ASSET PROTECTION PLANNING
FOR A LITIGIOUS SOCIETY
Gornto Law, PLLC
310 Wilmette Ave., Suite 5
Ormond Beach, Florida 32174
In today's ever-increasing litigious society and hard economic times, more and more people now recognize the importance and necessity of proper asset protection planning. The goal of any asset protection plan is to take advance steps to ensure that assets are placed beyond the reach of future creditors (not existing creditors). Before engaging in any form of asset protection planning, it is imperative to remember that the fraudulent transfer laws of Florida (and most States) largely prevents debtors from transferring assets beyond the reach of existing creditors.
There is a broad spectrum of steps one can take to protect their assets from potential creditors. These steps range from: (i) obtaining adequate liability and umbrella insurance coverage, (ii) using Florida's favorable statutory creditor exemptions, (iii) establishing business entities such as corporations, limited liability companies, and limited partnerships, and (iii) transferring assets to irrevocable trusts, Domestic Asset Protection Trusts (DAPTs) and Offshore Asset Protection Trusts (OAPTs). The purpose of this memorandum is to describe how these techniques and the use of Florida's statutory creditor exemptions can be utilized to protect your assets from potential future creditors.
2. Reasons for Asset Protection Planning
As the reasons listed below illustrate, certain events can result in such substantial liability that insurance alone is often not enough to completely protect one's personal assets from the claims of creditors or injured parties. Further, depending on the severity of the liability, a previously wealthy person having significant assets to cover all current debts could, in a relatively short period of time, become insolvent.
A. Professional malpractice liability - Doctors, lawyers, architects, dentists, engineers and other professionals have regular exposure to substantial malpractice liability due to nature of their profession. Where significant damages, serious injury or death occurs, it is not common for malpractice claims to exceed the coverage of a doctor's or other professional's malpractice insurance. This is particularly true in light of the medical malpractice crisis that Florida doctors face where exorbitant insurance premiums are required for Florida doctors to carry relatively low malpractice coverage.
B. Negligence/Auto Accidents - Under Florida's comparative negligence law, you can be found liable for damages incurred by an injured party even if you are only partially the cause of the injured party's damages. In other words, if you are in an accident and a jury finds that you were less than 50% at fault, say 30% at fault for example, then your insurance (and potentially your personal assets) would be liable for 30% of the victim's damages. If death or serious injury were to occur in our example then it would be possible that 30% of the total damages would exceed your insurance coverage, thus exposing your personal assets to pay the remaining damages.
Another general area of concern is that under Florida's dangerous instrumentality law, the owner of a dangerous instrumentality (automobile, boat, motorcycle, etc.) is potentially liable for the injuries caused by third persons (family, friends, co-workers) while operating such dangerous instrumentality. In other words, if you loan your car to a friend and she injures another driver while driving your car then both you and your friend would be liable for the resulting damages. Inevitably in today's litigation prone world, both you and your friend would be named as co-defendants in any potential lawsuit. Again, a successful plaintiff could recover from your personal assets if the damages exceed your insurance coverage (and your "former" friend's insurance or other personal assets).
C. Vicarious Liability - Liability Created by the Acts of Third Persons - In general terms, one can be held liable for the acts of certain third persons such as partners, employees, joint tenants, sub-contractors and children.
D. Contractual liability/Personal Guarantees/Leases/Installment Purchasers
E. Corporate liability of Officers, Directors or Shareholders
3. Florida Constitutional and Expansive Statutory Exemptions
Florida's Constitutional and statutory exemptions, which protect certain assets from the claims of unsecured creditors, are among the most expansive in the United States.
A. Homestead Exemption - Perhaps the most well known and publicized Florida creditor exemption is the homestead exemption. Under the Florida Constitution, a person's homestead is exempt from forced sale under process of any court, and no judgment, decree or execution shall be a lien thereon, except for the payment of taxes and assessments thereon, obligations contracted for the purchase, improvement, or repair thereof, or obligations contracted for house, field or the labor performed. In other words, a person's homestead is exempt from the claims of unsecured creditors. Of course, the homestead it is not exempt from the claims secured creditors such as lenders who hold a valid mortgage on the homestead property.
