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JUST WHAT THE DOCTOR NEEDED:Multi-Tiered Systematic Approach For Implementing

Estate Planning and Asset Protection Services for Physicians and Dentists

Presented By:

Jeffrey R. Matsen, Attorney at Law

THE ADVISORS FORUMJanuary 20, 2010

©January 2010 by Jeffrey R. Matsen

Founder and Partner-In-Charge of Wealth Strategies Counsel , the Estate Planning and Business Transaction Department of Bohm, Matsen, Kegel & Aguilera, LLP, of Costa Mesa, California

A Southern California “Super Lawyer” (Los Angeles Magazine), with a national reputation for emphasizing wealth preservation for his high net worth and professional, accomplishment-driven clientele

Nationally recognized CLE Speaker in the areas of asset protection and LLCs

Areas of emphasis include: International and Domestic Asset Protection, Estate Planning & Wealth Preservation, Real Estate Acquisitions & Development, Business Formation & Transactions, Probate, and Trust Administration

Certified Business Appraiser by the National Society of Appraiser Specialists

Member, Society of Trust & Estate Practitioners (“STEP”) Fellow, Center of International Legal Studies Professor, Chapman University School of Law & Western State

University College of Law, in Business & Estate Planning Visiting faculty member, European law schools Awarded highest rating (“AV”) for competency and ethics, as

published in the prestigious international Martindale-Hubbell attorney directory

Awarded highest rating (“10/10 Superb” )by The Nationally Renowned Attorney Rating Service, ‘AVVO’

Recognized as one of “O.C.’s Top Lawyers” by OC METRO Magazine

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Understanding How Physicians Understanding How Physicians ThinkThink

Trusting and caring

Intelligent

Non Confrontational

Surgeons

Attitudes towards attorneys

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Know What Is Important to Know What Is Important to PhysiciansPhysicians

Asset Protection:

MDs have virtually no trust in the legal system

MDs have sacrificed heavily both financially and time wise and want to protect their wealth

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How To Obtain Physician How To Obtain Physician ClientsClients Use physicians’ personality traits and quirks to your

advantage

Accessibility

Saturdays, evenings, wherever and whenever the MD is available

Offer other services within your firm that are unique to physicians

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IntroductionIntroduction

It helps to have a systematic approach in analyzing and designing business, legal, tax and financial services for physicians, other professionals and business owners.

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There Is A NeedThere Is A Need

The Wealth Strategies Counsel Ladder of Success addresses this need.

Each step on the Ladder or Level strategy provides immediate Asset Protection and Estate Planning benefits.

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The Ladder of Success - Level One: The Business Entity

- Level Two: Basic Estate Planning - Level Three: Exemptions and

Marital Planning - Level Four: Liability Protected

Entities for Investment Assets - Level Five: Domestic Modular

Planning with Asset Protection Trust - Level Six: Offshore Modular

Planning with Asset Protection Trust - Level Seven: Advanced estate

Planning Techniques 

Reviewing and Implementing The Plan

Reviewing and Implementing The Plan

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Step One on the LadderStep One on the Ladder

The Operating Business Entity A first important decision a physician or business owner has to address is selecting the proper form of business entity.  Crucial, because of its on-going legal and tax consequences. Liability protection is the most important non-tax consideration. Liability shield protects against inside debts that are directed to and arise from the business operation itself. 

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Step One on the LadderStep One on the Ladder

Physicians, business owners and other professionals can choose between the following six types of entities: Sole Proprietorship

General Partnership

Limited Partnership

Corporation; C or S

Limited Liability Company

Limited Liability Partnership 

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Step One on the LadderStep One on the Ladder

 Most physicians also incorporate as a Professional Corporation because they can gain some benefit of protection even though physician may also have personal liability. Benefit of Professional Corporation is that it provides a shield against the liability of others involved in the professional process. The Professional Corporation may shield certain malpractice claims against other physicians, clinics or hospitals.

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Step Two on the LadderStep Two on the Ladder

 Basic Estate Planning This Level involves the set up and implementation of a Living Trust. Pour Over WillsDurable Powers of AttorneyHealthcare Powers of AttorneyMedical Record Release Authorization Forms Basic level that has to be addressed by almost everybody, but especially physicians, other professionals and business owners.

