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Asset Protection Strategies to help clients safeguard wealth

Presenter’s name Title


Topics for today

• Why consider an asset protection strategy?

• Clients at risk

• Strategies to help clients safeguard wealth

• Opportunities for your business

• Resources


Why asset protection?

• Prevalence of litigation in the U.S. • U.S. tort costs annually are approximately $250 billion • As of 2006, there are over 1 million lawyers in the United

States, more per capita than any other country

• 98% of all surgeons and over 90% of anesthesiologists are projected to face at least one medical malpractice claim

• Small businesses with less than $10 million in revenue bear 68% of business tort liability cost — $88 billion in total

Towers Perrin, “2007 Update on U.S. Tort Cost Trends”, New England Journal of Medicine, August 2011, U.S. Office of Management and Budget, 2006. Most recent data available.


Case examples: Could this happen to one of your clients?

• $6.2 million judgment against a doctor who prescribed antihistamines that caused the patient to have an auto accident — malpractice insurance did not cover the claim since the patient wasn’t suing, but instead it was the injured party who sued

• $932,000 against an elderly woman who bought a used car for her nephew who then injured another party in a car accident

• $27 million against a property owner for failure to provide better lighting when a tenant was shot and killed

Source: Asset Protection for Physicians and High-Risk Business Owners, Robert J. Mintz, ESQ., 2007.


Do you have clients at risk?

• High-net-worth and other high-risk clients • Doctors — especially surgeons and OB-GYN • Other professionals (attorneys, CPAs) • Real estate developers, rental property owners • Business owners — especially those with employees

• Elderly clients who are still driving or clients with teenage drivers living at home

• Homeowners — at risk for personal injury claims


Taking care of the basics

• Conduct an insurance “audit” • Consider increasing underlying liability coverages offered

through automobile and homeowner insurance policies • Make sure other insurance coverages, such as umbrella

and/or professional liability policies, are in place

• Apply for a homestead exemption (protection varies by state and only applies to personal residence)

• Be careful when re-titling assets

• Identify and correct any potential risks associated with property and real estate

• It is critical to implement a plan before anything happens


Using retirement accounts: ERISA vs. non-ERISA plans

• An important factor is whether or not the individual has applied for Chapter 7 federal bankruptcy protection

• ERISA plans offer full protection from creditors regardless of bankruptcy status

• 1992 Supreme Court decision — Shumate v. Patterson

• Non-ERISA plans (IRAs, 457 plans, many 403(b)s) receive federal creditor protection only if the owner is in chapter 7 bankruptcy

• However, many states grant comparable protection from creditors for IRAs and other retirement accounts


Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 FULL PROTECTION LIMITED PROTECTION • Rollover IRA accounts

• SEP IRA

• SIMPLE IRA

• 403(b)(7)

• Other non-ERISA accounts such as Individual 401(k)

• Traditional IRA and Roth IRA (up to $1 million)

• College savings programs (529 and Coverdell ESA)


Federal bankruptcy protection for 529s and Coverdell ESAs

• 100% of contributions made more than 720 days prior to a bankruptcy filing are excluded

• Up to $5,000 of contributions made more than one year and less than 720 days prior to bankruptcy filings are excluded

• Contributions made less than one year prior to bankruptcy filings are not excluded

• Accounts having the same beneficiary are aggregated

• UGMA/UTMA custodial accounts are deemed owned by the minor and are typically not subject to claims against the parents


Selecting the right ownership structure to limit liability

STRUCTURE CONSIDERATIONS Corporation (C Corp, S Corp)

• Principals do not bear personal liability for debts of the corporation • May be more complex and expensive to establish and maintain • Potential double taxation for C Corp structure, S Corp income flows

through to shareholders • S Corp limited to 100 shareholders and type of stock issued

Limited Liability Company (LLC), Limited Liability Partnership (LLP)

• Similar liability protection as corporations but in some cases better • If judgment is against LLC member or limited partner, the legal

remedy is generally a charging order where the ownership interest is protected

• Less complex to establish and maintain — not as many “formalities” as corporations such as directors meetings, written minutes, etc.

