Unlocking Opportunity Series: Honey I Shrunk the Balance Sheet – Asset Protection Planning for Business Owners

It is estimated that one lawsuit is filed every thirty seconds in the US, and about one in every ten adults are sued each year.

Organizing one’s affairs in advance to protect against risks that would otherwise threaten those assets – this includes protecting against the ramifications of an adverse judgment AND serving as a deterrent to litigation or, at least, an incentive for a quick and reasonable settlement.

Good afternoon, everyone. I wanna thank you for joining us today. My name is Joel Redmond, I'm a Director of Consulting at Key Family Wealth's Business Advisory Services Unit and it's with great pleasure that I'm presenting to you the next topic in our 2021 Unlocking Opportunity Series for business owners. And the name of this discussion is Honey I Shrunk the Balance Sheet: Asset Protection Planning for Business Owners. And joining me for today's discussion are Jeff Getty who's the Managing Director of our Family Wealth Consulting practice and Francis Brown, Senior Director of Consulting for our BAS practice. And Jeff and Francis bring a unique blend of expertise to our business owner clients, their deep legal tax and transaction experience qualify them any uniquely in their roles as managing and senior directors of BAS respectively. And as directors of the BAS Consulting Practice, Jeff, Francis and the rest of the team are committed to serving as owner advocates. And what that means is they provide unbiased advice and education to business owners wealth events of contemplated or actual transitions or transactions. And the BAS team has over $8 billion worth of cumulative transaction experience. And they work very hard to help owners avoid predictable mistakes and suboptimal business transition outcomes. Their overall goal is to provide owners with an understanding of the risks that threatened their personal and business and financial goals and share strategies to mitigate these risks. And this topic today ties very, very closely with that overall mandate, which is great. So we look forward to sharing timely, actionable information with you today. If you'd like to submit a question and we'll have some time toward the second half of this talk for Q&A, just type the question in the Q&A box at the lower right of your screen and click send. And we'll ask Jeff and Francis your questions in the order received. We'll answer as many as we can in the final few minutes of our discussion. So what's on the agenda? We're going to talk about the definition of asset protection, an overview of different asset protection strategies, examples of how those strategies work with one another and an overview of the various levels of asset protection that are out there for business owners. And so Jeff and Francis, let's start today's presentation with a brief definition of what you both mean when you say asset protection. And Brandon can we have the next slide?

Yeah, so thank you, Joel and good afternoon, everyone. I'm Jeff Getty, let's start with what it is not. Asset protection plan or true asset protection plan has nothing to do with hiding or concealing assets. I often tell clients when I meet them, when I first started speaking to them, if I'm sitting there across from someone and they start telling me about, they have a hidden account or assets off shore that no one knows about. And in my mind, I start thinking of them as a felon. They might not be convicted yet but they are more than likely a felon nonetheless. There's no such thing as hiding assets. Perhaps years and years ago it was possible to set up off shore hidden accounts. But today in particular, with the new reporting requirements, the excise tax requirements and general civil and criminal liabilities for hiding assets, it's just not a thing. That's I guess, in some corners, maybe the bad news. Realistically though, traditional good asset protection planning is really designed to set up a typically we talk about a series of barriers or fences to easy reach of assets to either deflect a claim or if there is a claim sitting out there to get a relatively quick and perhaps cheap settlement. So if you think about kind of a traditional scenario as an example, and this comes up quite frequently, where there might be, what's known as joint and several liability, right? So there's some sort of business transaction, Joel, Francis and myself are in a business deal and we all get put into a lawsuit by a third party. We were found at fault, more often than not the court's gonna order that the settlement or the judge, sorry, the judgment sitting out there is joint and severally liable, meaning that the plaintiff with a successful judgment can now collect from all of us, any two or any one of us, it's joint several, meaning that they can pick and choose who they wanna take it from. So in that scenario, if I've done absolutely no asset protection planning, I've ever owned in my own name individually but Joel and Francis have been to a presentation like this and have paid attention and created barriers and things around their assets, more likely than not the creditor is gonna go after me, satisfy their judgment and then I in turn have to go after them. So even though we're not making it impossible to reach those assets, we're making it easier to look somewhere else. The corollary or the other piece of that is if we all three of us, we engage in asset protection planning, we would start a dialogue or a conversation with that successful plaintiff and say, "Hey, look, here's all the things we've done to limit your ability to collect on us. Here's insurance that covers maybe 50% of let's say that claim. And the other 50%, it'll take you years and tens of thousand hours of litigation to try to break these structures, how about you just agree to take 10, 20, 30 cents on the dollar?" We talk asset protection planning. We're talking about creating barriers that give a high degree of certainty of outcome, where in more likely than not, we maintain a high level of control over those assets. And like I said, either discouraged lawsuits from the outset or encourage relatively quick and cheap settlements. That's how we view it, that's how we define it, that's how we view this area of practice. Francis, you have anything to add to that?