The Florida Constitution defines homestead as real property (and the improvements thereon) owned by a natural person to the extent of:
- 160 contiguous acres if located outside a municipality, and
- 1/2 acre if located within a municipality.
Note, the 1/2 acre size limitation on homestead property located within a municipality can be a major concern for doctors, lawyers and other professionals who own large homes. If the home exceeds the 1/2 acre limitation then any creditor, could attempt to force the sale of the homestead and recover its judgment against the proceeds attributable to the homestead acreage in excess of the 1/2 acre limitation.
Under Florida law, there is NO dollar limitation on the Florida homestead exemption. For example, a $3,500,000 house situated on a 1/2 acre of beachfront property within a municipality would be completely protected from general creditors under the homestead exemption property, even if the homeowner has insufficient other assets to satisfy a debt or claim.
Clearly, Florida residents should declare their homestead by filing a homestead application (Form DR-501) with their county property appraiser's office in order to avail themselves to the Florida homestead creditor exemption. Also, any person planning to purchase a large home should strongly consider purchasing outside of a municipality or a home within a municipality that is situated on 2acre or less. Homesteads within a municipality that are situated on more than 1/2 acre are potentially subject to a forced sale by creditors and recovery to the extent of the property exceeding 1/2 acre. Those persons whose homestead is within a municipality and situated on more than a 1/2 acre should take steps to ensure that such excess property associated with their homestead is also protected. For example, the excess property could be legally titled as tenants by the entireties or in a special purpose entity, as later discussed in this memorandum.
B. Qualified Retirement Plans & IRAs - Both Federal law and Florida law protect assets held in qualified plans and IRAs from the claims of creditors. In the nonbankruptcy context, Florida Statutes Section 222.21(2)(a) exempts any money or assets in or payable to a participant or beneficiary of a qualified retirement or profit sharing plan or IRA. However, in bankruptcy, the recently enacted amended Federal Bankruptcy Act reduces the amount of the exemption for IRAs to $1,000,000, exclusive of amounts attributed to qualified rollovers. Also, SEPs and SIMPLE-IRAs are expressly excluded from this $1,000,000 limitation.
C. Life Insurance - Florida law exempts life insurance from the claims of the insured's creditors in two ways. First, the proceeds payable under a life insurance policy on the insured's death are exempt from the insured's creditors and shall pass directly to the beneficiary named in the policy. A key exception to this rule is if the beneficiary under the policy is the insured's estate or personal representative (executor). If the insured's estate is the beneficiary under the policy (or the named beneficiary predeceases the insured), then the creditors of the insured's estate can seek to recover the debt or judgment against the life insurance proceeds.
Secondly, and perhaps more importantly from an asset protection perspective, during the insured's lifetime the cash surrender value of a life insurance policy is generally exempt from the insured's creditors. Some of the numerous asset protection planning opportunities created by the exempt status of the cash surrender value of life insurance are discussed further below.
D. Annuities - Similarly, the proceeds from annuity contracts issued to Florida residents are also exempt from creditor claims. This exemption has been applied broadly by the courts because the applicable statute provides that annuity contracts upon whatever form, shall not in any case be liable for any creditor of the person who is the beneficiary of such annuity contract. While this exemption would clearly apply to commercial annuity products, both Florida and bankruptcy case law has extended the scope of this exemption to both private annuities between family members (which are discussed further below) and structured settlement annuities arising out of litigation. The truly broad scope of this exemption makes annuities an effective asset protection technique. The use of annuities for asset protection purpose is discussed further below.
E. 529 Plans & Other College Savings Plans - The relatively new state-sponsored 529 plans have become extremely popular and useful tools to allow parents to save for a child's education. Many people are aware that 529 plans allow people to save and invest for their children's education on a tax-deferred basis and, as long as the distributions are used for qualified education expenses, such distributions (and inherent growth) are tax free. However, fewer people are aware that 529 plans are extremely useful estate planning tools and are generally exempt from the creditor claims of both the account owner and the beneficiary. Florida law now specifically exempts assets held in any State’s 529 plans from the creditor claims of both the account owner and the designated beneficiary.
