Call Robert Sayman today or Click Here for a free, no obligation consultation to see if an Asset Protection Plan is right for you.

704-542-5499

Asset Protection

Is a Family Limited Partnership for you?

Why Is Life Insurance Needed?

Is a Closely Held Insurance Company for you?

What are the advantages of an Offshore Trust?

Is a Family Limited Partnership for you?

ASSET PROTECTION OVERVIEW
The concept of asset protection, in various forms, has been around for many years. The wealthiest American and European families have always structured their holdings to insure that their wealth would remain intact and inviolate as it passed from one generation to another. In recent years, the threat of lawsuits, business reversals, divorce and actions by government regulators has made every business owner, property owner and professional acutely aware of the need to create some form of asset protection. Now, the typical asset protection plan is designed to accommodate the needs of those who have accumulated some equity in a home or other real estate, those who own a successful business, and others who are trying to preserve a nest egg for their children's education or their own retirement.

WHO NEEDS ASSET PROTECTION
Doctors, lawyers and other professionals face constant exposure to malpractice lawsuits and jury awards in these cases often reach staggering proportions. These professionals often find that adequate liability coverage is so restricted that the policy has little value. As a result, every professional finds that he is quite literally, betting the house on a successful outcome with every patient or client who comes in the door.

Business owners as well as officers and directors are all common targets of litigation these days. In addition to negligence and products liability lawsuits, claims by customers, suppliers, employees, lenders and business competitors can easily lead to financial devastation. Also, litigation with government agencies such as the IRS or the EPA can tie up a business and its assets for years. Win or lose, these types of cases will inevitably drain a company and its owners of all financial resources.

Anyone who owns rental or commercial property is also a common target for a lawsuit. As a "Deep Pocket" defendant, a property owner is a virtual magnet for never-ending barrage of frivolous claims. And if a tragedy should occur and some tenants are seriously injured, potential liability in the millions of dollars can easily exceed the amount of any insurance coverage.

Real-estate developers and builders must deal with potential liability to buyers and users of a property. In California, liability for latent (unseen) defects in a project lasts for 10 years. If that's not bad enough, liability to lender for one bad deal can wipe out all of the equity in other projects that has been accumulated over a lifetime.

Even those who are not engaged in business, those who work for someone else or are retired will find that an Asset Protection Plan is an essential tool in their overall financial plan. Significant illnesses or injuries may create large uninsured liabilities to doctors and hospitals. An auto accident which injures several people can involve damages which exceed the amount of insurance coverage.

The logical conclusion from all these scenarios is that anyone who does not take the necessary steps to protect his accumulated assets is brazenly flirting with financial disaster.

THE OBJECTIVES OF AN ASSET PROTECTION PLAN
Sound Legal Foundation: Any asset protection plan by a responsible attorney must be based upon a sound legal foundation of established principals of law. An appropriate plan does not involve hiding or concealing assets or otherwise attempting to defraud creditors. A properly constructed asset protection plan allows a client to achieve his objectives while fully and truthfully disclosing all of his financial circumstances.

Discouraging Litigation: An asset protection plan is designed to discourage a potential lawsuit before it begins. In the ordinary course of litigation, the attorney for the plaintiff will want to make sure that sufficient assets of the defendant can be reached if the litigation is successful. This is especially true when the attorney is working for a contingent fee. Accordingly, prior to commencing a lawsuit, the plaintiff's attorney will perform a financial investigation of the target defendant's assets, seeking to locate any real estate, bank accounts or other valuable property. If the defendant has substantial, reachable assets the lawsuit will go forward. If the investigation reveals that the defendant's assets are not in a form that can be seized, only the most self destructive plaintiff would incur the expense of proceeding with the case.