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Step Three on the LadderStep Three on the Ladder

 Bankruptcy Considerations, Exemptions and Marital Planning

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Any transfer within two years before the date of filing made with the actual intent to hinder, delay or defraud any present or future creditor may be voided by the Bankruptcy Court. 

Under the TALENT Amendment a special 10-year avoidance period exists for a transfer made with actual intent to hinder, delay or defraud a present or future creditor if the transfer was made by the debtor to a self-settled trust or similar device.

Debtor must have been domiciled for 730 days pre-petition before seeking state’s local exemption laws.

 Debtor’s homestead exemption is capped at $125,000 if he/she acquired residence less than 1,215 days pre-petition.

Bankruptcy ConsiderationsBankruptcy Considerations

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Qualified Retirement Plans and Qualified Retirement Plans and IRAsIRAs

Protection in Bankruptcy:Unlimited protection for qualified plans and

rollover IRAs

$1MM aggregate protection for IRAs

Protection outside of bankruptcy:

Unlimited protection for qualified plans*

Widely varying state law protections for IRAs

*Beware – Single Participant Plans

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Adequate InsuranceAdequate Insurance

Adequate Personal and Business Insurance is always the first line of defensePersonal Max out auto limits

Be sure homeowner’s insurance is sufficient

Always buy umbrella insurance

Business Be sure commercial general liability insurance is sufficient

Buy umbrella insurance

Consider as much professional liability insurance as client can reasonably afford

Consider employment practices insurance

Read the policies!

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ExemptionsExemptions

Homestead – limited in most states; substantial protection in a few states

Life Insurance – substantial protection of cash value in some states

Annuities – substantial protection of cash value in some states; protection of annuity payments in a few states

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Joint Ownership of PropertyJoint Ownership of Property

Tenancy in common and joint tenancy interests can be reached by creditors

Tenancy by the entirety interests cannot be reached by the creditors of one spouse, but this protection is available only in a handful of states, and usually only for real estate

Tenancy by the entirety protection ends when the marriage ends, whether by divorce or death

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Marital Property PlanningMarital Property Planning

Consider possibility of transmuting separate property or jointly held interest of professional spouse into separate property of non- working spouse

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Marital Property PlanningMarital Property Planning

Remember, what is good for the goose is good for the gander. What is good for asset protection planning will probably be good for divorce consequences.

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Marital Property PlanningMarital Property Planning

Generally, agreements between spouses may be subject to avoidance as a fraudulent conveyance.

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Step Four on the LadderStep Four on the Ladder

 Liability-protected entities for investment assets for either real estate or financial investments. LLC is entity of choice.

LLC provides a shield of liability against claims directed against assets within the LLC itself

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Inside CreditorsInside Creditors

Definition: Inside creditors are those creditors

whose claim is directed against the business operation or real estate which is operated and owned inside a business entity.

Creditor

Business Opsor

Real Estateof

LLC or LP

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Outside CreditorsOutside Creditors

Definition: Outside creditors are those creditors

whose claims arise outside the purview of the business entity and are generally asserted against the business or real estate owner personally.

CreditorLLC or LP Member/Partner

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Protecting Against Inside Protecting Against Inside Debts or ClaimsDebts or Claims

Operating Businesses:

C Corporations

S Corporations

Limited Liability Companies

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Real Estate assets need to be protected!

1. Insurance

2. LLCs or FLPs

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Warning!!!Warning!!!

Jointly owned real estate should generally not be held as individuals or in General Partnerships

Tremendous liability potential: You MUST consider LLCs or FLPs!

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Segregate Business AssetsSegregate Business Assets

Real estate should be held in LLC and leased to professional practice or business

Equipment can be held in LLC and leased to professional practice or business

Separate liability-protected entity for different business or practice functions and operations

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Historical Background

Limitations of Charging Order

Charging OrdersCharging Orders

LLC or LP

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Charging Order Distribution Charging Order Distribution SchemeScheme

Manager

Member/Partner 1 Member/Partner 2

Distributions Charging Order =

DistributionsCreditor

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Forum ShoppingForum Shopping

Why Forum Shop?