Yeah, just in terms of, I guess, a technical definition of asset protection planning would be to rearrange one's assets to minimize the chance of a loss from a future claim or a litigation. So to that extent, by engaging in, trying to appropriate or approve asset protection planning to Jeff's point, you're not hiding your assets, you're arranging them such that you're putting barriers in place to try and deflect or for somebody to settle. So you're not hiding the assets and Brandon could we go to the next slide? So asset protection planning, a key component of business and estate planning. So if you think of your basic estate planning as tier one planning, asset protection planning would be tier two and tier three and it's using structures. So trusts, irrevocable trusts, partnerships, LLCs to add layers of protection to your assets so that it'll be more difficult for somebody to get at them. So how to asset protection strategies work? Well let me back up, give you a little bit of history on them. So the concept of asset protection planning, you could say originally started back in England in the 1400s, where, I forget the House of Lancaster and Wilshire, Blackacre, I forget which one it was. If you were deemed to have been on the wrong side of the king, they could take your assets. And so they decided, well, rather than me on the assets, my land, I'll put them into trust. So it was a form of somewhat asset protection planning. It grew and gained a great deal of popularity over the centuries. In the early 20th century, it took root and the idea being by putting structures in place you make it harder for somebody to get into your wealth. So there's a hierarchy of creditors. That's something to keep in mind in terms of, well, who are you trying to protect your wealth from? First thing you need to do and every client is different. So there's nine different ways to develop an asset protection plan. And it involves looking at your individual situation. What are the assets that you have in place? What are the structures you have in place? And trying to figure out how do put barriers in place to prevent a litigant or claimant from getting to those assets. And so the hierarchy of creditors is a great place to start. One of the things that we tell, so Jeff and I, as practicing attorneys would have these conversations with clients saying asset protection isn't something that you do right after you got into a car accident. It's something that you need to do ahead of time before you have a claim. So the issue being you have an existing creditor or you're trying to protect wealth from future creditors? Obviously the preferable way to do it is to put a plan in place to protect assets from future creditors. So you don't know if you're gonna have a bankruptcy as opposed to you just got into a car accident. You know there's a potential claim coming and try and engage into asset protection planning. The compounded with the hierarchy of creditors, we'll wanna talk about the type of creditors. And so all creditors are not equally. At one end you've got the government, so the IRS, the federal government, state governments, their ability to get to your assets regardless of those structures will be greater than if it's say a general creditor from a car accident and in the middle of there I have family creditors. So were you trying to evade alimony from a former disgruntled spouse? Are you trying to get out from the ability to not provide for your family, for your underage children? So there's a hierarchy of creditors and saying, not all assets are treated the same and a creditor's ability to get those assets will be dependent upon who that creditor is. Last bullet item here is protecting assets versus income. So as we talk about some of the asset protection structures and the tools, we wanna be kind of cognizant of, are we talking about the asset itself and or are we talking about the income? 'Cause there are a lot of strategies out there promoted by various entities and people where they're saying that they have a true asset protection strategy and it's not really an asset protection strategy when we'll get into that. So we'll talk a little bit about charging orders and what those do and how those allow creditors to get access to the income, part of this is a waiting game. And if Jeff has a claim against me, can I wait him out? Ultimately getting him to say, "Okay, I'll take pennies on the dollar rather than trying to wait you out." And enhance, when we talk about effectiveness, I'm not able to get out from under the claim but I'm able to get to reduce the claim thereby the structure worked. Do you have anything you wanna add there?

Sure, just a little bit of a finer point on the type of creditor. 'Cause this is a super important point here. When you think about that hierarchy of creditors, I mean, for those of you have had the unfortunate circumstance of dealing with the IRS as a creditor, they're about as tough as it gets, right? They've got all the depth and the resources and the money and the federal Congress kind of behind them, pushing that forward, very difficult to negotiate or puts you in a very difficult bargaining position let alone structurally they'll pretty much punch through anything eventually. As you kind of move down that continuum, when you get out of the government, the reason why the government's the top end, top dog creditor out there is because they have the force, authority and power of the police, arguably behind them to enforce its action. And the court system would be like contractual obligations and contractual claims. And those aren't created the same, right? If you gonna do a contractual dispute with Google, they're a little better funded than the local gas station down the street where you had your car repaired. So I'm not gonna belabor the point too much but when we talk to people about structural components and how much what's the value prop of setting up these structures, which some of which can become very expensive and very complex to maintain, if really you're only trying to protect against a slip and fall liability or a fender bender, things like that, not probably worth your time. If instead, you're developing unusual technologies that you're trying to sell to a big multinational company that might not work or you're storing gasoline in underground containers next to a water source, which would give rise to a circular or environmental liability run by the state. Those have a different type of approach than we're putting more effort, money and energy into structures would make more sense. So we can probably move on from this at this point. But I do really like to focus clients and when we start this conversation, who's your likely creditor, how well-funded are they, how willing are they to go 10 rounds with you versus not? So next slide, please. So the next thing we really need to focus on, which is kind of a related to this issue is the types of risks and I'm not gonna read through this list. I usually talk to people about, look, there's kind of four general categories that liability can arise from with a whole bunch of sub points. So the high points here are you can have liability from contractual or tax obligations, right? Those are pretty evident. Francis mentioned this domestic relations issues, right? Whether it's divorce, alimony, child support, things like that, those things can give rise to a creditor action. You can end up in the world of torts, which can be both negligent and intentional acts. One thing people don't know and we'll probably talk about this in a few minutes about when we get talking about insurance coverages is in a tort action insurance companies typically view if you're liable for negligence, they're gonna write the check. If it's an intentional tort, you did it on purpose and that can be proven, that can be grounds for denying coverage. So this idea of a tort action as an intentional or negligent, both of which are covered. And then interestingly enough, in an area where people don't necessarily is liability can arise even if you personally have done no wrong. Two quick example of this would be under the legal definition and of legal terms will be vicarious liability, which are torts or actions for someone else did that you're vicariously liable. So a good example would be a business partner perhaps, or a parent child, minor child relationship. You can be my kid who's 16 driving, could be an accident and I could be liable, I would be liable for that because they are minor and I still have dominion control over them. They're under my policy, they're probably driving my vehicle. And then there's the concept of strict liability. There are certain types of things out there for which one is held strictly liable. Even if you can't prove that they did some negligent act and you're being. So there are certain types of products in the chain of production, for example, they have strict liability attached to them or the concept of times or certain types of real estate. What are known as a attractive nuisances can give rise to this issue. So if I own a lake and there's kids coming to my lake and swimming and I don't have any signs up, I don't have any barriers up to that lake even if I did, if God forbid something were to happen to some of those kids, you can be held strictly liable because the fact that it is an inherently dangerous condition could, if it is considered inherently dangerous condition. So again, not to belabor the point we can go on and on with examples but this concept of liability arising from some are easy to identify, right? I get into a contractual dispute, I do this, I do that. But sometimes it's something you don't even affirmatively do that can give rise to that liability and is important when you're kind of going through this and checking the boxes or someone's asking you the question, how big of an issue is this? They fully understand, develop with you. What else do you have going on that could give you liability even if it's not obvious at the outset. So next slide, please.