Allowing Access to Funds:  In many types of litigation the plaintiff can obtain from the court a Pre-Judgment Writ of Attachment or a restraining order effectively freezing all of the defendant's funds pending the outcome of the case. This is often the single most potent weapon available to the plaintiff. Without access to funds to meet business and personal expenses the defendant will not be able to survive financially during the lawsuit. This tactic will usually force a defendant to enter into an unfavorable settlement regardless of the merits of his defense. The objective of an asset protection plan is to make sure that property cannot be tied up in this manner in the event of litigation. An appropriate plan should be designed to keep real-estate assets free of attachments and liens and should allow the client undisturbed access to his funds during the litigation process.

Ease of Operation: An asset protection plan should be easy and convenient for the client to use and understand. After the plan has been established, the client should be able to deal with his property without difficult or burdensome restrictions.

No Loss of Control: An asset protection plan must allow the client to maintain continued control and enjoyment over his property. A plan that requires a client to place his valuable assets under the exclusive direction and management of a third party will not be appealing to most sophisticated clients.

Consistent with Estate Plan: If the client has an existing state plan, such as a will or a Living Trust, the asset protection plan must be consistent with these arrangements. If the client has not yet created any estate planning documents, the asset protection plan must be designed to minimize or avoid estate taxes, avoid a costly and time consuming probate procedure and pass the clients property in accordance with his ultimate wishes.

Protection of Family Assets: Above all else, the asset protection plan must accomplish its primary purpose of sagely insulating and preserving family assets from any kind of attack. If a structure is not properly established within the appropriate time period and within the correct mechanisms in place, the hoped for asset protection features will not be available

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Why Is Life Insurance Needed?

Life insurance is a unique asset.  Because of its potential high yield and its tax-favored benefits, it can be used to solve some of life’s perplexing financial problems. 

Death Benefit Uses for Life Insurance

• Create an estate:  Where time or other circumstances have kept the estate owner from accumulating sufficient assets to care for his or her loved ones, life insurance can create an instant estate.
• Pay death taxes and other estate settlement costs:  These costs can vary from a low three or four percent to over 50 percent of the estate.  Federal Estate Taxes are due nine months after death.
• Fund a business transfer:  Business owners often agree to buy a deceased owner’s share from his or her estate after death.  Life insurance provides the ready cash to finance the transaction.
• Pay off a home mortgage:  Many people would like to pass the family residence to their spouse or children free of any mortgage.  Often a decreasing term policy is used, which decreases in face amount as the mortgage balance is paid down.
• Protect a business from the loss of a key employee:Key employees are difficult to attract and retain.  Their untimely death may cause a severe financial strain on the business.
• Replace a charitable gift:  Gifts of appreciated assets to Charitable Remainder Trusts can provide income and estate tax benefits.  Life insurance can be used to replace the value of the donated assets.  Proceeds from life insurance policies can also be paid directly to a charity.
• Pay off loans:  Personal or business loans can be paid off with insurance proceeds.
• Equalize inheritances:  When the family business passes to children who are active in it, life insurance can give an equal amount to the other children.
• Accelerated death benefits:The Health Insurance Portability and Accountability Act of 1996 changed federal tax law to allow a “terminally ill” individual to receive the death benefits of a life insurance policy on his or her life, income tax free¹.  Such “living benefits”, received prior to death, can allow a person to pay medical bills or other expenses, and maintain his or her dignity by not dying in destitute.  If certain conditions are met, a “chronically ill” person may also receive accelerated death benefits free of federal income tax.

 Other Uses for Life Insurance
While life insurance products are primarily used for death benefit protection, they are also commonly used for long-term accumulation goals.

• College fund for children or grandchildren:  Cash vale increases in a policy on a minor’s life (or parent’s life) can be used to fund college expenses.
• Supplement retirement funds:  Current insurance products provide competitive returns and are a prudent way of accumulating additional funds for retirement.

Available cash values may also serve as an “emergency reserve”, if needed, or a source of loans, since life policies frequently include features permitting borrowing against these cash values².

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Is a Closely Held Insurance Company for you?