The Charging Order and the “Exclusive Remedy” Issue

“Most Favorable” Jurisdictions for LLCs

• Delaware• Alaska, New Jersey and Oklahoma • Arizona • Nevada• Wyoming

See “Merric and Comer,” Steve Leimberg’s Asset Protection Planning Newsletters #112 (8, Aug. ’07), #114 (28, Aug. ’07), #117 (19, Aug. ’07) and #127 (17, Apr. ’08)

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Step Five on the LadderStep Five on the Ladder

 Domestic Asset Protection Trust and Modular Planning Utilized with Such Trust

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Domestic Asset Protection TrustsDomestic Asset Protection Trusts

• Recently, several states have adopted legislation similar to various offshore jurisdictions

• Provide by statute various degrees of asset protection for a settlor’s interest as a beneficiary in a self-settled trust

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If Properly Set Up and MaintainedIf Properly Set Up and Maintained

Domestic Asset Protection Trust will be a significant barrier to creditors and will afford significant leverage to the debtor with respect to its negotiations with the creditor. 

This is especially true if the assets of the trust that need to be protected are domiciled in a state which is the domiciliary of the Asset Protect Trust.

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The problem is that the courts of the non-domiciliary state may not give effect to the Asset Protection features of the trust.

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However, there is no question that a significant degree of protection is afforded by utilizing the Domestic Asset Protection Trust especially when it comes to negotiating for a settlement with the creditor.

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It is recommended that a professional Trustee be utilized with respect to a Domestic Asset Protection Trust and, in fact, it may be mandatory in many instances.

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Eleven states now have legislation providing spendthrift protection to a settlor-beneficiary•Alaska•Delaware•Nevada•South Dakota•Missouri•Rhode Island•Utah•Tennessee•Wyoming•Oklahoma•New Hampshire

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Modular StructuringModular Structuring

The Modular Structure

DAPTor

FAPT

LLC#1 LLC#2

95% Member 95% Member

5% Member 5% Member

Real Property Liquid Investments

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Enforcement of Outside Creditors’ Claims Against the Modular Structure

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Step Six on the LadderStep Six on the Ladder

 The Offshore Asset Protection Trust and the Modular Planning that accompanies it

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Why Go Offshore?Why Go Offshore?

2.) International Connections

Relatives or Family Offshore Own Property Offshore Doing Business Offshore

1.) To set up your nest-egg and protect your liquid funds

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FOREIGN ASSET PROTECTION FOREIGN ASSET PROTECTION TRUSTSTRUSTS

A Foreign Asset Protection Trust is a trust that is set up in an offshore jurisdiction which has enabling trust legislation providing for substantial protection against creditors of the trustor

One of the greatest advantages of the Foreign Asset Protection is the fact that by its very nature any legal attack against its assets are transferred abroad to a different legal system

A foreign Trustee is necessary for the efficacy of the Foreign Asset Protection Trust

The biggest advantage in utilizing the Foreign Asset Protection Trust is that assets can be placed offshore beyond the jurisdiction of the U.S. courts

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FOREIGN ASSET PROTECTION FOREIGN ASSET PROTECTION TRUSTSTRUSTS

Some of the advantages of the Offshore Trusts are as follows:

a. Most foreign jurisdictions do not recognize U.S. judgments. This may force a new trial on the merits in the foreign situs country

b. Some foreign situs jurisdictions require a much more difficult burden of proof for a creditor to challenge asset transfers to Foreign Asset Protection Trusts

c. Some jurisdictions have a statute of limitations for challenging asset transfers to a trust that begins to run on the date of transfer

d. Fees and expenses in litigating in the foreign jurisdictions are going to be substantial thereby serving as a strong deterrent to foreign litigation

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FOREIGN ASSET PROTECTION FOREIGN ASSET PROTECTION TRUSTSTRUSTS

Takes the teeth out of a fraudulent conveyance charge because of the difficulty of the creditor to proceed against the transferee

 

Prevents attachment against the transferred asset 

Makes any type of an injunction against further disposition of assets extremely unlikely

 

Practically eliminates the appointment of a receiver over the transferred assets

 

Places the assets in a jurisdiction whose laws are favorable to debtors and hostile to creditors

 

 

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Modular StructuringModular Structuring