Well, actually Jeff, before we go on, can I chime in on a couple points, yeah, Brown can you go back there the direction. So closely aligned with asset protection planning, estate tax planning comes up, so one of the issues being if you can remove assets from your estate, are they typically then protected from your creditors? And so there's a close correlation between asset protection planning and estate planning. And one of the reasons why a lot of estate planning attorneys are at the forefront of some of these conversations. Jeff talked about liability and so there's two generic ways that I can talk about liability. So if you've got a business and the bulk of your wealth is in your business versus the bulk of your wealth outside of the business. So if a claim comes from something that your business has done, which is generated that my ability or the creditor's trying to get through your company, your corporate veil to your personal assets or vice versa, or you got in a car accident and hurt somebody. And they're trying through you individually into that asset. So you have to think about what's the source of the liability and where are the assets that you're trying to protect. Next slide. So when the plan, talked about this just a little bit but it makes sense to plan before there's a potential claim, hiding and moving assets is themed fraud. And the reason that this is such a big issue is because not only is it with the fraud for you as an individual who's doing the planning but it also falls on the shoulders of professionals, attorneys and the like. So the idea of being at your attorney's gotta verify that what you're telling them is true. They'll believe you but they need to verify it because the last thing that you can do for structured work is make yourself insolvent. So you're worth X millions of dollars and you transfer the bulk of your wealth into a structure where you don't have access to it. That is gonna be more likely than not deemed fraudulent. And you're not only moving those assets from your quote unquote, gross taxable estate but you're trying to hide those from creditors. And that's where you're hiding them from the car accident you had at the gas station versus the IRS. The IRS has ability to get to those assets and in turn invalidate that structure are gonna be greater than say the claimant from the gas station. Fraudulent conveyance, part of the same line of thinking. We'll talk a little bit ERISA plans here in the future but I'd heard a long time ago one of the senior attorneys said, "Noah, didn't wait for it to start raining before he started to build the arc." So here at the concept is don't wait until it's too late. Part of what we're trying to help you do is understand that there's a balancing act between how much you wanna spend to be able to put a structure in place versus the likelihood of that risk. Next slide.

Well, hold on one second, I wanna clear up, maybe not clear but make something very simple for folks to understand about fraudulent transfers and badges of fraud. There's a whole area of law that specializes in this concept of fraudulent transfers. I'll make the definition quite simple for everyone to get. After you make your transfers to your asset protection structures, do you continue to have the ability to meet all current and foreseeable claims or debts? So if you can answer that, yes, I have the cashflow to meet all my current and future identified obligations, you're in the clear, right? That's fine, if I've given away so much, I can't afford to make my car payments, my mortgage payments, things like that, that's where you definitely run into trouble. So a very simple test for most people is, "Hey, look at this, you're gonna move X number of dollars off your balance sheet into this. Can I still meet those obligations?" If you can still meet the obligations, you're probably good. If you can't, you almost certainly have a problem, make it very simple.

Great point, Brandon, next side, please. So levels of protection, there's several seven, excuse me, levels of protection that we're gonna just touch on. The first level that we'll often hear are exemption. So there's state and federal exemptions, which protect a certain amount of wealth as a base level. The problem with focusing solely on exemptions, if you're worth a lot of money, I'm using air quotes there, exemption planning is really only for those who plan to go into bankruptcy and typically most wealthy people don't plan to be in the bankruptcy. So while we'll hear this is the first level depending on your level of wealth, this is kind of the last catch level of protection to protect the bare minimum amount of wealth for you to be able to survive. And for most wealthy individuals, they've got sufficient more wealth than that. So the exemptions while useful, don't really help them out a lot. One click forward, please.

