Kansas & Missouri Estate Planning

When Your “Alter Ego” May Not Be Enough

LLCs or "Limited Liability Corporations" can be excellent vehicles to accomplish just what their names suggest - limiting liability. However, great care must be taken not to forfeit that protection, especially when yours is a "single member" LLC.

A recent Forbes article discussing the recent court case of Martin v. Freeman, ___ P.3d ____, 2012 WL 311660, 2012 COA 21 (Colo.App., Feb. 2, 2012) is instructive (and, perhaps, foreboding) to anyone who already has or is considering a "single member" LLC.

You might say an LLC is one thing, but a SMLLC, or a "single member" LLC, is a horse of a different color, at least from an asset protection point of view. To wit, the above Forbes article points out that a single member LLC is "an alter ego case waiting to happen."

The case of Martin v. Freeman is, as you might have imagined, a "veil-piercing" case as Freeman was the sole owner of an LLC involved in some hefty litigation and sold the LLC's property to, at least in part, help cover the legal fees of the litigation. Of course, that left the LLC with no assets to satisfy the judgment that came down against it and only one place to turn for that satisfaction: Freeman himself.

After all, Freeman had just under-capitalized the LLC, and did so by distributing funds to himself only to turn around and help pay legal fees for the LLC. "Undercapitalization" is the great no-no of corporations when it comes to asset protection and with little difference on record between "Freeman the LLC owner" and "Freeman the individual," the corporate veil fell apart. Freeman was held personally liable.

This is one more lesson on a subject that always bears repeating. Single member LLCs aren't exactly flawed by nature, but they are often the easiest to mess up. In the end, keeping things straight between yourself as the "business owner" and yourself as the "individual" requires some vigilance and diligence.

Reference: Forbes (February 5, 2012) "Martin: The Inherent Dangers Of The Single Member LLC And Alter Ego Veil Piercing"

Is Bankruptcy Slavery?

Does slavery still exist in the United States? Mr. Derrick Dewayne Gordon seems to think so.

There are just some cases where you wish you could be there to see the look on the Judge's face when they hear a defense. One such recent case is in re Gordon, ___ F.Supp.2d ____, 2012 WL 255274 (N.D.Ga., Jan. 24, 2012).

As reported here in Forbes, Mr. Derrick Dewayne Gordon has given (unique and creative) voice to the many persons filing for bankruptcy by complaining it was like slavery or peonage. However, he raised this complaint as his defense against filing for Chapter 11 bankruptcy.

It's especially hard to believe Mr. Gordon once you learn the circumstances.

In brief, he was sued for running afoul of a non-compete clause and, having managed to have that reversed on appeal, went out to prevent having to pay for the $335,000 in legal fees that the court didn't reverse.

No one likes to pay legal defense fees... especially when one prevails in court. I get that. However, Mr. Gordon's strategy to skip out on his legal fees was to file for Chapter 7 bankruptcy.

Naturally his former employer balked at this strategy and wanted to either move him to Chapter 11 (which uses a payment plan in lieu of the full discharge of Chapter 7) or reject the bankruptcy out of hand. Indeed, Mr. Gordon was about to rack up a $250,000 annual salary, but that doesn't change the principal, or so he would contend, that he is therefore put into a condition of servitude against many laws.

The court didn't bite, and even if you had figured that out already you can read all about it here.

This case is something of an outlier, albeit an amusing one. Nevertheless, it also goes to show a few core realties to bankruptcy and asset protection. Firstly, that the purpose of bankruptcy is not to protect the bankrupt, but to marshal their assets for their creditors, whichever chapter will get that accomplished most completely. Second, court doesn't cotton to tricks and last-minute strategies; asset protection is a real exercise in understanding your assets and keeping them out of harm's way as much as possible.

Reference: Forbes (January 31, 2012) "Gordon: Debtor Asserts Concepts Of Slavery And Peonage To Try To Avoid Chapter 11 Bankruptcy"

Asset Protection - Proper Planning Required

It's unclear how long this economic slump will last. One thing is certain, however, it's not likely to change anytime soon. And, while the "times" have taken their toll on people, so have "creditors."

