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Asset Protection Basics

Asset Protection Basics. By Salvador C. Orofino of The Kleinfeld Law Firm www.kleinfeld.com. BUSINESS BASICS 101. In running any business, success is determined by focusing on the basics: Define your target market Analyze the competition Analyze your strengths and weaknesses

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Asset Protection Basics

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  1. Asset Protection Basics By Salvador C. Orofino of The Kleinfeld Law Firm www.kleinfeld.com

  2. BUSINESS BASICS 101 In running any business, success is determined by focusing on the basics: • Define your target market • Analyze the competition • Analyze your strengths and weaknesses • Select your strategy • Specify marketing methods that are cost effective • Determine Goals and monitor benchmarks

  3. SMALL TO MID-SIZE BUSINESSES “Although the majority of executives in charge of small business worry about being sued, fewer than one in five have asset protection plans in place. The reason? Most say it’s because “Asset Protection” has never been explained to them.” Source: Hannah Shaw Grove, managing director of Merrill Lynch Investment Managers – from Prince and Associates, 2003.

  4. HOW TO GET STARTED • IDENTIFY GOALS!: • Many owners of closely-held business have similar financial and estate planning goals. Among those typical are: • Maintain control • Preserve the Business • Tax savings • Creditor Protection • Live their chosen lifestyle • Flexibility • Create independent wealth • Benefit the Community

  5. Owners Reveal their Key Business Concerns Concerns: Family Corporate All Business Owners • Managing growth 83.7% 94.0% 87.4% • Managing costs 85.5% 87.5% 86.2% • Mitigating taxation 78.0% 93.1% 83.4% • Competition 74.4% 75.9% 75.0% • BEING SUED 66.9% 62.0% 65.2% Source: Prince & Associates, 2003

  6. Asset Protection and Estate Planning – an Integrationist’s Perspective • Asset Protection or Wealth Preservation • Estate Planning • Financial Planning

  7. The Asset Protection Continuum LIFE DEATH Asset Protection & Financial Planning Estate Planning Continued Tax Planning

  8. Privately Owned Businesses – The Universe In order to successfully create a solid wealth protection plan, you must first determine: • The Life Cycle of Your Business • Determine Your Level of Wealth Concentration in General a. Reasons for Continuing to Hold Your Business b. Reasons to Sell

  9. BASIC CASE STUDY THE HAWAIIN LITTLE SURF SHOP OF HORROR • JOINT AND SEVERAL LIABILITY The theory of Joint and Several Liability Reform States allows that each defendant in a legal action is responsible for the entire amount of damages that a plaintiff is seeking, regardless of their relative degree of responsibility for the damages involved. This has come to be known as the “Deep Pocket” rule.

  10. BASIC CASE STUDY CONTINUED . . . • Lessons learned: • Early planning is essential • Expanding theories of liability put business owners squarely in the Liability Exposure spotlight • Expect the unexpected and plan ahead using the integrationist approach – financial planning, asset protection and estate planning. • A complete estate plan reflects a sensible balance between asset protection, tax minimization and family wealth transfer considerations.

  11. ASSET PROTECTION – WHAT IS IT? • Asset protection is a combination of wealth protection, estate planning and financial planning • Definition: The use of various mechanisms available under one or several legal systems to protect one’s personal and corporate assets against seizure from a creditor or other adverse party, as well as to ensure the succession of those assets to future generations (financial and estate planning).

  12. WHY DO YOU NEED IT? • Expanding Theories of Liability • Concerns Over High Jury Awards • Traditional Corporate Veil Pierced More Than Ever Before • Deep Pocket Syndrome • Once You’ve Been Sued, You’ve Lost

  13. GOALS OF ASSET PROTECTION • Create a user-friendly plan • Deter Litigation • Integrate Estate and Financial Planning • Provide Built-In Incentives for early and cheap Settlement • Level the Litigation Playing Field • Enhance One’s Bargaining Position • Win the Game

  14. WHAT IS IT NOT? What Asset Protection is not: • Not an excuse or vehicle for evading taxes – largely tax neutral unless and until combined with estate planning and financial planning. • Not based on hiding assets • Not an excuse to defraud creditors (fraudulent conveyance)

  15. ASSET PROTECTION LIMITATIONS Major considerations: • Federal criminal statutes • State criminal statutes • Fraudulent conveyance (transfer) statutes • Establishment costs • Maintenance costs • Compliance costs • Freeze order by courts • Future litigation defense costs

  16. ASSET PROTECTION TOOLS The CORE Asset Protection Strategies: • Adequate insurance umbrellas • Fictitious name holding vehicles • Lease not buy • Leveraging down values • Corporate holding of assets • Use of multiple legal entities • Homestead for family residence • Exemption for wages • Exemption for annuity contracts • Exemption for private retirement plans

  17. THE CORE DOCUMENTS Basic Estate Planning Documents ALL Business Owners should have in place: • Last Will and Testament • Living Will (a.k.a. “Pour-Over Will) • Durable Health Care Power of Attorney • Durable General Power of Attorney

  18. THE CORE DOCUMENTS The CORE Estate Planning Techniques with Asset Protection Benefits: • Outright gifts • Gifts to an Irrevocable Spendthrift Trust • Charitable trusts • Qualified personal residence trusts • Limited powers of appointment • Qualified retirement plans and IRA’s • Bypass (Exemption) and Marital (QTIP) Trusts with spendthrift clauses • Disclaimers

  19. THE CORE DOCUMENTS The CORE Financial Planning Techniques with Asset Protection Benefits: • Tenancies by the Entirety for Property in a qualified jurisdiction • Family limited partnership • Limited liability company • Alaska, Delaware or Nevada Protection Trust • Foreign Irrevocable Trust • Civil Law Foundation • Nevis single member LLC

  20. CONCLUSION MAKE ASSET PROTECTION YOUR PRIORITY! THANK YOU Salvador C. Orofino, Esq. www.kleinfeld.com

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