Yeah, so I'm gonna jump in on this one, let's talk about insurance. So this is the 800 pound elephant in the room. More often than not clients will ask. "Well, hey, if I have a rigorous property casualty policy and personal liability policies, with the max I can possibly get, as far as coverage goes and then I have an umbrella policy to cover off, aren't I in good shape?" And the answer is, of course you are. I mean, anytime you can effectively cost effectively lay off risk management to a third party, it's typically a good outcome. And insurance plays an integral central role to the asset protection structure. It's almost unheard of where someone is completely self-insured meaning they don't have a purchase of a third-party policy just 'cause it's good business sense, right? There's always something out there and there's always some mandates from the state or the government, for example. You can't drive without car insurance, I think in every state but one now in the United States. So insurance always plays a key role. Do you wanna cover just a couple issues that I find historically can be problematic with insurance? This first one hasn't been a big deal recently but carrier solvency can be a problem at times, right? So we've had some pretty spectacular insurance company failures in the history of the United States where people have been left, quote unquote, holding the bag 'cause there's no money left in the coffers and the company's in bankruptcy itself. So that could be a problem, kind of unlikely but worthwhile mentioning. The big ones we see is claims actually exceeding policy limits. This happens quite frequently actually, particularly in the more catastrophic cases, typical car insurance coverage, let's say, for example, might be $300,000 per injury, per occurrence, per person. So if you hit a car full of people, you might have coverage for 300,000 per person injury with a max cap on that accident of like a million dollars, right? So it's a bad enough accident, big issue. These issues become more complex and exasperated with business insurance policies, particularly if you're doing some sort of product that goes into the chain of production or goes into the chain of the commerce, where you can have a lot of people getting hurt with some pretty big liability. So policy limits can be a big issue and how you tie those in with your umbrella coverages or personal coverage can be a big one. And you also have the policy exclusions or exemptions, there's actually kind of a long list of things that are excluded or exempted. I already mentioned one purposeful acts are typically excluded. You are also excluded from things like punitive damages because they're designed to punish the individual who did it, who was responsible for it. And then we sometimes get into the classical kind of law school question, which I'm heard somewhere along the way actually happened of what policy is actually to cover what type of risk. And this is a complex way of saying, "Hey look, a lot of us during COVID probably were working at least part of our time from home. I work from home most of the time now. So if I'm in my home, my homeowner's policy would cover the slip and fall of someone on my walkways, for example." But what about if that person on my walkway was delivering a package for work, right? Somebody was sending me something for my job not for my personal use. Does that change the analysis? The answer is I don't know or it depends, right? Certainly someone could argue that that becomes a work-related issue not a personal related issue. So would that give rise to the ability of my personal carrier for my homeowners deny coverage. Yeah, it might, so there's a whole bunch and we usually spend a tad bit of time going through exclusions and exemptions with clients, bear in mind that they change year over year. So if a company has a particular category of extreme losses in a particularly year, in a particular geography, they tend to adjust the policies in that area to have specific exclusions or exemptions from coverage. So it's not something to lose sleep on on a daily basis but just understand as a general rule insurance has an integral very important role to the asset protection scenario but it in and of itself is not the hero for most people of means, right? If you don't have much to go after, sure, it covers the things you need to have cover, you move on. But if you've accumulated more than a couple of nickels to rub together, it probably probably some holes there that you might wanna consider filling in with the next levels of strategies that we're gonna go through, so Francis back to you.

Brandon, next click, please. So I don't recall if we mentioned this, so I'll reiterate it if I've mentioned it before but these levels build upon themselves. And as you can imagine, so I'm located in Colorado, Jeff's in Pennsylvania, we're doing this presentation across our national footprint and the laws of the various states are gonna be different. So what might work in Colorado might not work in Pennsylvania and vice versa as well as some of the other jurisdictions. So when we talk about the exemptions, the insurance at the professional entity formation, please keep in mind that this is really a matter of sitting down with somebody in your location to be able to understand what are the laws in your particular state and how would they be applied. Professional entity formation, so you're professional, you're a doctor, you're an attorney, accountant, somebody who has a professional designation. And you're gone out into business for yourself. The idea of being you wanna put your business into a legal entity and thereby you're insulating your assets outside of the business from any claims that might arise from you had a bad day in surgery and you're now being sued. As a young attorney one of the very first cases I worked on was a surgeon who was being sued by her contractor for $250,000 lawsuit over concrete. Now that was not something she had never ever contemplated. So again, you gotta think where's the potential claim coming from and what are the assets that you're protecting. She was worried about her professional practice, where then she got into a claim from activities outside of her day job. So professional entity formation, very basic. It's something that you wanna have in place as a first step or third step, so to speak. Next item. So creating leasing or real estate LLCs. Typically you do not wanna have real estate within the same business as your operating company. So the idea being, you put that a piece of real estate into a separate LLC, very common practice. The idea being you wanna do that with other assets of the business, instead of having it all in one business, you can create multiple levels of multiple entities to be able to diversify your assets, your business assets, amongst different LLCs, thereby providing a level of protection. Your operating business gets sued, all the other assets and the other entities are protected. Next item. So a family limited partnership and a family LLC, this kind of gets into a level two tier planning which we'll talk to on the next slide. In terms of some of the structures that you put in place in a family limited partnership is a pretty standard tool that's used throughout the industry to be able to create an entity where you can bifurcate parts of it, your trust owns some, your kid owns some, your spouse owns some thereby providing a level of protection, such that if there's a claim coming from outside from you personally doing something you've done, you're insulating those assets, making it more difficult, trying to force a settlement or even avoid that claim. Next item. Jeff back to you.