• LLCs and LLPs are flow-through entities for purposes of taxation


More on LLCs

• Adoption of LLC format began in 1970s and varies by state — popular choice for small businesses

• Convenient to maintain — flexible rules regarding the administration and operation of the business

• Income and deductions “flow through” directly to members and are reported on personal tax returns

• May be a means of achieving a level of financial privacy

• Professionals such as physicians generally cannot use the LLC form for their practices

• But they can establish an LLC to own certain underlying business assets such as real estate or medical equipment


Other advanced strategies for business owners or professionals

• Equipment and property leasing • Asset is owned by another entity (LLC, LLP, etc.) and

leased back to the company • Also may provide certain tax benefits by creating

a depreciation shelter

• Accounts receivable borrowing strategy • The objective is to strip out the equity by securing a loan

against the value of the accounts receivable • Loan proceeds are distributed to the business owner who

invests them into a protected asset such as a retirement plan, annuity contract, or life insurance


Real estate considerations

• Critical to insulate risky assets like real estate from other benign assets such as bank or stock accounts

• Real estate is a visible asset which may be sought after by potential creditors

• For rental properties consider using a trust, LLC, or limited partnership to contain liability within that particular asset

• Real estate developers should avoid being personally involved in projects

• Consider using a management company to administer projects


Insulating liability exposure: Using multiple LLCs

LLC #1 SUMMER RENTAL

COTTAGE

PERSONAL ASSETS Primary residence, bank and investment accounts, etc.

LLC #2

APARTMENT BUILDING

LLC #3

COMMERCIAL REAL ESTATE

Liability “event” affecting one property is contained from affecting other properties or personal assets


Trusts for asset protection

• Offshore trusts • Assets held in a trust established outside the jurisdiction

of U.S. courts • Several court cases reflect limitations on ability to protect assets • Can be complex and expensive to establish and maintain

• Domestic asset protection trusts • Relatively new and available in a few states • Self-settled trust (e.g., individual can be both the

settlor and grantor)

• Irrevocable trusts • Key is to have a spendthrift provision • State law precedent is a factor


Captive insurance for doctors and business owners

• Separate insurance company is formed to insure all or a portion of malpractice/liability risk • This may allow the medical practice or business to increase its deductible

on its existing policies, lower coverage limits, or — over time — transition all of the risk over to the newly formed entity

• The associated savings can be used to offset funding the new insurance company

• Additional benefits: Premiums to fund captive are deductible business expenses; funds held inside captive may accumulate over time and appreciate in value; captive assets are generally protected from creditors


Other strategies

• Tenancy by entirety • Certain states allow marital property to be titled as

“tenants by entirety,” which means creditors generally cannot take joint assets to pay for one spouse’s debts

• Life insurance and annuities • Many states provide protection from creditors • Some states may provide full protection while others

may only protect death benefit proceeds (e.g., the cash surrender value does not receive protection)


Opportunities for advisors

• Retirement plans and IRAs

• Insurance products and annuities

• 529 plans

• Referrals, prospecting, and practice differentiation • Partnerships with local attorneys • Asset protection important to HNW clients and prospects


Resources

• Putnam Investor education • “Asset Protection: Basic principles and strategies for

safeguarding your wealth”

• Internet • www.AssetProtectionBook.com • www.Horsesmouth.com • www.Leimbergservices.com

• Books: • “Asset Protection: Concepts and Strategies for Protecting

Your Wealth,” Jay Adkisson & Chris Riser • “Asset Protection for Physicians and High-Risk Business

owners,” Robert Mintz, Esq. • “Asset Protection Planning Guide,” Barry S. Engel


Contact Putnam

• Putnam Dealer Marketing Services 1-800-354-4000

• IRA and Retirement Hotline 1-888-661-7684

• Putnam website putnam.com/advisor

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