If you want to protect your assets from "future creditors," then know that planning must take place well in advance.

As a reminder of some of the basics of asset protection, along comes this article from NuWire Investor on the topic of "fraudulent conveyance." Simply put, creditors and the laws that protect them have every reason to be wary of the last minute tricks some people try to pull to hide their assets. [Sidebar: It would be pretty difficult to be a creditor if last minute tricks were allowed.]

As a result, laws are set up to void slick moves to defraud just creditors. In fact, they are aptly designated "fraudulent" transfers. Bottom line: If there's already a creditor in the picture, and one that's sniffing around no less, then it's already too late.

Of course, you have every reason to want to protect your assets. Who doesn't? Accordingly, make sure you seek qualified legal counsel before making moves with your assets that will be ineffective… or get you in legal trouble.

Reference: NuWire Investor (January 17, 2012) "Asset Protection in Uncertain Times"

Discretionary Trusts Can Trump Bankruptcy Liquidation

Sometimes giving assets to a loved one in hopes of protecting those assets from future creditors may not be such a good idea. This is especially true when the loved one is a young one. No, if you want your asset protection planning to be successful, then that usually means a trust is necessary.

Trusts are incredibly powerful tools for a number of reasons, foremost because they allow you to protect both the beneficiary and the assets.

A powerful lesson on trusts recently came out and is featured in a recent Forbes article. It's the case of re McCoy, 2011 WL 6748388 (Bkrtcy.W.D.Wis., Slip Copy, Dec. 21, 2011) and it's worth a look.

The case focuses on a trust containing a "spendthrift provision" against bankruptcy. A mother set up the trust for her daughter (and soon to be debtor) with her son as trustee. The trust has a spendthrift provision, meaning that the assets are controlled and kept from the beneficiary except in regular distributions. Further, the trust provided that the brother, as trustee, has discretionary control over the distributions, and can release them or hold them in the trust as deemed appropriate in his capacity as trustee.

The daughter went bankrupt. Soon thereafter, her bankruptcy trustee soon turned a leering eye to those trust funds. You see, bankruptcy is about marshalling the available assets of a debtor to pay as many debts as possible. However, thanks to the spendthrift provision the trust funds are immediately disqualified from consideration.

Why? Because the beneficiary doesn't "own or exercise control" over them. Nevertheless, the bankruptcy trustee did try to grab an upcoming distribution, thinking it was leaving the trust and therefore fair game. This, too, was denied, because the trustee had discretionary control over its release and simply wouldn’t release it into the hungry jaws of creditors.

If the trust had appointed the brother as trustee without granting discretionary powers and, instead, required mandatory distributions, then the distributions would have fallen into the creditors but instead it was saved.

In the end, there are a few good lessons for the wise in this case. Here are a succinct few advanced by the Forbes author:

1. A well-drafted Living Trust can provide, as here, very substantial asset protection for beneficiaries. Mark me as in the camp that says that children should never be given a significant gift outside of a trust, since children (particularly those with money, but without experience) are prone to develop creditors.
2. A well-drafted non-self-settled trust can provide, as here, very substantial asset protection for beneficiaries. Contrast this with self-settled spendthrift trusts (a/k/a "asset protection trusts" which despite their nickname provide at best highly dubious and almost entirely untested asset protection advantages). See Chart Regarding Effectiveness of Asset Protection Trusts
3. For asset protection purposes, trusts should be drafted as discretionary trusts. Remember: If a beneficiary has a right to the trust assets or payments, etc., so will creditors.

To learn more and to successfully set up a trust for your loved ones, you will want competent counsel. This is not a Do-It-Yourself project.

Reference: Forbes (December 28, 2011) "The Real McCoy: Living Trust Provides Spendthrift Protection To Assets Of Beneficiary In Bankruptcy"

Risk Management: Unique Assets Require Unique Planning

Not so fast: With unique assets, things aren't always straightforward. More specifically, owners of unique assets - such as family businesses, legacy real estate and valuable art, coin and other collections - need to consider specialized risk management.