Yeah, I'm gonna jump in here. So the next two categories we're gonna talk about typically revolve around trust and trust type structures, both domestic and foreign. So things people do off shore, so to speak. And let's start off with a quick premise of not all trusts are created equal, right? So irrevocable trust, which can be a valuable estate planning or disability planning tool does absolutely nothing from an asset protection standpoint, right? So at the end of the day, if someone says, "Oh, well this is a trust that you can use to do X, Y, and Z." If they say asset protection and it's completely revocable, it doesn't work, right? Now, we're not really talking about these but generally the first level of asset protection structure is a third party trust settled for the benefit of another meaning that I've got three kids, I move a million dollars into a trust for the equal benefit of my three children, that trust as long as it's not a fraudulent conveyance, those assets I've taken off my balance sheet put in the trust for my kids benefit, not subject to the claims of my creditors because I no longer own it. It's put in a trust for the benefit of others. And for my three children, it is protected from their creditors, slip and fall liability on their homes, car accidents, ex spouses, whenever, those assets are protected. There's a little bit of nuance in some of state law. Certain states do have certain levels of exemptions for certain things. But as a general rule, if someone sets up an irrevocable trust for someone else's benefit, it is protected from the creditor claims that anybody as long as it stays inside the trust, right? As soon as distributions start to go outbound then a creditor can step in and receive those assets. So I can tell people when you have powers inside of trust and you have retained interest or interest you're giving to beneficiaries, anything the beneficiary uses or controls in their own name, distributions that come out, ability to request distributions without the trustee saying, "No, they have to give it to them." So at age 35, you get a third of the trust, anything like that, the creditor can step in and get, super important. What we're talking about here, domestic asset protection, trust is a slightly different animal. So what we see with domestic asset protection trusts is back in 1996-97, several US jurisdictions made the determination that they thought that individuals should be able to set up trusts for their own benefit in these jurisdictions to protect against future creditor claims. I was in Delaware when this occurred and Delaware is one of those jurisdictions that was one of the initial ones to allow it and it works exactly like this. I am going to quit my job here at Key and I'm going to be in the business of doing something very risky for which I could be sued on multiple levels. Let's say I'm going to do very aggressive investing on behalf of clients in very risky business ventures. Great idea, I can make a lot of money, my clients can make a lot of money but there's also a big potential for loss. I could under this domestic asset protection trust set up a trust that says, I'm gonna take this portion of my assets, let's say a million dollars, drop it into a trust, I'm a beneficiary of the trust, my spouse is a beneficiary of the trust, my three kids are beneficiaries of the trust. And I go forth with my business. As long as that trust is properly structured because it is an irrevocable trust and I am merely one of several beneficiaries for which I don't have control over distributions coming back to me, I have to ask my trustee down in Delaware to make a distribution to me if I need the money. If my business venture goes south, the assets transfer that trust but I'm not subject to those creditor claims. In essence, that's how it works. So it takes the standard trust created for another and allows you to add yourself as a beneficiary, certain rules parameters around that. But at the end of the day, this idea of a domestic asset protection trust or a self-settled asset protection trust or self-settled trusts, they all mean the same thing. They allow you to move your assets to one of these trusts in typically a jurisdiction other than where you live, certain jurisdictions have these, most do not. Pennsylvania does not, Colorado does not, New York does not, which is your three panelists here today but any one of us can set up a trust in Delaware and get this benefit. Great, they work well, again for a negotiated settlement, if you take a portion of your assets, 10%, 20%, whatever, they work exceptionally well. The next step beyond that or something to the next level. So one click forward, please, would be this offshore structure. So domestic asset protection trust were born out of a foreign asset protection trust. So the concept of this self-settled trust or asset protection trust was born in foreign jurisdictions. Exotic sounding places like the Cook Islands, the Jersey Islands, a lot of islands in this world where jurisdictions set up laws to make it attractive to move assets. Again, nobody was hiding anything back in the '80s and '90s with these structures, they were literally moving these into trust structures for which they would could carve out a portion of net worth and keep it against future creditor claims. So these are where the domestic, the US jurisdiction got a lot of their copied laws from. If you go even a step further beyond that, there are certain structures inside, particularly Europe that look like trusts but aren't technically trusts. So trusts are creature of what's known as common law. Which came out of what is now Great Britain, really historically came out of England. In continental Europe, they don't have trust typically they have these very exotic saying things like gestalts or angst, which both of which Germanic sounding 'cause they are Germanic, they're both in Lichtenstein for example, they're kind of a mix between a trust and a charitable foundation. They kind of work the same way in the sense you're moving assets for the benefit of yourself and for other pieces and parts. And the part the control is held by an independent third party that happens to reside in that jurisdiction. The concept's exactly the same, except the additional barrier here going on is if I have one of these trusts, a domestic trust and I get into trouble here in Pennsylvania and a creditor gets a judgment against me. It's a lot easier to go to Delaware and try to enforce the judgment against the trust that I created in Delaware. Now there's a whole bunch of barriers about, is that goes on in Delaware but at the end of the day, a creditor can drive from Pennsylvania to Delaware and start an action there in the court system is at least similar to PA. The benefit of being in an off shore structure is is that you have to take that same judgment the creditor got in my example of Pennsylvania and now fly to a foreign jurisdiction and try to enforce judgment. If it's not in a common law country, it's in a place like Liechtenstein or somewhere like that, that has these laws, not only is it not a common law issue, it's a civil law issue and those two areas of law are substantially different but there's a language barrier where I know for example, a client who does creditors rights work who sent an attorney over there to try to enforce a judgment. And the first thing they had to do is find a law firm in Lichtenstein that would take the case, they were all conflicted out, they had to go down to Germany to find a lawyer who could speak the language. And then they came in and tried to proceed against these assets, very, very difficult to do. So taking this back to the beginning, we talk about barriers, this would be at the highest level of barrier. So they've jumped through all these different steps you have. Well, they looked at the exemptions, they went through the insurance, they went through the entity structures, boom, boom, boom, boom, boom, they went through the domestic asset protection trust structures and now you have this big daddy of foreign asset protection trust that makes things very difficult to reach. That's the concept here folks, right? It's rare, some would look at this and say, "I just need it all, I'm gonna go right to level seven." Most clients who engage in sophisticated asset protection planning have pieces and parts from a lot of these different steps for specific assets to protect against specific types of claims. And only those with the most complex situations, the most amount to lose and to some extent, the highest riskiest ventures they're involved in would go all the way to a level seven or that final step to setting stuff off shore, setting stuff up off shore.

