31 Jul Combined Asset Protection & Estate Planning Services
Liberty Street Advisory Group’s combined asset protection and estate planning services are oriented toward wealthy individuals and families with wide financial interests and the desire for a thoughtful approach to preserving their assets and generational estate planning.
Our services begin with a no obligation consultation followed by a confidential review of your financial resources, including your risk level, assets classifications, and personal objectives.
OVERALL PLANNING GOALS
With the tendency of the judicial system to allow for ever-expanding theories of liability, runaway juries, and an increase in the number of marital separations and dissolutions, the practice of estate planning today demands that attorneys preparing plans for wealthy clients be highly skilled in asset protection, as well as traditional fiduciary and probate practice.
Liberty Street’s estate planning/asset protection practice is oriented toward carefully crafted recommendations aimed at:
- Constructing total privacy around clients, so that curiosity seekers, attorneys, and potential judgment creditors (usually frivolous) cannot locate or identify our client’s assets and financial affairs. The goal is to insulate client wealthfrom potential liability by minimizing the economic incentive to sue;
- Structuring estate planning/asset protection plans such that our clients are not put in the untenable position of having to disclose, under oath, the location and nature of their important assets and financial affairs in affidavits, judgments and other court orders. We are not aware of any other planners with the knowledge and expertise to accomplish this goal;
- Devising strategies that avoid unnecessary estate taxesand related costs, while still providing necessary protection.
- Providing options for insuring that the assets clients leave behind will be used to enhance the lives and futures of the client’s heirs; and
- Deterring workplace lawsuitsby requiring mandatory arbitration of disputes as a condition of employment.
DOMESTIC ASSET PROTECTION TRUSTS
Our asset protection and estate plans are specifically crafted for each client; however, our experience and special skills have led us to become expert in certain techniques that have often proven to be best available.
“Irrevocable” trusts generally provide excellent asset protection; however, traditional irrevocable trusts mandate that the grantor (settlor) lose control over the use of his or her assets. This is an untenable result and we often use self-settled trusts (often referred to as domestic asset protection trusts or “DAPT’s) to solve this problem. Although the trust is “irrevocable,” in self-settled trusts, the grantor is designated a permissible beneficiary and is allowed access to the funds in the account. Importantly, if properly structured and there is no voidable transaction, creditors should not be able to reach the assets in a self-settled trust to satisfy the settlor’s legal obligations. In addition to providing asset protection, a self-settled trust may also offer state income tax savings when sitused in a no income tax state. We only use the highest rated trust and asset protection jurisdictions.
Just a few other unique advantages of Domestic Asset Protection Trusts may include:
- Two-year fraudulent conveyance statute.
- Unlimited sealed records. There is no requirement for court accountings and client privacy is in perpetuity for court matters such as divorce and judgment proceedings.
- Allows for: (1) trust protectors and (2) investment and distribution advisors.
- Allows a trustee with discretionary authority over either income or principal to ‘decant’ a trust—to pour the assets of the original trust into a new trust with different provisions.
- Grantors of DAPTs can determine which beneficiaries are able to receive notice about the trust. The grantor can define or limit the scope of the notice as well.
Only a few trust jurisdictions have effective self-settled domestic asset protection statutes. However, most jurisdictions offer some asset protection through incorporation of spendthrift provisions into a trust. A spendthrift clause seeks to prevent the beneficiary’s creditors from attaching a trust. In certain instances, however, courts have ruled that a beneficiary may still have an enforceable right to a distribution, which could remain unprotected by the spendthrift clause. DAPT states uniquely address these potential issues by enacting a discretionary support statute.
Discretionary Support Statute
While many states have expanded the rights of creditors and have provided for exception creditors, DAPT states generally limit the rights of a creditor. For example. the DAPT state may have a statute that clearly provides that limited power of appointments and remainder interests in these discretionary trusts are not property interests. The trustee can have mandatory, discretionary or support distribution authority. Even under the mandatory support standard, a trustee would be able to pay over the head of the beneficiary directly for the benefit of the beneficiary and can also postpone a distribution for a reasonable period of time.
By statute, if the trustee has discretionary authority over distributions, then the beneficiary may have no “property” right. Rather, it is an equitable interest that can’t be reached by creditors. By statute this equitable interest is not subject to division in divorce proceedings, nor is it available for purposes of establishing or paying spousal support. The trust can be required to pay child support, but the assets cannot be used to determine the appropriate level of support. A few states’ law contains a provision limiting assess to attorney fees and costs against an unsuccessful claim brought by a creditor.
BELLS & WHISTLES
While establishing a DAPT, in and of itself, provides a significant impediment to a creditor attack, it is only part of the process of setting up a complete asset protection plan.