Unique assets call for comprehensive planning; whether legacy real estate or a valuable collection, but this is especially true if the asset is a business. When you own a small business, and especially if you and your family are the sole owners of a not-so-small business, it's important to remember that personal planning and financial planning are not separate activities.

Financial Planning magazine recently ran a piece on this very issue and I thought it was worth passing along. According to the author, you likely practice some form of risk management in your business. In fact, you probably know all too well that things don't always go along as planned. And, when Murphy's Law strikes, there's a great deal at stake. An even greater source of risk is personal when your business life, personal and family lives are one and the same. In short, you need a risk management plan for your business, yourself and your family in the form of comprehensive estate and succession planning.

The original article has much more to say on this important subject and includes some stories that ring all too familiar.

Reference: Financial Planning (October 1, 2011) "To Collect and Protect"

Training Wheels And Inheritance Planning

Remember how you equiped the first bicycles for your children with training wheels? Likely you did that so they would get used to riding astride and atop their bicycles without spending a fortune on Johnson & Johnson band-aids... or worse. Have you ever thought about equipping their inheritance with training wheels now, so they will be ready for it later?

Estate planning is about taking care of your family and loved ones. But what if you have concerns about how your loved ones will use those assets? You spent a lifetime earning what you have through hard work and thrift. So why pass it along only to be squandered? Would you hand over the car keys to a teen who hasn't proven he or she can drive? As any automobile insurance agent can attest, we spend a good deal of energy (and resources) ensuring that doesn't happen.

I've written on this topic before (see this earlier article I reviewed in the New York Times), but The Wall Street Journal recently provided more suggestions worthy of your consideration.

An elaborate but effective way of ensuring the financial literacy of your heirs and the security of your family assets can be the formation of a family investment company. Here's how it works: You establish the company, put your heirs on the board, and have them hold discussions with your financial advisors. Throughout the process, you can look on and ensure that correct decisions are being made. While you may elect to hold back and observe the progress of your heirs, the process may surprise you and exceed your expectations… or it simply may justify your concerns.

In any event, the family investment company can make for a great learning experience. For some families, that may entail paying for academic financial lessons, as well as providing a time for inter-generational conversations about the family assets. Regardless, to be most beneficial, the process should be started earlier rather than later and provide for ongoing involvement.

The main tool for teaching financial skills and inheritance training usually will be the trust. There are a great many tools at your disposal when you begin a trust and you can tailor them to include incentives or benchmarks to protect the assets and the heirs. Of course, the trust also can be powerful, since it brings the trustees into the mix.

Another suggestion to consider is appointing multiple trustees. For example, you may appoint one trustee to manage the purse-strings and another to oversee the heirs and gauge their progress. Depending on how you arrange the trust, the trustees can become powerful gatekeepers to protect the assets and even motivate the heirs.

As a result, it is often advisable that you consider appointing someone far removed to be in charge of trust finances, with a family friend to interact with the heirs. In many instances, it is not advisable to appoint a family member as trustee, since this may create intra-family strife.

There are many options to consider and these are just a few. What you do will depend on your assets, your heirs, and the specific concerns you hope to address. It is best to discuss your concerns with appropriate legal counsel who understands your situation and can help you determine the best course of action.

Like training wheels on a bicycle, proper pre-inheritance estate planning can avoid unnecessary (and costly) pain.

Reference: The Wall Street Journal (September 19, 2011) "When You’re Child’s A Spendthrift"

Adult Children With Special Needs? Plan Wisely!

Deciding how to leave your assets to your kids is tricky enough. But when your adult child has special needs, the task is much more complicated and the stakes are even higher.

Estate planning is never easy. For one thing, it necessitates thinking about protecting your loved ones when you're no longer around. It's tough enough making plans to protect self-sufficient heirs who take care of themselves and an inheritance. However, it can be a real challenge when planning for heirs with special needs, for a variety of personal and legal reasons. Unfortunately, as The Wall Street Journal Online recently pointed out, with the economy and politics as they are, there are new concerns to bear in mind as you plan.

Both state and federal budgets are strapped for cash. No surprise there. To make up some of the deficiencies in government coffers, more of the burden is falling on Medicare and Medicaid. It's up to the Congressional Special Committee to consider the future of Medicare now, but many Medicaid programs already are feeling the squeeze with tighter income restrictions for benefits and services.