So really, Jeff, it's a combination of some of the different strategies, knowing that you've got the exemptions is the bare bone minimum amount. You've got some insurance to protect you from other claims, you've got your entities with the FLP, with the LLC. You've got these different entities in place to be able to make it more difficult. And one of the reasons people struggle with asset protection planning is most want access to that wealth at some point in time. A lot of asset protection planning is there for a rainy day, should that event ever happen. So in Jeff's example of taking a million dollars to put it into a domestic asset protection trust, Jeff, for somebody who would do that, I mean, granted this is a very simple example, what's the total net worth of somebody who's willing to do a million dollars into to a DAPT?

You usually starting to see that happen at about 10% of someone's underlying value. So you're probably looking at a million dollar trust and probably means they have a net worth of at least 10 that will be subject to creditor claims. So we're gonna get to this I know probably in a minute about risk of assets but if everything's held inside of qualified plans, they wouldn't do it but if they had $10 million liquid, they might take a million or 2 million dollars and drop it into a domestic asset protection trust as a rainy day strategy.

Thanks Brandon, next slide, please. So I'm gonna suggest something here because I'm looking at the list of Q&A and we've got several questions here. Can we sidebar quickly and jump into some Q&A and then come back to this if we have some time.

So let me take 10 seconds just to talk about it here. So what we're showing you here and we'll come back to it is there is a basic level of asset protection planning from a tier one or level one type plan where you get some protection not much through your own individual and your spouse's revocable trusts. You get another level through passing assets into an irrevocable trust or to multiple irrevocable trusts. Next slide.

Great, so Francis-

I'll take 10 more seconds on this one.

That's fine.

So what I've got here is the tier one from the prior slide and then we're showing the second tier at level of planning where you're using a family limited partnership. And one of the techniques is to be able to bifurcate the ownership between John and the ERAP trust. And you'll notice at the bottom, I've got cold asset LLC and I've got hot asset LLC. And by diversifying your assets, what's a hot asset versus a cold asset? Cold asset is an investment account. Something that where there's zero or low likelihood that there's gonna be a lawsuit coming from that. Hot asset might be an operating business where there is a potential, it could be a rental property where you're afraid of a claim being generated by somebody slipping and falling there by suing the LLC or the owner of that property which would be the LLC. So trying to bifurcate and diversify your assets to segregate them from potential claims that might be coming from different sources. Next slide. Actually, did you wanna just go straight to the questions? I'm sorry.

Yeah, lets-

Yeah, we got a few. And so just as a reminder, we already do have a few in queue, so thanks for the comment, Jeff. If you'd like to submit a question, just enter it, type the question in the Q&A box at the lower right hand corner of your screen and then just click send. And so I'll go to the first one and the first one is, how wealthy do I have to be to worry about asset protection planning? Are there hard lines or there lines of demarcation for where it starts and where it ends?

So Jeff, I'll start and you can chime in here. That is a really great question. I think part of that depends on your asset composition. To the extent excuse me, to the extent that you've got the bulk of your wealth tied up in businesses, it'll be hard for someone to a certain extent engage in asset protection planning for the wealth that's outside because you're gonna need that wealth outside to be able to live on. So Jeff, anything you wanna add to that?

I would say it's an issue of both composition of assets and then where you are in your personal business cycle or life cycle, right? So there's obviously if you're completely retired and you don't really do much but go out to eat once in a while, whatever, do a little bit of travel, your exposure level is relatively low, even if you're wealthy and you're liquid wealthy versus someone who's in their mid 30s growing their business, high risk ventures, there's really no hard and fast rules. I would say, when you start worrying about your ability to reset your life, if I lost everything tomorrow because of this type of liability and I'm 30 versus I'm 70, I can't at age 70 replace that wealth. Definitely that's a point in time where I be considering and looking at it but in and of itself, a quick audit or review with someone who knows what they're doing should be able to make you feel a lot better about what's going on just by going through exemptions and things like that. And saying, "Look, at the end of the day, even if everything went south, you still have this bucket that's protected through whatever it is you already have in place." You might be surprised how little was actually exposed.

Jeff, the other thing I'll chime in there. I used to talk with clients about when they're leaving wealth to heirs upon their passing. So you made the comment of a typical state plan will have assets going out of a trust at age 35, 40, 45, whatever to the beneficiaries. And I used to ask clients if you think $500,000 inheritance would be more or less important to your family members than say Ted Kennedy or somebody of significant means receiving 50 million? And they'd take the position that that 500,000 for your family member is gonna be more important because that's such a smaller amount but relative to their wealth, significant. And so there's asset protection planning that you can do for yourself but there's also asset protection planning that you can do for your heirs upon passing and leaving that wealth into an irrevocable trust is another form of asset protection planning to protect that wealth for your children should they get divorced or have credit or problems in the future. Joel, next question.

Great, thank you for that. So our next question is how well protected are my retirement plans from creditors?