F. Other Exemptions - Other state exemptions are also provided for: (i) all wages of a "head of family" (note, wages of a head of family in excess of $750 per week are subject to garnishment only if the head of family agrees to such garnishment in writing), (ii) a portion of the wages of a person who is not a head of family, (iii) unemployment compensation, (iv) disability income, (v) $1,000 of tangible personal property, and (vi) an automobile valued at $1,000.
G. Relevance of Federal Bankruptcy Law to State Exemptions - While a full discussion of Federal bankruptcy law is beyond the scope of this memorandum, bankruptcy law is deeply interrelated with Florida's debtor/creditor law and asset protection planning. The recently amended Federal Bankruptcy Act modified many of the exemptions available to debtors in bankruptcy, including the limitation on the homestead and IRA exemptions discussed above in this memorandum. In general, when a debtor files for bankruptcy all creditor collection procedures cease and the debtor's assets are theoretically divided into two classes: (1) exempt assets which are not subject to the claims of general creditors (remember that exempt assets are subject to the claims of secured creditors to the extent of the secured creditor's perfected security interest therein), and (2) nonexempt assets which are subject to the claims of general creditors.
The Bankruptcy Act basically has two different methods to determine the exemptions available to a particular debtor: the Federal exemptions and the state "opt-out" bankruptcy exemptions. Since Florida is an "opt-out" jurisdiction, its state law exemptions are used to determine exempt and non-exempt property. A debtor must have been domiciled in Florida for the greater part of the 730 days (2 years) preceding the filing of the bankruptcy petition in order to take advantage of Florida's favorable exemptions. Florida's exemptions were previously discussed in detail above and such exempt assets (except to the extent an exemption is modified in bankruptcy) are exempt from the claims of unsecured creditors in a bankruptcy proceeding.
4. Asset Protection Techniques
A. Outright Gifts - Probably the simplest technique to protect your wealth from future creditors is to simply make lifetime gifts instead of waiting to transfer your assets upon your death. The gift tax consequences of outright gifts can be avoided or minimized by utilizing: (i) annual exclusion gifts (a person can gift $13,000 to any third party donee without gift tax consequences) and (ii) leveraging one's unified credit applicable exclusion amount, which for lifetime gifts (and estates), which is currently $5,000,000 per person (or $10,000,000 per married couple).
While there are significant estate planning advantages to this simple technique, there is a very significant disadvantage to this technique from an asset protection standpoint. The problem is that while outright gifts will remove assets from the reach of the donor's future creditors, the gifted assets will have no protection from the recipient's creditors. This can obviously still be a problem, particularly if the recipient is also a professional or has other creditor exposure. One unsettling fact to keep in mind when making substantial lifetime gifts to married children is that in today's world marriages often end in divorce. This means that your child's spouse could be potential creditor of your of child and in most states would have a right to 50% of your child's assets, including your gifted assets to the extent such gifted assets are commingled with marital assets. Therefore, there are more desirable choices for gifting if asset protection planning at the donee level is a high priority.
B. Gifts to Irrevocable Trusts - Transfers to irrevocable trusts that are commonly used for estate planning purposes can also have asset protection benefits by placing assets outside the reach of the settlor's (the creator of a trust) future creditors. However, in most states a settlor's creditors can attack trust assets where: (1) the transfer to the trust is a fraudulent transfer, (2) the settlor retained too much control over the trust assets, and/or (3) the settlor is a beneficiary under the trust.
The first method in which creditors can reach assets held in an irrevocable trust (fraudulent transfer remedy) was previously discussed. Under the second method of attack, creditors can potentially reach assets in a trust where the settlor retained too much control over the assets, such as a power of revocation, a power to appoint trust property, a power to veto trust distributions, by directly managing the trust assets or by retaining other trustee powers.
The third method is the key concern when using an irrevocable trust for asset protection purposes. The general rule in most states, including Florida, is that the settlor's creditors can reach trust assets to satisfy their claims to the extent that the trustee has discretion to make distributions to the settlor/beneficiary. Therefore, it is important when using such a trust to achieve asset protection planning goals that the settlor has a "limited" retained interest. For example, a permissible settlor retained interest would be an interest that limits the distributions to the settlor by an ascertainable standard (health, maintenance, support, etc.).