Closely-Held Insurance Company (CHIC)
One of the best tax-advantaged risk-management tools for businesses is the so-called closely-held insurance company, or "CHIC". These are simply insurance companies that are set up, owned and controlled by business owners to insure their own businesses (and to take advantage of other underwriting opportunities as they present themselves). These are insurance companies, not merely another insurance product. The reasons why CHICs are such great risk management tools include:

• The owner of the business knows exactly the amount and quality of his insurance company's reserves, so that he doesn't have to worry about whether the insurance company has the financial ability to pay claims.
• The owner of the business knows that the insurance company will not wrongly dispute claims, pay slowly, or otherwise act in Bad Faith toward the owner's business.
• The business is able to obtain certain types of insurance that are not commonly available.
• The business can acquire comparable insurance at more favorable rates.
• Congress has given very favorable tax treatment to insurance companies, to induce the formation of new insurance companies and to create stronger competition within the insurance markets.

Favorable Tax Treatment
To promote the use of insurance companies, Congress has given insurance companies -- and especially "small" property & casualty companies -- very favorable tax treatment.

The very best tax treatment given by Congress comes in the form of the IRC § 501(c)(15) company. Essentially, so long as an insurance company is: (1) primarily in the business of insurance; and (2) receives less than $350,000 in annual insurance premiums, the company is tax exempt, subject to certain restrictions. This means that the insurance company may obtain the following tax benefits:

• Premium Income Received Is Not Taxed – All insurance premiums are received by the company tax-free.
• Passive Investment Income Received Is Not Taxed -- This is the really Big Bang for qualifying 501(c)(15) insurance companies. So long as the company continues to qualify under the Internal Revenue Code, its passive investment income is NOT taxed. What this means for qualifying insurance companies, under certain circumstances is that:
• Capital gains are not taxed. This means that if a person has a large appreciated asset, whether a large bloc of IPO stock or appreciated real estate, that they could transfer those assets to the insurance company as reserves and surplus, and the insurance company could liquidate and diversify those assets with NO tax immediately payable.
• Short-term capital gains, dividends earned by stock held by the company, etc., as reserves and surplus, are not taxed.
• Royalty streams, such as income streams from patents, copyrights, and trademarks which have been contributed to the insurance company as reserves and surplus, are not taxed. [Caution: There are very complicated rules for contributing such income streams or intangibles to the insurance company, and the failure to follow these rules correctly can lead to unfavorable results.]

All Taxes Deferred -- Although the 501(c)(15) insurance company typically pays no taxes, the owner of the company will pay taxes: (1) whenever a distribution is made or a salary or management fee paid, at ordinary income tax rates; and (2) when the insurance company is sold or liquidated long-term capital gains rates will be paid (assuming the insurance company has been held for a significant amount of time. But note that, at worst, the owner of a 501(c)(15) insurance company has converted ordinary income (premiums received) and non-long term capital gains investment income, into long-term capital gains which are deferred until the company is sold, etc.  

CAVEATS
The insurance company tax rules are full of “tax landmines”, which you can easily explode if you or your planner are not familiar with this area of the Internal Revenue Code (very few planners have any experience with insurance company taxation). If you hit a “tax landmine” you may end up with worse tax consequences than if you had done nothing at all.

In particular, the 501(c)(15) insurance company is an oddity, because it is a for-profit insurance company which falls into rules for the tax-exempt organizations (such as charities and other non-profit organizations). This creates some additional tax traps, including the following:

• It limits the types of assets which can be placed into the insurance company, and the methods of placing them there.
• A 501(c)(15) company will be taxed on income from a non-qualifying subsidiary or on other "active" income, i.e., you cannot put an active business into a 501(c)(15) and claim that the income from the business is tax exempt.
• The primary business purpose of the insurance company must be insurance, and not some other purpose, such as investing.
• The surplus and reserves must make sense based upon actuarial calculations. Simply declaring that the policy premium will be "X" doesn’t work.
• There are a myriad of state and federal regulatory issues that must be addressed.