Let me take a crack at this one. This is actually a somewhat complex answer but there's some decent rules around this and these rules have changed a little bit over time. So if any of you have known me long enough, I might've given you a different answer 10, 15, certainly 20 years ago. Let's start off with things that are really completely protected. ERISA plans for which you are a participant versus inherited, anything that's held inside an ERISA plan and ERISA is the acronym for the Employee Retirement Income Security Act of 1974, best known by most clients today is that act, which allows for the establishment of 401ks. It has other stuff but that's where 401ks were born as a retirement vehicle. Assets inside an ERISA plan are protected completely under federal law. The only time you see ERISA plans being broken to pay off creditor claims and almost any circumstances is upon divorce that the court can order an ERISA plan to be severed, right? This spouse have split, one worked, the other did not. The one that worked might have to give up some portion of their ERISA plan to their soon to be ex-spouse. So that's kind of at the top in the retirement plan category. ERISA plans that were converted to non-ERISA retirement accounts are also typically protected to the participant. That's a fancy way of me saying, I work at a company that has a 401k, I hit retirement age, I retire, I don't leave my 401k at the company, I rolled over into an individual retirement account or IRA. My IRA from my retirement account is protected under federal law. Before I go any further, the one kind of side word we take here is if I get into a bankruptcy proceeding and I choose, you get to choose when you do exemptions between state and federal exemptions. Some states, so if I go a bankruptcy and I choose my state exemptions, because they're worth more to me, that rollover IRA I had that was in my name or that came out of my 401k might be limited by certain state laws. Some states do a means test that says only the first million or 1,500,000 is protected. So that's the only time you really see an individual retirement account set up by the person out of an ERISA plan being attacked by successfully breached by a creditor claim. IRAs set up for the benefit of the recipient of rollover funds from a non-participant, which is a mouthful but really says same example. I have a 401k, I retired moving to an IRA, one of my children, his name is the beneficiary at IRA, I pass away, it's now a rollover IRA, it goes to the benefit of my kid who's the named beneficiary, that is not protected under federal law. You have to look to state law, most states have a little exemption but that exemption can be limited. So big mouthful way of saying for the most part retirement accounts are pretty well protected. You have to understand what is the nature of that protection, is it federal or state? And is it a qualified or a non-qualified retirement account? If it's a qualified, it's probably pretty well protected. If it's non-qualified, things like non-qualified deferred compensation arrangements in closely held businesses. That's a retirement account it's not gonna have that same old protection that a 401k or an IRA even would have. So Joel, generally protected but there are certain carve-outs and exceptions. It's worth sitting down with someone who really understands how these things work and have them walk through on a flow diagram, here's your different types of accounts, here's what they might become, here's where they lose protection, here's where they have protection.

Hey Jeff, you made a comment there about, you said rollover and I think you meant to say an inherited IRA. A rollover typically is gonna do it to yourself or your spouse would be qualified. So I just wanted to clarify that.

Yeah, you're right, I misspoke. It is not technically a rollover, it's an inherited IRA and you're right, that is the distinction, so thank you.

Thank you for that both of you. Yeah, so the next question is none of this came up when I worked on my estate plan with my attorney, should I be concerned?

So I'll take a crack at this, both Francis and I did a turn in private practice. And Francis hit on a little bit of this. The answer is it depends because your attorney might have been answering some of these questions or asking some of these questions in a way that wasn't quite as obvious. So as an example, Francis use the example of, hey, if you're leaving money to the benefit through your state in a trust for your kids benefit, if they suggested that it stays in trust throughout your kid's lifetime, they've made perhaps the assumption that you wanna keep those assets protected in case that child gets divorced and it would be protected against that future spouse. So it's possible in the concept of marching through a traditional estate plan, a lot of the asset protection ticks and tags you would run across as an attorney or being covered not necessarily directly asking, like we're kind of going through things and slicing and dicing things. So maybe I would say I would be more concerned if you talk to someone and did your estate plan and it was very pro forma. "Oh, here's kind of our standard packet and you get it, you look at it, it looks smart and you sign it and move on. And there wasn't any real conversation about how assets flow, when they come in and out of structures, none of that was discussed. I would probably be a little more concerned than if you kind of marched through and went through in great detail about your goals and objectives, talked about your kids, talked about the makeup for your assets, how things are titled, how things are owned. If you've been through all that, I would never say 100% it's it's covered but I wouldn't feel a lot better that it's probably been at least discussed in their mind or dissected in their mind, Francis.

Yeah, I totally agree there, I mean, I think attorneys have their own biases as well. And in terms of, if you've worked with somebody and you're in the low risk category, they may have asked you some basic questions and found out, now, this is on an issue. If you're a substantial well and or in a risky profession and they haven't had that conversation, then it's probably worth going back asking to have a more in-depth conversation. And they'll probably walk you through a lot of these same levels of protection and it's just a matter of... One of the things I've got on the slide here, picking the right tools and structure. So there's a cost of creation. And so you're trying to balance what's an effective structure versus do I really wanna spend 10, 20, 30, 50, $100,000? I'm putting all these structures in place that not only do you have to pay for the cost of formation but then there's the effectiveness, the cost over time of maintaining those structures. So there's the financial cost as well as your effort. One of my very first cases was with the lady who would come to me after her husband had passed and she wanted me to quote unquote, take apart the estate plan because it was too complicated. So husband had put it in place, it worked perfectly and now she's like, "I can't deal with it, it's too complicated, please take it apart." So there's both sides. I often talk about the continuum of complexity. That was a perfect example of the husband willing to put a complicated plan in place to achieve certain goals and benefits, was willing to give up control, he had what I call called effective control. A surviving spouse was like, "Nope, I don't wanna deal with the complexity." And she didn't have the same control issues that her husband did. Joel, next question.

Great, so probably is gonna the last one, just looking at time, we've got about seven minutes. So I have a CRT, isn't that already asset protected?

So I'll take a shot, I'll take a shot-

Go ahead Francis.