Of course, much of the disabled population (12% of the overall population) relies on state and federal services for those services that they couldn't afford in the private market. To plan for an heir with special needs, then, means planning to provide for them without risking their main sources of care. Now, more than ever, that means a "special needs trust," tailored to provide the inheritance as a "safety net" without endangering the continuation of benefits. [Sidebar: Sometimes an older parent can make this move and kill two birds with one stone. How? They create the trust now for themselves and a loved one with special needs so that both qualify for government benefits, once the "look back" period has past for eligibility disqualification. Caveat: As budgets get tighter, expect greater governmental scrutiny regarding such moves.]

The other major issue, and a related one, is housing. Many Americans with special needs live in group housing programs. These programs are, in turn, subsidized by government agencies, but are increasingly unable to meet demand and are cash-strapped. The same political/economic pressure is keeping those agencies from expanding.

At the same time, there simply are more prospective residents due to lengthening life expectancies. In fact, the US would have had to expand its residential-services capacity by 28% to meet the demand as of two years ago. Clearly, housing has been an issue and it will only get worse.

Amidst all of this uncertainty, you still need to plan where your loved one will live. This might mean another form of trust. For example, a "Qualified Personal Residence Trust" (QPRT) could provide that you live in your home until your death, but that your family member with special needs would continute to live there (without disqualifying ownership). Great care is required in the preparation and execution of such an arrangement. Also, it may be possible to provide a home to shelter several persons with special needs. For example, several families could pool resources and maybe donate a home to a non-profit that, in turn, can convert the home into a new group home. The options are limited by your creativity, but careful to avoid elibility diqualifying mistakes.

Ultimately, the best plan will depend on your own unique family circumstances, as well as the current state and federal laws governing benefits and services. Unfortunately, according to a recent study by Arc, an advocacy group, only one-third of affected families actually have plans to control what happens when the caregiver grows old and evem after they are gone.

Bottom line: Remember to engage qualified legal counsel to help you navigate the regulatory minefields.

Reference: The Wall Street Journal Online (September 3, 2011) "Taking Care of Disabled Heirs"

Debtors Beware: Courts And Creditors!

"Just as the rich rule the poor, so the borrower is servant to the lender." (Proverbs 22:7)

Creditors tend to win most of the asset protection cases brought to court. Period.

It seems King Solomon was spot on. In fact, a review of debtor-creditor cases suggests that courts have a bias in favor of creditors over debtors. Jay Atkinson at Forbes recently weighed in on why that is so and offers a glimpse into the politics and psychology of the court.

Truth be told, simply scanning a record of court wins and losses for debtors and creditors is not an accurate means to assess the value of asset protection. Why? Creditors, by nature, tend to be the litigants who are after something. That means creditors can elect not to pursue collection through litigation, if they feel their legal position is not particularly strong. As a result, they are more likely to pursue an out of court settlement.

Debtors, on the other hand, have to stay on the defensive no matter how much legal ground they're forced to surrender. Unfortunately, too, this means most of the court precedents and legal interpretations are going to be pro-creditor, because the only way the court can affect change is by coming to a decision. If the decisions are always (or nearly always) victories for creditors, then it follows that the precedents also will be skewed pro-creditor. As Atkinson concludes: "The cases that are 'good' for debtors usually settle; the cases that are 'good' for creditors will probably go to a decision and thus 'make law.'" That is about as well-summarized as I have seen it.

Atkinson has more to say, particularly on the topic of judicial psychology, but the main lesson here: A courtroom is not a "friendly" venue for debtors. Indeed, as Atkinson points out, proper asset protection is really about avoiding court or the need for a court decision. Simply put, proper asset protection is about proper planning and having that proper planning completed far ahead of time.

Reference: Forbes (August 25, 2011) "Why Do Creditors Win In Most of the Reported Asset Protection Cases?"

Asset Protection: Plan Today For Protection Tomorrow

Free Legal Tip: Do not call an asset protection attorney today about a lawsuit filed yesterday.

