia has passed Va. Code §34-34. This section appears to exempt IRAs provided that you do not have another pension plan, Keogh, or 401-K plan.

If you have another plan, it appears to limit the exemption to the extent you would receive an annual benefit in excess of $17,500.00.

But the statute is far from clear.

23. When must you begin taking money out of your IRA?

A. Federal law does not require that income be withdrawn from IRAs until you reach age 70 ½. See 26 U.S.C. § 408(a).

Indeed, on April 1 of the year following the year when you reach 70½ , you must make an irrevocable election as to how quickly you want to take money out of your IRA.

What many couple do is elect to receive the money over their joint spousal life expectancy.

If you fail to make the election, it is made for you.

24. When may you begin to take money out of your IRA without incurring the 10% early withdrawal penalty?

Putting aside certain exceptions for such things as extraordinary medical costs and first time home buyers, generally speaking you cannot begin taking money out of your IRA until you reach age 59½.

However, there is a 72 T election which allows for an IRA distribution over your life expectancy without incurring an early withdrawal penalty.

I trust these Questions and Answers have helped clarify your understanding of asset protection. Due to the rapidly changing nature of the law, information contained in these Questions and Answers can become outdated. These Questions and Answers are intended solely for educational and informational purposes. The information contained herein is general in nature and should not be a substitute for seeking the advice of an attorney. Please remember that individual circumstances may affect the manner in which the law applies to each situation.

These Questions and Answers are not provided for use or reliance by you or any third parties and do not purport to be exhaustive or to render legal advice for your particular situation or any other specific case. They are meant merely to assist you in sharpening the questions you might ask of your legal advisor in your particular case.

Please give me a call should you have any questions.

Tom Leggette