I'll let you chime in. So we were talking about this issue yesterday and CRT does provide a little bit of protection. So I've got less effective tools on here. The assets that go into the charitable remainder trust typically are gonna be protected. It's when the income comes out of that trust. So if the creditor has gotten a judgment against you and they're just waiting for that money to come out, because the CRT says it's gonna pay a certain percentage of the income out to the beneficiary. And if you're the lifetime beneficiary by putting assets into a CRT and that payment coming out, the creditor can just step into your shoes. I'll make one comment, this related to, we talked about charging orders before and that's a technique that is used to be able, that people will use with an LLC family limited partnership to be able to protect themselves from that income coming out. So a creditor gets a charging order and says, "Jeff, you've created this entity and I'm gonna sit here and wait for you to take distributions." I can't force liquidation of the asset, the liquidation of the entity, I can't get on the board, I can't make any decisions, all I can do is sit there and wait for the income to come out. And that's, again, that's a barrier so am I willing to wait 10, whatever number of years for Jeff to take a distribution so I can get paid or am I willing to settle? Jeff, you wanna chime on the charities?

Yeah, the way you answered certainly what I would consider the correct response for 99 times out of 100, 95 times out of 100, there is some case law out there that has allowed creditors to come in and actually break apart CRTs beyond just the charging order concept and waiting for income to flow through. There was a bankruptcy court opinion out of Minnesota a while ago, it was I think, around the early 2000s, where in the court allowed the trust to be broken, the charity got their piece upfront, so to speak. And the amount that the client was otherwise going to live off of with this income flow was completely distributed to meet creditor claim. There was a similar case out of Florida a few years later. That one actually was at the 11th Circuit. That's the bad news, so it is possible that you can have the trust broken and understand the way most people use CRUTs, generally is it's a retirement planning tool, right? Where they say, "Hey, I'm putting this money into this CRUT, I'm guaranteed income stream for the rest of my life and then when I'm gone, the remainder interest passes to a charity." So there's a big tax benefit play that's going on here as well. That whole structure fails if the trust is broken and paid off in a creditor claim. So it's a very, very, very bad result for clients. That's the bad news. The good news is it's a relatively easy fix. We mentioned before domestic asset protection trust jurisdictions, they are designed specifically to protect with self-settled trusts. A CRUT by definition is a self-settled trust area, here we go, those same cases that came up had the trust been in sited and administered under, for example, Delaware law, there would have more likely than not or almost certainly been a different result. The Delaware courts would have taken the position that, "Hey, we can't break this because it's under our self-settled trust law." So if you utilize CRUTs or if you're thinking about utilizing CRUT, there is a definite advantage in this context, asset protection, by using one of these self-settled trust or asset protection trust jurisdictions. The other piece you can pick up and this is well beyond the scope of this webinar. More often than not when clients are utilizing this strategy they would like a little more flexibility on the income flow out of the CRUT. So there's a version called a NIMCRUT, which stands for net income amount charitable remainder trust, which allows under certain state law, again, we utilize Delaware, 'cause it's particularly attractive where you can control that income flow more effectively than you can through a straight CRUT. So when we talk to clients about that particular strategy, there's a number of reasons why we tend to push that or gravitate towards our Delaware shop because you pick up this asset protection benefit, you pick up this income flow flexibility benefit which can be quite meaningful as well. And I guess that's not a bad place for us to kind of stop. I'll say this and my summary is at the end of the day it's like anything else, there's a lot of nuance here. And when you're talking to somebody or you're worried about this type of subject, I would highly encourage you to talk to someone who really understands the nuances here, because there can be significant differences between doing it this way versus that way. And the last thing you wanna do is walk out of someone's office and think I've done a good job, this is all controlled, I got where I need it to be and then low and behold something minor like the CRUT example, which would be a very dramatic and bad outcome. So talk to someone who knows what they're doing, who really understands these rules and can help match you through what is the best asset protection plan for you. And I will say this, most people out there claiming to be asset protection experts are one trick ponies. They're selling you one particular strategy. We pride ourselves in being strategy agnostic. Most of our clients they use a variety of things. We evaluate a variety of things and we don't care which one they pick or which one we help them pick. The idea is outcome oriented and if it's better to do this versus this, by all means, we'll do this. Francis any final thoughts here or Joel?

Well, I'll just wait one comment. I think I touched on it earlier. So our goal is to help our clients avoid what should've, could've been to them where they're looking backwards after the fact saying, "I didn't know that." And to Jeff's comment, a lot of attorneys have a particular bias or they've practiced a certain amount using certain tools and have not looked elsewhere. So to that extent we're happy to be a second year.

Great, thank you both very much. Brandon, can you push forward to the contact slide, please or one slide back, I think from this? So in conclusion, wanna thank everyone for attending today. And we typically conclude with a specific notion and that notion is we come across three different types of business owners in all the work that we do. Owners that make things happen, owners that watch things happen and then owners that wonder what happened. And the main goal is we don't want you to be that third type of owner. If you have additional questions after this, we weren't able to get to all of them unfortunately, please reach out to the person who invited you to this webinar or feel free to reach out to Francis or Jeff directly for more. Finally wanna remind everyone we have our next webinar in the series on August 19th at 3:00 p.m and I hope you'll be able to join Francis and myself. We're talking about insights into M&A evaluation. So once again, thank you very much and have a great day.

In this video workshop, Joel Redmond is joined by Managing Director of Family Wealth Consulting Jeffrey T. Getty and Senior Director of Family Wealth Consulting Francis Brown to discuss common at-risk assets and how you can protect them. Listen in as Joel, Jeff, and Francis lead an in-depth discussion about where the liability exposure comes from, which assets are protected by statute, insurance, or legal entity, and which assets could be exposed. After watching this video, you’ll walk away with a firm grasp of what these strategies will accomplish and how to evolve these elements of your plan as your net worth grows.

For more guidance on responding to and negotiating unsolicited offers for your business, contact our Business Advisory Services team.

Any opinions, projections, or recommendations contained herein are subject to change without notice and are not intended as individual investment advice.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice.

KeyBank does not provide legal advice.

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