Key #1 to Asset Protection success: The best advice is to plan ahead. Period. Waiting for a crisis means you'll have many fewer options available to protect your assets. If you have valuable assets, or your business or profession makes you particularly susceptible to lawsuits, then now is the time to plan your asset protection strategy – before you face a financial or legal crisis.

Key #2 to Asset Protection success: You have to do it right. So, if You're trying to keep your precious assets safe, but are attempting to do it through disingenuous (or even illegal) means, then such schemes can (and will) bite you in the end (sometimes literally), and could even land you in jail with a roommate not of your own selection.  

How do you do it right? Qualified legal counsel is your best resource, but even here there are a few good, general maxims to keep in mind. Jay Adkisson of Forbes recently offered his 10 rules for asset protection planning. While I think it's worth your time to look at the entire list, here are two of Jay's practical pointers to keep in mind:

Plan ahead of time. Do not wait until a claim arises. Planning before a claim allows you to escape from accusations of fraudulent transfer. Knowingly making a fraudulent transfer is especially dangerous since the judge doesn't simply undo the transfer, there is likely to be substantial punishment involved as well.

An asset protection plan is not "insurance" and does not afford the same protection. An asset protection plan may keep your assets safe in the event of a claim, but it won't protect you from legal fees. An insurance plan can shield you from paying those legal fees and, as such, offer a vital supplement to the overall asset protection plan itself.

Learn more about how to legally protect your assets in the Asset Protection Practice Center on our website.

Reference: Forbes (July 13, 2011) "Ten Rules For Asset Protection Planning"

The Estate Planning Window Is Open (For Now)

The only thing constant is change itself. So it is with your estate plan. The recent tax act has created some opportunities, if you act while the window of opportunity is open through December 31, 2012. Why? You can't pass through that window once it's shut.

The Tax Relief Act of 2010, passed in December, opens a number of new estate planning "windows of opportunity" – some of which may be short-lived, since the law expires at the end of 2012. Of course, with the change in the law comes the possibility that your current estate planning may need some updates, both to reflect the new rules and to perhaps to take advantage of opportunities not previously available.

In a recent article titled The New Rules of Estate Planning, Smart Money focused on a few of the most common issues to consider.

• Gifting as a Means of Asset Protection. The new law raises the gift tax exemption from $1 million to $5 million (yes, Virginia, you read that right). That means you can give away up to $5 million of your estate without paying gift taxes. Under the previous law, sheltering significant holdings from potential creditors required sophisticated planning, legal entities and valuation discounts. Now, especially with market-induced valuation discounts, transferring significant holdings is much less complex, and you can more easily shift up to $5 million to someone else. If you have asset protection concerns, this may be a strategy to discuss with your estate attorney.
• Formula Clauses. Certain wording in older estate planning documents could have unintended consequences in today's generous tax-exemption environment. For example, it was not uncommon for documents to call for "an amount up to the federal estate tax exemption" to be transferred to a trust for the benefit of your children, with the balance passing on to your spouse. When the exemption amount was $675,000, this may have made more sense. However, with a $5 million exemption, this same language could result in the unintented consequence of disinheriting your spouse. Ouch!
• Dynasty Trusts. The new rules also make certain types of trusts more attractive. For example, Dynasty Trust, which can shelter assets from estate taxes for generations, are permitted in more than half of the states and the District of Columbia. Warning: The Obama Administration has hinted at its displeasure with these types of trusts. Accordingly, they could be curtailed in the future. Teaching point: This may be a good time to explore this open window before it is slammed shut. Watch your fingers.
• State Taxes. Sixteen states and the District of Columbia have "decoupled" from the federal estate tax guidelines and have enacted their own estate tax laws. And, given the revenue pickle many states are in, who knows what will happen next? To help avoid a future "state estate tax" bite, an aggressive gifting strategy now might be a good strategy to consider.

You can learn more about estate and gift taxes at the Estate Tax Practice Center on our website. And, be sure to sign up for our free monthly e-newsletter to stay abreast of changes that could affect you, your family and your estate plan.

Reference:  Smart Money (July 14, 2011) “The New Rules of Estate Planning”