Limited Liability Companies
In almost all our Asset Protection Plans, we use a series of limited liability companies (“LLC,”) which benefit from what the law calls a “charging order.” A charging order is simply a lien. If a creditor gets a personal judgment against a member of an LLC, all the creditor generally gets is a charging order, or lien, against the member interest. The idea is that if assets aren’t distributed from the LLC to the members and, in particularly, the debtor member, they would not become available to a judgment creditor. We are expert in identifying the states that offer the maximum in privacy and provide the greatest protection to LLC members.
Trust Protector, Distribution Advisor and the Like
The creation of a newly drafted DAPT or the movement of an existing trust to a DAPT state requires that the trust be administered in the trust state and that the client’s team have special expertise in tax, accounting, financial asset management, trust state law and other areas. As part of our service, we identify for clients the parties and the roles that can best implement the plan. Typically, the plan will be set up for the trustee to delegate certain responsibilities, such as investment management and accept direction from a distribution advisor, as selected by the grantor.
Another crucial feature of a DAPT is the creation of a trust protector. A complete asset protection plan assumes nothing and leaves nothing to chance. For every trust, there is a trustee; and most trustees perform their tasks admirably. However, too much is at stake to assume the chosen corporate trustee will always act in the best interest of the client and ignore its own interest. So, enter the concept of the “trust protector.” The original idea behind the trust protector was to have someone who could watch over the trustee and terminate the trustee for any misconduct. Today, that power is typically expanded to include other protections like both firing and appointing a trustee. The trust protector is at the center of the trust process and the role has become so commonplace that it is almost always appropriate.
Liberty Street plans efficiently accommodate these scenarios, bringing in experienced and knowledgeable trustees, as well as state of the art technology and other services, as needed. For example, our team includes a Ph.D. level family financial expert to work with the family in making some of the difficult choices required for thoughtful generational planning.
When Chicago’s Pritzker family and a host of other billionaire families plan for future generation heirs, many turn to “dynasty trusts,” which allow families to escape estate taxes forever. DAPT states tend to be at the forefront, offering iron-clad secrecy for trusts and protection of assets from creditors and former spouses and statutes geared to accommodate dynasty trusts. In recent years, the amount of money administered by one trust state alone has tripled to $121 billion, almost all of it from out of state,
Prior to the “modern age” of estate planning, most states limited the duration of trusts to the lifetime of a living heir, plus 21 years. Only a few have not imposed any time limit. Because the estate tax is imposed on large fortunes at death, wealth that’s large enough to last for generations will have to contend with multiple tax bills. A dynasty trust set up in an authorizing state could shield a family fortune from estate taxes for centuries, as it hands out cash to great-great-great-grandchildren and beyond.
Why an unlimited trust duration? Preserving family values:
- Examples of clauses promoting fiscal responsibility:
- Incentive clauses (for instance, $2 of trust income for each $1 of W-2 income) – with exceptions, for example, disability
- Distribution auditto determine suitability of future distributions; cap distributions based upon beneficiaries’ net worth indexed for inflation
- Assumption $7.5MM enough to live well, but have to protect it
- Supplemental income for socially responsible; for instance, artist, musician, teacher, etc.
- Monthly stipend for stay-at-home parent; also, adult child to care for elderly relative
- Education costsfor family in perpetuity
- Lump sum received at college graduationand/or advanced degree(s) (depending upon quality, academic rigor and college reputation)
- Monthly payments for academic excellence
- Medical costs for family in perpetuity
- Real estate – “use factor”: buy real estate for children, grandchildren within the trust and they “use” it tax free (operates as family time share)
- Clause to encourage descendants to stay in marriage while the children are minors
- Clause to encourage descendants to get married (wait until certain age, marry right person, etc.)
- Divorce protection
- Floating Spouse Clause (in-laws): define in-law spouses as “spouse I am married to and living with”
- Deny trust payments unless beneficiary has a prenuptial agreement
- Beneficiary conflict clause; if beneficiary sues, they get nothing
- Denial of distributions if beneficiary fails a drug test or psychological treatment
- Family bank: loan to beneficiary (term insurance purchased to provide repayment)
- Denial of distributions if beneficiary does not participate in family meetings about charitable giving, family investments, estate planning and trusts
- Examples of clauses promoting social responsibility:
- Prepare written document or transcribed videotape illustrating charitable desires, goals, values and purpose (i.e. mission statement)
- As part of trust or as letter of wishes
- Get buy in from family, advisors and distribution committee
- Education – develop a family learning plan, distribution advisor meetings, site visits to charities, advice from other philanthropists
- Charitable donations by family in perpetuity once Dynasty Trust attains a certain fair market value
- The distribution advisor makes donations from the trust directly to the charity, thus actively involving the family with charities and thus promoting the family values and mission statement
- If beneficiary fails to meet trust performance standards, then funds divert to charity
- Child works for charity, family foundation, or volunteers – supplement income
- Conservation easement on family residence and/or vacation home
- Limited powers of separate shares/appointment
- Charity gift over
- Governance – distribution advisor (possibly outside advisor/consultant)
In recent years, some trust grantors have begun to question the advisability of the “carrot and stick “or “incentive” approach to controlling heirs’ behavior described above. This has led to the development of a relatively new concept in trust planning called Purposeful Trusts.
