Probate, Estate Planning & Trust Section - South Carolina Bar ...

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upon the death of either of them, then to the survivor of them, his or her heirs and assigns forever in fee simple…” Smith v.Cutler, 366 S.C. 546, 623 S.E.2d 644 (2005). Remember the homestead exemption. Pursuant to S.C. Code Ann. §15-41- 30(A)(1), a debtor’s interest in his/her “residence” (real property and personal property) up to a maximum of $50,000 in value (as indexed for inflation) is exempt from attachment by any court or bankruptcy proceeding. If a house is owned by a husband and wife and a claim is made against both of them, then the maximum exemption is $100,000. Encumbering real estate lowers the equity in the real estate. Steps must be taken to protect the loan proceeds. 9. Section 529 Plans. A Section 529 college savings tuition plan allows you to own an account under the plan for the benefit of your child’s post-secondary school education needs. States that provide a statutory creditor protection for Section 529 Plans include Alaska, Colorado, Maine, Ohio, Pennsylvania, Virginia and Wisconsin. You can frontload a Section 529 Plan with five years worth of annual exclusion gifts. This allows a person to contribute $65,000 in one year ($13,000 times five) without any gift tax consequences. Note: If a client takes advantage of the frontloading, the client cannot make any other annual exclusion annual gifts to or on behalf of the same beneficiary for five (5) years. 10. Life insurance. Any unmatured life insurance contract owned by a debtor (other than a credit life insurance contract) is exempt from attachment by a court or bankruptcy proceeding. S.C. Code Ann. §15-41-30(A)(8). There are two other statutes which protect life insurance. Proceeds of group life insurance contracts and benefits of accident and disability contracts are exempt from claims of the creditors of the insured. S.C. Code Ann. §§38-63-40(B) and (C). Also generally exempt from the creditors of the insured are proceeds and cash surrender values of life insurance payable to a beneficiary (other than the insured’s estate) in which such proceeds and cash surrender values are expressed to be for the primary benefit of the insured’s spouse, children or dependents. Amounts over $50,000 must meet more conditions. S.C. Code Ann. §38-63-40(A) and §38-65-90. Foreign Life Insurance. Several foreign jurisdictions have laws which expressly protect that jurisdiction’s insurance and annuity products from seizure by a client’s creditors. Two of the more well known of these foreign jurisdictions are Switzerland and the Bahamas. Chapter 6 of the Asset Protection Planning Guide, by Barry S. Engel (CCH 2005) focuses on the insurance and annuity statutes of Switzerland as a model. “The judgment of a court outside the insurance company’s resident jurisdiction will generally not be honored to the extent in conflict with these statutory protections.” Engel at 601.01. Independent proceedings to reach a Swiss policy have to be instituted in Switzerland and adjudicated under Swiss debt collection and bankruptcy laws—this is a sizeable impediment to a creditor. Engel at 625. 11. Corporations. Consider electing to be a “statutory close corporation” under our corporate code and an S corporation for tax purposes. It is arguably harder to “pierce the veil” of a statutory close corporation and an S corporation. See Hunting v. Elders, 359 S.C. 217, 597 WCSR 7084580v1 3
S.E.2d 803 (Ct.App. 2004). Also, if the business qualifies, consider electing to be a professional corporation since SC Code Ann. §43-19-200 limits who can be a shareholder in a PA. 12. Limited Liabilities Companies. About the only asset that you should resist placing in an LLC is a personal residence. Liquid assets (for example, bank and brokerage accounts) as well as real estate can be titled in the name of an LLC. A client owning a distributional interest in an LLC is in a better position vis-à-vis a creditor than a client owning assets in the client’s individual name. The creditor’s exclusive remedy is limited to a charging order or a foreclosure of the LLC interest. S.C. Code Ann. §33- 44-504(e). A charging order constitutes a lien on the judgment debtor’s distributional interest. S.C. Code Ann. §33-44-504(b). A charging order entitles the judgment creditor to whatever distributions would otherwise be due to the debtor whose interest is subject to the order. A charging order or foreclosure does not grant the creditor any management or voting rights. The creditor has no say in the timing or amount of those distributions. The charging order does not entitle the creditor to accelerate any distributions or to otherwise interfere with the management and activities of the legal entity. See Uniform Limited Partnership Act section 703, Comments. Although a debtor can not receive distributions, “debtors can frequently pull assets out of the entity using loans and guaranteed payments.” Uniform Limited Liability Company Act section 101(5) and Stein at page 25. “The foreclosure remedy is rarely useful to a creditor…the purchaser at the foreclosure sale has the rights of only a transferee.” Stein at page 25. S.C. Code Ann. §33-44- 504(b). A creditor does not want allocations of tax items with no corresponding distributions of cash. Recommended provisions for the LLC operating agreement: • Establish a multi-member LLC. • If you have any concern about making sure a creditor has no voting rights, use a manager run LLC making the potential debtor a non-manager member. • Make interests non-assignable, or assignable only with the consent of the other members. • Consider including a trigger that requires redemption of a member’s interest at a predetermined price in the event of a collection action. See S.C. Code Ann. §33-44-504( c)(3). • Eliminate a transferee’s right to request a judicial dissolution of the LLC pursuant to S.C. Code Ann. §33-44-801(5). • Rather than being forced to make distributions to members in accordance with their percentage interests, you can insert a clause directing the manager to withhold distributions from a debtor-member in the event of a charging order while continuing distributions to the other members. WCSR 7084580v1 4
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