Protecting Business Assets From Creditors in Litigation: Strategic - - PowerPoint PPT Presentation

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Protecting Business Assets From Creditors in Litigation: Strategic Choice of Entities, Avoiding Fraudulent Transfers

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific TUESDAY, JULY 21, 2015

Jacob Stein, Partner, Klueger & Stein, Los Angeles

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ASSET PROTECTION PLANNING

Threshold Questions

• Identity of Debtor
• married or single; entity protection and exceptions
• Nature of Claim
• timing; prejudgment attachment; dischargeable in

bankruptcy

• Identity of Creditor
• creditor characteristics – aggressive, lazy, intelligent, etc.
• Nature of Assets
• liquid, real estate, residence, exemptions

Outline pp. 1-7

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Jacob Stein, Esq, 2015

Debt Collection

• Who will be sued?
• both spouses; entity owners
• Where will the creditor sue?
• Prejudgment attachment
• Collecting on judgments
• lien duration; writ of execution; writ of

attachment; title to property

• Debtor exam
• Wage garnishment

Outline pp. 8-13

Jacob Stein, Esq, 2015

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Fraudulent Transfers

• Transfers by debtor that reduce the amount of

assets reachable by a creditor

• Transfers involving actual intent to hinder, delay
• r defraud any creditors
• badges of fraud
• business purpose / estate planning
• present and future creditors
• Transfers involving constructive fraud – less than

full consideration and debtor is insolvent

• Remedy / Good-faith exception

Outline pp. 14-26

Jacob Stein, Esq, 2015

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Planning in Context of Marriage

• Common law states – separate property not liable

for debts of other spouse; concept of marital property on divorce

• Community property states – liable for debts of

either spouse

• Nevada – only debtor’s share of CP liable for pre-

marital debt

• Community property - acquired during marriage,
• ther than by gift or inheritance, analyze for titling

and commingling

• Determining nature of property

Outline pp. 28-47

Jacob Stein, Esq, 2015

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Entity Planning

• Sole Proprietorship/General Partnership
• simple, inexpensive, no protection
• Corporation
• centralized management, limited liability
• Limited Partnership
• limited liability for LPs
• LLC
• limited liability for all members
• LLP
• limited liability for all partners, except for malpractice

Outline pp. 81-87

Jacob Stein, Esq, 2015

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Choice of Entity

• Non-tax factors
• Economic flexibility – favors partnership type entities

like LPs and LLCs

• state statutes, structure, close corporations, Series LLCs and

LPs

• Liability protection – favors partnership type entities
• entity provides liability shield; exceptions
• charging order protection;
• buy-out rights; poison pills
• single-member LLCs; reverse piercing the veil
• Alter Ego Theory
• Choice of Jurisdiction

Outline pp. 81-115

Jacob Stein, Esq, 2015

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Choice of Entity

Asset

Outline pp. 117

Corporation

Lawsuit

• Corporation owns valuable Asset, but also

manufactures and sells

• Exposes Assets to risks of product liability

Lawsuit reaches all corporate assets

Jacob Stein, Esq, 2015

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Choice of Entity

LLC Asset

Outline pp. 117

Corporation

• Corporation continues to manufacture and sell
• LLC owns Asset and licenses to corporation
• Asset separated from liabilities

Lawsuit

Jacob Stein, Esq, 2015

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Choice of Entity

LLC

Corporation

Asset Asset

Individual Owner

Outline pp. 117

• Using LLC Charging

Order Protection for Corporate Assets

• Corporate exit tax too high

to terminate corporation

• Issues: Number of

members to maximize protection, working with S corporations and using foreign LLCs

Jacob Stein, Esq, 2015

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Planning with Trusts

• Trust – requires a settlor, a beneficiary, a

trustee and trust property

• Ownership of property is split – trustee has

legal title, beneficiaries have equitable title

• Creditors can attach any asset that a person
• wns or can exercise control over for his
• wn benefit

