Risk Management & Asset Protection - Nicholls State University

Risk Management&Asset ProtectionGlenn M. Terrones, JDAdvanced Planning ConsultantNEW YORK LIFE INSURANCE COMPANY470596 CV exp 3.2.14

Why Risk Management &Asset Protection?‣ Experience a Great Teacher‣Motivates Implementation of Holistic Planning‣ Planning Incomplete Without It‣ The Fact Finder

Before We Move On,A Quick Quiz‣Do you check the status of your portfoliosregularly?‣ Do you watch CNBC, CSPAN or CNN?‣ Do you follow Bernanke’s announcements?‣ Do you follow the value of the dollar, oil orother commodities?

WHY?

Beware the Popular Press‣Books, newspapers, websites, magazines, &talk shows generally target the average person‣If you are not the average person, then youmust be very careful not to take bad advice‣Affluent individuals are not average people!

The Right Advice isNOT Common Advice‣Affluent individuals are different!‣They require special attention!‣They don’t buy their planning“Off the Rack!”

Why You NeedAsset Protection‣ Traditional “Risk Management” Only Goes SoFar- Business Liability Verdicts Often Exceed $3,000,000- Coverage Becoming More Difficult‣ Your greatest potential economic risk:Probably Divorce‣ Protect Your Business Assets‣ Protect Your Personal Assets‣Do you have $5 million of liability insurance?Shield Yourself From The Legal Lottery!

What Asset Protection Is‣ Not About Hiding or Concealing‣ Objectives- Use the existing laws to protect yourself- High degree of certainty- Maintain control- Discourage lawsuits from the outset‣ Avoid Liability “Traps”- General Partnerships & Joint Ownerships‣ Possible “Non-solutions”- Inter-spousal Transfers- Alaskan Trusts & Domestic Asset Protection Trusts(DAPT)

Asset Protection Asa “Sliding Scale”Ultimate Shields(+4/+5)No Shield(-5/-1)Basic Shields(+1/+3)OwnNameJoint Corporations MultimemberOwnersDomesticLLC/LPsIrrevocableDomesticTrustsState &FederalExemptionsDebt OffshoreShield Entities &CICs

PART I: StatutoryAsset Protection‣ Pensions & IRAs- ERISA Plans Protected if Structured Properly- IRA Protection Varies State to State‣ Homestead Laws (Texas & Florida are best)‣ Life Insurance CSV & Annuities by State‣ Captive Insurance Companies (“CICs”)

Why Own a SmallInsurance Company?‣Deduct premiums for risks you are alreadycovering without deduction- Could be worth 40% in CA & NY- Worth no less than 35% in all other states for highestearners‣ The CIC’s reserves are asset-protected‣Reserves not ultimately used to pay claims aredistributed as dividends to the owners- Taxed at dividend rate of15% (or cap gain rate of 15%)

PART II: BUSINESSPROTECTION‣ Statutory Protections- ERISA Qualified Plans- Captive Insurance if Suitable‣ Multiple Entities Strategy‣ Income Stream Protection

How NOT toStructure BusinessBusiness Owner – Maximum VulnerabilityAll OwnersAll EmployeesAll LawsuitsCorporationAccountsReceivableReal EstateEquipment

Don’t Put Eggsin One Basket!‣ Multiple Entity Approach‣ Segregation Techniques- by Business Function- by Location- Asset Based Segregation for RealEstate, Valuable Equipment, IP, A/R’s

Limited Partnerships& LLCs are Key‣Limited Liability Companies (LLC) & LimitedPartnerships (LP) Protect Assets from Lawsuits‣Recommended for Real Estate Portfolio‣May Use for “Large” Investment Accounts‣ Offer Estate Planning Benefits

What Is A “Charging Order?”FLP* orFLLC*YourA$$ET$Doesn’t become partner (RULPA sec 27)Can’t touch AssetsGets no FLP voting rightsCan’t force FLP distributionsCharging OrderCREDITOR* Family Limited Partnership (FLP)* Family Limited Liability Corporation (FLLC)Creditor gets the K-1 (Rev. Ruling 77-137)on phantom income

How to Use LLC’sfor Business AssetsOperatingBusinessTransfers assets fromBusiness to LLCLease Assets backto BusinessLLCReal Estate*Assets are protected and there is a capacityfor income sharing with family members and/orestate planning with gifts of LLC interests