C. Spousal Co-Ownership - "Tenants by the Entirety" - "Tenants by the entirety" is a form of ownership only available to married persons and is basically tied to the common law concept that married persons should be treated as single economic unit. The key benefit of this form of ownership is that assets titled in this manner are generally only subject to the claims of the joint creditors of both the husband and wife. In other words, if you own real property with your spouse as tenants by the entirety then that real property will generally not be available to yours or your spouse's individual creditors. This same form of ownership can be used to title personal property, such as brokerage or bank accounts.
D. Planning Opportunities With Life Insurance - As previously mentioned, the full cash surrender value of life insurance policies is exempt from the insured's creditors under Florida law. The exempt status of the cash surrender value coupled with the fact that income from assets held in an arrangement that qualifies as life insurance under the Internal Revenue Code is not subject to income tax. Therefore, using the tax free build-up of the cash surrender value in a whole life, universal life or variable life insurance policy might be an attractive investment alternative for a doctor or other professional who has ongoing liability exposure.
Also under Florida law, the proceeds payable on the insured's death will pass to the named beneficiaries free from the claims of the insured's creditors. However, it is important to note that once the life insurance proceeds are paid to the named beneficiaries the proceeds will then be subject to the claims of the beneficiary's creditors. Therefore, if the insured has a beneficiary that is a professional or a business owner who has personal guarantees on business debts or other sources of potential liability, then it would be more advisable for the insured to use an already popular estate planning technique known as an Irrevocable Life Insurance Trust (ILIT). While the primary goal of the ILIT is to remove the proceeds of life insurance from the insured's gross estate to reduce estate taxes, the ILIT can also be used to provide asset protection from the creditors of a beneficiary. In such a situation where a beneficiary may have particular creditor exposure, the trustee of the ILIT would hold the beneficiary's share of the life insurance proceeds in a continuing trust for his or her benefit. As long as the life insurance proceeds remain in the ILIT, that beneficiary's creditors would not be able to reach that beneficiary's share of the proceeds.
E. Planning Opportunities With of Annuities - Florida law provides a broad creditor exemption for the proceeds of annuity contracts issued to citizens or residents of the state, upon whatever form... from any creditor of the person is the beneficiary of such annuity contract. Thus, the annuity exemption applies to commercial annuity products, private annuities between trusts or family members, and structured settlement annuities arising out of litigation. Various court decisions have extended the protection of this exemption to also include the surrender value of a non-annuitized or deferred annuity. The broad scope of this exemption and its similarities to other retirement vehicles make annuities an effective asset protection technique.
The application of the annuity creditor exemption to "private annuities" between family members offers a great asset protection opportunity. A private annuity involves the transfer of property "in exchange" for an unsecured promise to receive a series of annuity payments. Typically, the current owner of the property (in our case, the person that has an interest in asset protection planning) would transfer the assets to an irrevocable trust in return for a stream of annuity payments from the trust that could be based on either the annuitant's life expectancy. Both the current and future annuity payments are exempt from the annuitant's creditors under Florida's statutory exemption. Typically, the trust would sell the transferred property and reinvest the proceeds in investments that would facilitate the stream of annuity payments. If this subsequent transfer by the trust is made shortly after the initial private annuity transfer then there would be little or no adverse income tax consequences to the trust. The use of private annuities also has other estate planning benefits that are outside the scope of this memorandum.
F. Use of LLCs or Corporations for Unincorporated Businesses - If a business is operating in the form of a sole proprietorship or a general partnership then the owner(s) of that business are personally liable for all the debts of the business, whether arising out of contract, injury or property damage. For this reason it is not advisable to use either a sole proprietorship or general partnership to operate a business unless the business and the business owners have adequate liability insurance coverage. If the business and the owner(s) do not have adequate insurance then all the assets of the owners, other than exempt assets under Florida law (homestead, IRAs, life insurance and annuities, etc.), will be subject to the claims of the business creditors.