The Modular Structure

DAPTor

FAPT

LLC#1 LLC#2

95% Member 95% Member

5% Member 5% Member

Real Property Liquid Investments

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Enforcement of Outside Creditors’ Claims Against the Modular Structure

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Step Seven on the LadderStep Seven on the Ladder

 More sophisticated Estate and Asset Protection Planning Techniques  1. GRATS  2. Private Annuities 3. Sale to intentionally Defective Grantor Trust 4. CRTs 5. QPRTs 6. Private Placement Life Insurance 7. Captive Insurance Companies

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Putting It All Together

 1. Obtaining information 2. Coordinating with professional advisors 3. Design and implementation of plan 4. Climbing the Ladder 5. Sometimes you have to make the quick fix and then come back and finish everything else up 6. Overwhelm or underwhelm

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Case Study No. 1Case Study No. 1

Dr. Harry Hands is a licensed physician certified and specializing in cosmetic surgery. He was recently affiliated with a medical group but has since ventured out on his own. He has not incorporated but has a working relationship with a Surgery Center that is operated by a group of other plastic surgeons and anesthesiologists.

Dr. Hands is 42 years old and is married to his wife, Priscilla Prudent, who is 40. The couple have two minor children ages 13 and 10. Their personal financial statement reads as follows:

Assets: Residence, fair market value of $2,000,000 less $500,000 mortgage

Vacation Home: $1,500,000 fair market value

Residential Rental Property: $1,000,000 less $400,000 mortgage

Pension Plan: Harry: $350,000

IRA: Priscilla: $50,000

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Case Study No. 1 ContinuedCase Study No. 1 Continued

Securities at Morgan Stanley

Smith Barney: $500,000

Harry’s Professional Practice: $500,000 ($150,000 of which is equipment)

Liabilities: Business Line of Credit: $150,000

Credit Card Debt: $175,000

Dr. Hands and Pricilla contact you to assist them with Asset Protection Planning. Dr. Hands has recently had difficulty obtaining malpractice insurance because of previous litigation that has now been settled.

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Case Study No. 2Case Study No. 2 

Cindy Reed is a practicing vascular surgeon. She is in her early 40s and is contemplating marriage for the first time with Brett Nolan who is a high school teacher and Boys Basketball Coach. Brett has two minor children from a previous marriage and a very acrimonious relationship with his ex-wife. Cindy comes to you wanting not only a pre-nuptial, but a structure to protect her assets from both potential malpractice claims and attacks by Brett’s ex-wife. In general, what are some of the options and strategies that Cindy should consider? Most of Cindy’s assets are represented by her Pension Plan, her medical practice, and her personal residence and a Palm Desert Condo. Cindy and her brother, who is also a physician, will inherit substantial assets from their widowed mother.

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Case Study No. 3Case Study No. 3

Jose and Claudia Santos are in their late sixties. They are native Filipino, but are now naturalized US Citizens. They have been very successful in purchasing various real estate parcels in the Southern California area upon two of which they have constructed and now operate successful convalescent hospital operations. They have two adult children, a daughter and one son. The daughter and her husband are both involved in the convalescent hospital businesses. The son is a successful business litigation attorney. Jose and Claudia’s personal financial statement shows the following: 

Assets:•Residence: Fair market value $1,500,000, no mortgage•Palm Desert vacation condo: Fair market value $800,000, no mortgage•Commercial rental property (independent of convalescent hospital): Fair market value $3,000,000. Mortgage:

$1,000,000 

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Case Study No. 3 ContinuedCase Study No. 3 Continued

•Property in Philippines: Value $250,000• Liquid funds at HSBC: $5,000,000•Securities at Merrill Lynch: $2,000,000• Convalescent Hospital (“CH”) #1, Corporation: Value unknown• CH #2, Corporation: Value unknown• CH #3, Corporation: Value unknown•CH real estate #1: Value $3,500,000, mortgage $1,500,000• CH real estate #2: Value $4,750,000, mortgage $3,000,000• CH real estate #3: leased from 3rd party Jose and Claudia are interested in selling at least one and maybe two of the CHs within the next several months. Their daughter and son-in-law want to keep the third CH and eventually own and operate it. Jose and Claudia contact you for Asset Protection Planning.

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Thank you

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