CHICs vs. Captives
Certain insurance companies are called "captive" insurance companies because most of the insurance they underwrite is exclusively that of a related business, i.e., the insurance company is "captive" to the insurance needs of the related business.

CHICs are not restricted to underwriting insurance for any related company, except in the sole discretion of the common owner, and certain tax and regulatory restrictions. Many CHICs are formed to be stand-alone insurance companies, and intended to grow into separate and valuable profit centers for their owners. Some CHICs may never underwrite so-called related party risks.

Self-Insuring & Third-Party Insurance
An insurance company which shares common ownership with another business may typically underwrite the other business's insurance needs so long as the premiums charged are actuarially (read: statistically) reasonable. The business that is purchasing insurance from the insurance company should -- if the insurance is real and the premiums are reasonable -- get a deduction for the premiums paid.

However, for the premiums to be deductible to the other business, the insurance company must also sell some insurance to other unrelated third-parties.

The premiums charged must also be reasonable, which is usually proven by way of actuarial assessments. If the premiums are not reasonable, the arrangement is subject to challenge. In the famous UPS case, UPS's captive insurance company charged three times the going rate for a particular type of commonly-available insurance. The Tax Court ruled that the premiums in this context were not reasonable, and disallowed the deduction for the premiums paid.

Location, Location, Location
Many captive insurance companies are formed offshore -- not for tax reasons, as much as avoiding the bureaucracy of state insurance regulators. It is not uncommon for captive insurance companies to actually elect U.S. taxation, so as to take advantage of the very favorable U.S. tax treatment of insurance companies.

Keep in mind that although there insurance company is formed offshore, there is no requirement that assets be moved offshore, or placed in the control of an offshore person. Indeed, assets are typically invested in the U.S.

Control, Control, Control
One of the benefits of CHICs is that both the insurance company and the insurance company’s assets are kept directly in control by the client as the insurance company’s owner. There is no reason or need to obfuscate ownership or control, to or trust some other person with ownership or control.

Beware Shoddy Insurance Company Creators and Managers
Because of the tremendous tax benefits of CHICs, combined with tough new tax rules for offshore corporations and offshore trusts, there has been a steady growth in the number of CHICs formed, and in the number of people who think they have the expertise to create them. Unfortunately, as to the latter, there has been no corresponding increase in quality.

Too many "offshore service providers" are now offering CHICs. Their pitch is that they can get a company "licensed", which is mostly irrelevant under the U.S. Tax Code. The IRS simply doesn't care (at least very much) whether the insurance company is "licensed" or not – the key inquiry is simply whether the company is primarily in the business of insurance or not, and not whether the company simply has a license or not.

For an insurance company to be in the "business of insurance" it must at a minimum:

• Conduct real insurance underwriting to third parties
• Spread and share risks
• Be staffed with actuaries, underwriters, and insurance managers
• Be adequately reserved and capitalized
• Have an insurance purpose, and a long-term insurance business plan

To qualify for treatment under 501(c)(15), the insurance company must additionally make a number of difficult elections, and make several key statements on its tax returns. If the company fails to make these elections, it may result in taxation upon capitalization, whether the assets are sold or not. It may also be treated as a Controlled Foreign Corporation (CFC), a Passive Foreign Investment Company (PFIC), Foreign Passive Holding Company (FPHC), or several other types of "bad" tax entities, also with disastrous tax consequences. (If the company makes the correct series of elections, it is treated as a domestic company and thus avoids all the “bad” foreign company tax issues.)

Unfortunately, most offshore providers and unqualified U.S. providers either fail to make these elections, or fail to make these elections in the correct sequence, which as shown leads to potentially disastrous tax treatment.