A purpose trust is a type of trust which has no beneficiaries, but instead exists to advance various non-charitable purposes. In most jurisdictions, such trusts are not enforceable outside of certain limited and anomalous exceptions, but some foreign countries and a few other states have enacted legislation specifically to promote the use of non-charitable purpose trusts.
A purposeful trust provides an opportunity for the client to put his or her fingerprint and voice on the document in a personalized way. It speaks to beneficiaries on an individual basis and is a vehicle to combat the negative psychological implications of “I don’t trust you.” An example of a purposeful trust clause would be one that encouraged entrepreneurship in descendants by providing that a portion of trust funds be allocated to create a family bank to be used for qualifying loans.
An emphasis of a purposeful trust is to make the document clear and more readable. It illustrates one’s beneficial reflections and life experiences, providing beneficiaries with words of wisdom. A purposeful trust is not an incentive trust which requires “acceptable” behavior for receiving trust benefits. In some cases, these provisions have caused antagonistic feelings towards the grantor and trustees.
In today’s society, where self-absorbed thinking and actions dominate the landscape, the goal of a purposeful trust is to provide the beneficiaries a platform for expressing appreciation and gratitude for what they receive. This is accomplished by capturing the meaning behind the gifts provided in the trust. In addition, the symbolic power of the naming of the trust can create positive emotions for both the grantor and the beneficiaries.
The final goal of a purposeful trust is to turn the planning process into a positive experience, with the results of completing such a trust projecting the grantor’s life into the lives of the beneficiaries for generations.
COURT CHALLENGE RISK?
After 18 years since the first DAPT statute was enacted, no non-bankruptcy creditor has challenged a DAPT all the way through the court system and been able to access DAPT assets absence a voidable transaction violation. There is simply no case law. So, what can be expected if a DAPT is ultimately tested through the court system for a resident of a non-DAPT jurisdiction.
Many believe that the reason no DAPT has been tested through the court system is that the substantial majority of practitioners believe that DAPTs will work and protect their clients’ assets if ultimately tested. Thus, it would be imprudent for a plaintiff to spend significant attorney’s fees to ultimately not be able to collect on a judgment.
Many practitioners take the position that one should only utilize a technique after a court has officially ruled that it works. However, in asset protection planning, it is often the case that the fear of an uphill battle and a nearly insurmountable structure is often sufficient to frustrate the potential creditor into settling the dispute or even going away altogether. Unfortunately, the practitioners who fail to recognize this generally end up doing no asset protection planning for their clients since they are unable to find a structure that they can guarantee protects the assets 100% of the time. Those practitioners harm their clients by failing to recognize that doing no planning guarantees that there will be little to no asset protection 100% of the time. In spite of some uncertainty, we believe that prudent asset protection planners should include the use of DAPTs in their plans.
The Bankruptcy Reform Act of 2005 empowers the U.S. bankruptcy Court to void any transfer of an interest of the debtor in property that was made on or within ten years before the date of filing of the petition, if the debtor made such transfer with the actual intent to hinder, delay or defraud any entity to which the debtor was or became, on or after the date such transfer was made.
Asset protection practitioners generally believe it is unlikely that a DAPT settlor will file for bankruptcy, especially if the settlor has an “old and cold” DAPT that is past the applicable state’s statute of limitations. However, in maintaining our philosophy that it is important to build into the structure every safeguard available, Liberty Street has developed special “bankruptcy” protection techniques which may be appropriate for clients’ on a case-by-case basis.
LIBERTY STREET ADVISORY GROUP’S ROLE
An important difference between Liberty Street and other planners is our approach in working with clients. We see our role as making recommendations, identifying and formulating the team and coordinating with family members and/or family advisors (e.g., CPA’s, attorneys, insurance advisors) to ensure that all the individuals involved in the establishment and administration of the plan complement each other and understand the unique needs of the beneficiaries. We accept no less than flexible, individualized, service-oriented and cost-effective plans for our clients.