Protecting Equipment or IPEquipment/IPOperatingBusinessLicensePays RentLLCBusinessOwner & Family*Could reduce taxesthrough “bracketborrowing”

Riskiest, Overlooked Asset‣ Receivables & Revenue Stream- Cash within 60-120 days- Possibly the ONLY business asset- Most likely to be attached/taken in suit- Least commonly protected- Every partner’s actions threaten YOUR salary for thenext 2 – 4 months- Will cover in tax deductible asset protection

Business asFinancial FortressOperatingBusinessR/E, IP, Equipment LeasingReal EstateLLCA/Rs orRevenuesMaxQualifiedPlanEquipment/IPAdministration orFactoring Company

SegregateMultiple OperationsBusiness #1(Corp/LLC, etc)Business #2(Corp/LLC, etc)Business #3(Corp/LLC, etc)Equipment orBuilding LLCEquipment orBuilding LLCEquipment orBuilding LLC

PART III: How To ProtectYour Personal Assets‣ Statutory Protections- IRAs, Homestead, Life Insurance, Annuities (by StateStatute)‣ “Inside” Creditors- Isolates their lawsuit damage only to FLP/ LLC property‣ “Outside” Creditors- Usually cannot reach principal LLC/FLP assets- Creditors may be limited to “charging order” relief againstthe FLP interest (RULPA Sec. 703)

How to Use LLC’sfor Personal AssetsLLC/LP #1 LLC/LP #2 LLC/LP #3BrokerageAccountsReal EstateReal Estate orRec. Vehicles

Improving LLC &FLP Protection‣ Non-spouse Partners‣ Non-family Partners‣ True Capitalization‣ Non-asset Protection Purpose‣ FORMALITIES‣ No Fraudulent Conveyances

Protecting Your Home‣ Not in LLC/FLP- Mortgage call may be triggered- Capital gains exemption compromised‣ QPRT is tough sell- Giving it away to later pay rent‣ Debt Shield is best- Limit downside, improve cash flow, upside potential

The Debt ShieldHome, realestate, etc.Secured InterestClientInvestmentInterest $Loan $LLC/FLPBank

Equity In Real Estate –A Creditor’s Delight‣ Immediately available to satisfy judgment‣ Lien can be filed easily:‣ Debt shield Insulate Equity Possible Tax Arbitrage May Increase SavingsEquity$$$$$$$$

PART IV: Estate Planning& Creditor Protection‣ Living Trusts:- Decedent’s half (B-C) Irrevocable at 1 st Death & protected- Most living trusts distribute assets to heirs upon the heirattaining certain ages (for example: a third at age 30, halfof what’s left at 35, balance at 40)- This is inefficient for the purpose of protecting heirs frompotential divorcing spouses or judgment creditors- It is also inefficient for the purpose of protecting assetsfrom estate taxation for future generations

Irrevocable Trusts‣ Irrevocable Trusts‣Qualified Personal Residence Trust (QPRT)- Low Asset Value/Higher Interest Rates‣Intentional Defective Irrevocable Trust (IDIT) &Grantor Retained Annuity Trusts (GRAT)- Low Asset Value/Lower Interest Rates- Caveat: “Zeroed Out” GRATS‣ Irrevocable Life Insurance Trust (ILIT)- Protects Death Benefit from Creditors

FLPs /LLCs Are YourBridge to Estate Planning‣ In addition to asset protection, FLPs &LLCs form the basis of many estatetax reduction plans‣ Easy to Gift Fractional Interests‣ Valuation Discounts!!

The ComprehensiveAsset Protection Plan‣ Business:- Revenue Protection- LLC/LP for Real Estate, Equipment, I/P- Qualified Plan‣ Personal:- Exempt assets for investments- Homestead Exemption & Debt Shield for Residence- LLCs/FLPs 2d Home, Investment Real Estate, Portfolio- Living Trusts, ILITS, GRATS, QPRTS, etc.

‣ Lawsuit ProtectionTypical Client Plan- Revenue Protection- LLCs for business assets- Statutory Exemptions (Retirement Plans, Life, & Annuities)- LLCs or LPs for personal investments‣ Tax Strategies- Maximum Retirement Planning- Life Insurance Planning‣ Estate Analysis- Review of Life Insurance, Wills, Trusts- LLC/FLP, other estate reduction strategies if high net worth

Next Steps – ContactContact your localNew York Life agent

Any Questions?