Similarly, a number of U.S. Circuit Court of Appeals cases have definitively established that to obtain the favored tax treatment, the company must underwrite some third party insurance. Thus, one of the most critical steps is to ensure that the insurance company is underwriting real, valid unrelated third-party risks (not some phony offshore IBC that somebody has set up somewhere), and the offshore service providers who have belated entered the "captive" game typically lack the sources and the experience to obtain this type of insurance, correctly evaluate the insurance, or correctly place it into the insurance company.

Therefore, unlike regular corporations or trusts, which are relatively simplistic, these insurance companies are complex entities and if you rely on a typical "offshore service provider" to assist you with these types of companies you are likely to come to serious tax grief (despite the "lowball" prices for these companies they are likely to quote you).

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What are the advantages of an Offshore Trust?

OFFSHORE ASSET PROTECTION TRUSTS
Clients who wish to achieve the greatest protection and flexibility generally will prefer to use what is known as an Asset Protection Trust. This is a trust which is created under the laws of a foreign jurisdiction in order to achieve certain advantages which cannot be accomplished with a domestic trust. We have created our program in response to the massive escalation of risk factors that adversely affect the preservation of wealth, and in recognition of the opportunities provided by the global investment markets and the availability of protective legislation offshore.

THE OFFSHORE ADVANTAGE
A properly structured offshore wealth protection trust will provide a greater degree of protection than a wholly domestic based plan. The principal attraction of an offshore trust is the legislative advantage provided by those offshore jurisdictions that have introduced trust legislation specifically to facilitate the protection of wealth. This legislation will include provisions for:

•  the protection of spendthrift beneficiaries; the avoidance of forced heirship rules;
•  the avoidance of the rule against perpetuities and restrictions on accumulations;
•  non-enforcement of foreign judgments;
•  specific rules to determine whether transfers of property are void or voidable against the settlor or the trust;
•  legislation which provides greater flexibility for estate planning purposes allowing the orderly distribution of wealth to families or charities;
•  use as an effective premarital planning vehicle either in substitution for, or as complementary to, prenuptial agreements;
•  a greater degree of privacy and confidentiality than is available domestically;
• diversification of client investment portfolios as the more established offshore finance centers provide direct access to specialized international or regional investment management facilities.

In using the Asset Protection Trust the individual does not need to sacrifice any degree of immediate control and access to his property. The client can be beneficiary as well as trustee of the trust and can thereby maintain continued access to and enjoyment of his property. If at any point there is an attack upon this structure by a creditor, the liquid assets and personal property can be shifted to offshore account that has been established in the name of the trust. This feature provides the ultimate protection for family assets since this account will not be subject to the jurisdiction of a U.S. court. Once assets have been safely relocated outside the U.S. and under the protection of the laws of that country, recovery of the funds by the creditor becomes impractical, if not impossible. Real estate or other nonliquid assets can be protected through an arrangement known as the Equity Reduction Plan. In a properly established trust of this type, even when liquid assets are moved into the offshore account, the client does not sacrifice any practical degree of control or authority. The tax rules governing these kind of trusts are identical to those concerning the domestic trust. For both income tax and estate tax law, the Asset Protection Trust is ignored by the IRS. Properly structured, there are no gift tax consequences to the arrangement and all income of the trust is reported directly on the return of the settler. Summary Asset protection is an essential component of any prudent financial plan. In today's dangerous business climate a lifetime of successful accomplishments can be obliterated by a single unexpected lawsuit. The objective of asset protection is to insure a level of certainty and security as one makes his way through the hazards of everyday life.

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Call Robert Sayman today or Click Here for a free, no obligation consultation to see if an Asset Protection Plan is right for you.

704-542-5499

¹ Beginning with benefits received after 1996.  Income tax treatment of accelerated death benefits under state or local law may differ.
² A policy loan or withdrawal will generally reduce values and death benefits.  If a policy lapses or is surrendered with a loan outstanding, the loan will be treated as taxable income in the current year, to the extent of gain in the policy.  Policies considered to be modified endowment contracts (MECs) are subject to special rules.