A major liability concern is the possibility of an injury or death to a third person either on the business premises or in the regular course of business. There are significant liability concerns if the sole proprietorship or general partnership regularly relies on the use of automobiles by either the owner or an employee. If either an owner or an employee gets in an accident in the regular course of business, such as a delivery or on the way to the bank or the post office then the injured party could recover against the business assets and the business owner's individual assets if the damages exceed the existing insurance coverage. If serious injury or death occurred then the resulting damages would quickly exceed the insurance coverage held by most small businesses and have a catastrophic effect on the owner's individual assets. In order to illustrate the benefits of operating a business as a corporation, LLC or other entity that provides limited liability to its owners, if the same accident were to occur to a business properly formed and administered LLC, then the injured party would not be able to reach the business owner's personal assets to recover their claim.
For this reason it is advisable for a sole proprietorship or general partnership to use an alternative form of business entity that limits the liability exposure of its owners. Two of the more common forms of business entity that offer limited liability are the corporation and the limited liability company (LLC). Both a corporation and a LLC can be owned by a single owner, therefore, a business formerly operating as a sole proprietorship can utilize either of these business entity forms. If one of these entities is used to operate the business, then the potential judgment creditor would generally only be able to recover against the assets of the business if his or her damages exceeded the available insurance coverage. Importantly, the judgment creditor would not be able to recover against the owner(s) individual assets.
There are state filing fees and statutory formalities that must be followed in order to benefit from the limited liability protection that both entities offer. However, unless the sole proprietorship or general partnership already has a high level of insurance and the owner(s) have an umbrella liability policy in place, the minor administrative costs involved by operating as a corporation or a LLC will almost always be greatly outweighed by the elimination of the business owner's potential personal liability exposure.
LLCs with only one member, the so-called "single member LLCs" which are disregarded for income tax purposes, are commonly used for various asset protection purposes. For example, several single member LLCs can be used to own separate commercial or rental properties that have inherent liability concerns. Generally, the simple use of separate LLCs to own such separate high risk properties will prevent a creditor that arises from the ownership or operation of the underlying property from reaching the owner's personal assets and the real property owned by the other LLC. Single member LLCs are also commonly used with Offshore Trusts and Domestic Asset Protection Trusts (discussed further below) to provide further asset protection.
There are numerous other issues that should be considered when selecting a form of business entity that are beyond the scope of this memorandum. However, from an asset protection standpoint both the corporation and the LLC would offer the same limitation of liability to the owners.
G. Family Limited Partnerships - While the family limited partnership (FLP) is primarily known for valuation discounts and its other estate planning benefits, it is also an outstanding asset protection strategy. When used as part of a properly designed overall strategy, the FLP can provide a very high level of asset protection.
Under the typical arrangement, the FLP is set up so that the Husband and Wife are each general partners. As such, a Husband and Wife will typically own a 1% general partnership interest in the partnership. The remaining ownership interests are in the form of limited partnership interests. These limited partnership interests will be held, directly or indirectly, by the Husband, Wife, or other family members, depending upon a variety of factors which vary on a case by case basis.
Once established, a significant portion of the family assets are then transferred to one or more FLP(s), including investments, marketable securities, and certain real property interests held through single member LLCs and real property (other than the homestead or principal residence). When the transfers are complete, Husband and Wife no longer own a direct interest in these assets. Instead, the FLP owns the transferred assets and the Husband and Wife, in turn, now own a controlling interest in the FLP. Husband and Wife in their capacity as general partners, have complete management and control over the affairs of the partnership and can buy or sell any FLP assets as they wish. They have the right to retain in the partnership proceeds from the sale of any partnership assets, they can reinvest the proceeds into other FLP assets, or they can distribute these assets or proceeds out to the partners.
A properly formed and structured FLP is an effective asset protection technique because the creditors of the Husband or Wife cannot reach FLP assets even though the Husband and Wife, as general partners, have effectively retained all control over the FLP assets. The following example will illustrate how the assets are effectively outside the reach of the Husband or Wife's creditors once transferred to the FLP. Assume that the Husband is a physician and that a former patient files a malpractice lawsuit and obtains a $2 million judgment. The successful plaintiff is now a judgment creditor of the Husband and will try to collect the $2 million from Husband's bank accounts, investments and other assets. Since the Husband and Wife took the proper advance asset protection steps, the creditor will quickly learn that the large majority of the Husband's assets are owned by the FLP. Since most of the Husband's assets were previously transferred to the FLP, the only significant asset held by Husband is his general and/or limited partnership interest in the FLP. Can the creditor reach into the partnership and seize the partnership assets? Generally, no.