Outline p. 48

Jacob Stein, Esq, 2015

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Planning with Trusts

• Trust should be irrevocable – if revocable,

settlor deemed owner of trust assets

• Spendthrift provision – beneficiary

prevented from anticipating distributions

• Discretionary trust – trustee has discretion in

making distributions, can exclude beneficiaries

Outline pp. 49-55

Jacob Stein, Esq, 2015

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Planning with Trusts

• Self-settled trust – settlor settles a trust for

his own benefit

• If more than one beneficiary, self-settled to the

extent of settlor’s benefit

• No asset protection benefits to a self-settled

trust

• In all other respects, self-settled trusts are

valid

Outline pp. 51-52

Jacob Stein, Esq, 2015

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Planning with Trusts

• DAPTs – referring to the 1997 and later trust

legislation in Alaska, Delaware, Nevada, etc.

• Legislation allows self-settled trusts as a creditor

shield

• Trusts need to comply with certain requirements
• Choice of law; Full Faith and Credit clause

Outline pp. 57-58

Jacob Stein, Esq, 2015

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Foreign Trusts

• Foreign trust – any trust governed by the

laws of a foreign country

• Looking for jurisdictions with trust laws

favorable to settlors and beneficiaries

• Jurisdiction features – self-settled trusts are

effective, favorable fraudulent transfer laws, does not recognize foreign judgments

• Favored jurisdictions

Outline pp. 60-67

Jacob Stein, Esq, 2015

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Foreign Trusts

• Issues to consider:
• Choice of jurisdiction
• Location of assets
• Time of funding
• Choice of trustee
• Contempt
• defense
• Anderson case
• Using LLCs to regain control

Outline pp. 60-67, 78-80

Jacob Stein, Esq, 2015

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Foreign Trusts

• Tax treatment of foreign trusts
• Every trust is a “foreign trust” for tax purposes,

unless meets the court test and the control test

• Court test and control test
• Grantor status
• Reporting requirements
• Forms 3520 and 3520-A
• Penalties

Outline pp. 67-74

Jacob Stein, Esq, 2015

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Retirement Plans

• ERISA qualified plans – Code Section 401 and

Department of Labor requirements

• Anti-alienation requirement defeats claims of all

creditors, other than the federal government and former spouses

• Ability to rollover from IRA
• To qualify under ERISA, need a non-owner employee
• ther than spouse of owner
• Nonqualified plans – limited protection under

California private retirement plan statute; up to $500,000 in Nevada; varies in other states

Outline pp. 124-126

Jacob Stein, Esq, 2015

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Comprehensive Example

Brown Family Balance Sheet

Value Debt

Residence $ 1 million $ 500,000 Medical Practice $ 4 million $ 500,000 Apartment Building $ 10 million $ 8 million Brokerage Account Cash $ 1 million Securities $ 0.5 million Retirement Plan $ 500,000

Jacob Stein, Esq, 2015

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Comprehensive Example

Transmutation Agreement Split

• Dr. Brown

Equity

Medical Practice $ 3.5 million Retirement Plan $ 500,000 $ 4 million

• Mrs. Brown

Equity

Residence $ 500,000 Apartment Building $ 2 million Brokerage Account $ 1.5 million $ 4 million

Jacob Stein, Esq, 2015

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Comprehensive Example

• Medical practice – limited value to a creditor
• Retirement plan – if not an IRA - sheltered

from creditors

• Residence – consider a sale, an equity strip or a

QPRT

• Apartment building – contribute to an LLC,

single-member LLC issues

• Cash and securities – LLC or foreign trust

Jacob Stein, Esq, 2015

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Jacob Stein, Esq. Klueger & Stein, LLP Los Angeles, California jacob@lataxlawyers.com 818-933-3838 www.lataxlawyers.com www.maximumassetprotection.com Follow me on: Facebook: facebook.com/assetprotectionlaw LinkedIn: linkedin.com/jacobsteinesq

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Please join us for our next conference, “Litigating Closely Held Business Disputes: Breach of Fiduciary Duty, Breach of Contract and Shareholder Oppression,” scheduled on Tuesday, August 4, 2015 starting at 1pm EDT .