Under Florida law (and the law in most states), generally a creditor of a partner cannot reach inside a limited partnership and recover from the limited partnership assets. In our example, since title to the underlying assets is in the name of the FLP and the judgment is against the debtor partner (Husband), the partnership assets may not be used to satisfy the judgment against Husband. Instead, the creditor's sole remedy under Florida law against Husband's partnership interest in the FLP is known as a "charging order". Since Husband does not directly own the underlying assets and only owns a partnership interest in the FLP, the creditor would apply to the court for a charging order against Husband's partnership interest. If a charging order was granted by the judge, then the creditor would be able to direct the general partner to pay over to the judgment creditor any distributions from the partnership which would otherwise go to the debtor partner (Husband), until the judgment is paid in full. In other words, distributions by the partnership to the debtor partner can be reached by the creditor until the amount of the judgment is satisfied. However, the major advantage the "charging order" provides is that it does not give the creditor the right to become a partner in the partnership and does not give the creditor any right to vote or otherwise interfere in the management or control of partnership affairs. Most importantly, the charging order would also not give the creditor the right to force the partnership to make a distribution to the debtor-partner.
The charging order is not a favorable remedy to the creditor for two more reasons. First, Husband and Wife, if authorized by the partnership agreement, may elect not to make any partner distributions once a creditor has a charging order. In such a case, the partnership would simply retain all of its funds and continue to invest and reinvest its cash without making any distributions. Secondly, if a distribution is made to the creditor, then that creditor would have to recognize the debtor-partner's share of partnership income that is attributable to the distribution. In other words, the creditor would have to pay income tax on the income distribution it receives from the partnership to satisfy its claim! All the above-mentioned factors give the partners of the FLP tremendous leverage against any potential judgment creditors and would encourage settlement negotiations that would be favorable to the debtor-partner.
Importantly, the same “charging order” remedy is the primary remedy available to creditors who seek to recover judgments against the membership interest that a debtor owns in a multi-member LLC.
H. Offshore Asset Protection Trusts - A simple description of an offshore asset protection trust (OAPT) is a trust which is established under foreign trust laws by a U.S. citizen, typically managed by a foreign trustee, and drafted to lawfully remove assets from the settlor's individual balance sheet without adverse tax consequences or causing the settlor to lose all control over such assets (prior to a creditor's claim or judgment). It has been estimated that over $2 trillion in assets are currently held in offshore trusts. While some jurisdictions such as the Cook Islands, Nevis and the Turks and Caicos provide particularly strong additional debtor protections, the common aspect in all of the true offshore asset protection havens is that a settlor has the ability to effectively establish a "self-settled spendthrift trust". In other words, all offshore asset protection havens protect trust assets from the settlor's creditors even though the settlor is a beneficiary of the trust and may retain some control over the trust assets. Some of the additional benefits of OAPTs are:
· the requirement that any creditor attack on the trust assets on the grounds of fraudulent transfer law be litigated in the foreign jurisdiction often requiring the use of a foreign attorney (even if the creditor already has a favorable U.S. judgment),
· shorter statute of limitations period for a creditor to set aside a prior transfer on the grounds of fraudulent transfer, and
· greater burdens of proof for a creditor to satisfy to prove a fraudulent transfer to an OAPT.
While OAPTs most likely provide the greatest level of asset protection, OAPTs are also one of the more costly methods of asset protection. First, the settlor must consider the costs of choosing an offshore jurisdiction and trustee that meets the settlor's needs. There are also costs involved with meeting the extensive IRS reporting requirements that are necessary for foreign trusts. For these reasons and the fact that settlors must overcome the "psychological" barrier of transferring his or her assets to a trustee in a foreign jurisdiction, OAPTs are primarily by those very wealthy individuals who have severe liability exposure and are highly motivated to implement a complex offshore asset protection plan.
I. Domestic Asset Protection Trusts - As previously mentioned, law in most U.S. states (unlike the law in many foreign jurisdictions) is that a "spendthrift" provision used in a trust will protect trust assets from the creditors of any trust beneficiary other than the settlor. Therefore, in most states if a settlor is named as a beneficiary of a trust, then the settlor's creditors can reach the trust assets to satisfy their claims to the extent of the settlor/beneficiary's interest in the trust.
However in an effort to attract the business of wealthy individuals interested in the asset protection benefits previously offered only in offshore jurisdictions to their states, there are now several U.S. states, including, but not limited to, Alaska, Delaware, Nevada, South Dakota and Rhode Island, that extend such spendthrift trust protection to the settlor of a trust. For example, assuming the funding of the DAPT was not a fraudulent transfer, assets transferred to a properly drafted Nevada asset protection trust would be beyond the reach of the settlor's creditors even if the trustee has the discretion to make distributions of income and principal to the settlor as a beneficiary. There are additional retained powers that the settlor can also possess without exposing the trust assets to his or her creditors. The list below sets forth the permitted settlor-retained powers/benefits available in all of the above states (note, there are additional powers not listed which vary from state to state):
· the settlor can be a discretionary beneficiary of trust income and principal (mentioned in the above example);
· the settlor can to veto distributions made by the trustee to the other beneficiaries; and
· the settlor can hold a testamentary limited power of appointment over the trust assets. This allows the settlor to appoint the trust assets at his death to any person other than the settlor, the settlor's creditors, the settlor's estate, or creditors of the settlor's estate.
In Delaware it is also permissible for a settlor to: (1) retain a complete income interest in the trust and (2) have a right to both trust income and principal for his or her health, maintenance and support (ascertainable standard) without exposing the trust assets to the settlor's creditors.
While generally these states require that either a resident or a bank or trust company organized in that particular state must serve as a trustee of the trust, there are relatively few other out of state contacts required to utilize these trusts. Furthermore, the law in these four states specifically provides that out-of-state residents may utilize the asset protection benefits offered by these trusts.
These trusts are relatively new in the asset protection world, first arriving in the late 1990’s. While the assets held in these trusts are clearly protected from the settlor's creditors by statute, there is still some uncertainty as to whether an Alaska court (or a Delaware, South Dakota, Nevada, or Rhode Island court) would be forced to recognize a creditor's judgment obtained in another state against a nonresident settlor of a DAPT under the Full Faith & Credit clause of the U.S. Constitution. For this reason DAPTs do not offer the same level of protection of OAPT established in a jurisdiction that does not recognize foreign judgments. Nonetheless, the domestic asset protection is less costly to administer and it still poses a substantial obstacle to a potential creditor and the creditor's attorney that is seeking recover against the settlor. Accordingly, the worst case scenario would likely result in settlement proceedings that are favorable to the settlor.
As this memorandum describes, there is a broad spectrum of techniques available to meet the growing need for asset protection planning. In some cases, adequate insurance coverage and the effective use of Florida's statutory exemptions can accomplish the desired asset protection goals. For other individuals that have ongoing liability or malpractice exposure the use of LLCs, an Irrevocable Trust, a Family Limited Partnership, a Domestic Asset Protection Trust or an Offshore Asset Protection Trust may be needed to reach the desired level of protection. Regardless of the desired level of asset protection planning, the objective is the same. That is, to preserve the wealth that you devoted your life to build by taking advance steps to remove such wealth from the reach of potential future creditors.
Since this memorandum serves as a summary of various asset protection planning techniques, it is certainly understandable if you have questions or general concerns that apply in your particular case. Our firm welcomes any questions or comments that you may have concerning asset protection planning. Should you have further interest in implementing an asset protection plan please do not hesitate contact our office by telephone at (386) 257-1899 or by email at firstname.lastname@example.org.
The above outline materials pertaining to asset protection planning is intended only for general informational purposes of the reader and not legal advice and should not be relied upon as such. It is not advisable to establish an asset protection plan without first retaining competent legal counsel. Unpublished Work, All Rights Reserved: 2015, Gornto Law, PLLC