Wealth Preservation Solutions: The Tiers Of Asset Protection
By: Joe D. Lieberman, J.D., LL.M., Law Clerk, Morris Law Group - November 01, 2019
The theory behind wealth preservation is to move assets away from a potential creditor's reach. The ideal time to consider wealth preservation planning is before being sued or threatened with a suit and while the individual is solvent. At Morris Law Group, we employ a tiered asset protection approach to create a Wealth Preservation Solution that is unique to each client’s situation. Below are the asset protection tiers, starting at the simplest form:
- Retirement Benefits:
Qualified plans, which include 401k plans and profit-sharing plans, are protected from the claims of creditors by federal law, namely the Employee Retirement Income Security Act of 1974 (ERISA). This law sets the minimum standards for most voluntarily established retirement plans to provide protection from creditors for individuals in these plans. Individual Retirement Accounts (IRAs) also are creditor-protected under Florida law. However, you should check with the plan manager as to whether the particular retirement or profit sharing plan is "qualified" under one of those code sections. If not, it may be at risk to the claims of creditors.
- Umbrella Insurance:
Often referred to as supplemental insurance, umbrella insurance supplements other liability policies, such as auto, homeowners, or, depending on your provider, renters’ insurance. The purpose of umbrella insurance is to provide coverage resulting from any liability in excess of the amount covered by other standard insurance policies. Generally, the price of obtaining personal liability coverage from an umbrella policy is relatively low.
- Joint and Concurrent Ownership:
There are three forms of joint and concurrent ownership; tenancy in common, joint tenancy, and tenancy by the entirety.
- “Tenancy in Common" is ownership by two or more persons sharing only unity of possession. Each individual owner's interest in the property is freely transferable by that owner. There is no element of survivorship between the owners, and each tenant in common is free to transfer his interest during life or to devise his interest at death. An individual's interest in property held by a tenancy in common is freely attachable by creditors. This is an undesirable form of ownership if a primary goal is to protect assets from the reach of creditors.
- "Joint Tenancy" is ownership by persons who share an undivided interest in the asset. Following the death of a joint tenant, the surviving joint tenant becomes (as of the moment of the other's death) the owner of the entire interest in the asset. Creditors may also reach a joint tenant's share of an asset during the joint tenant's lifetime. This form of ownership should be avoided as the assets may be attached by the creditor of either party. This also applies when you are added as a joint account holder for a parent or other relative as a convenience.
- "Tenancy by the Entireties" is available only to a husband and wife. The general rule states that an asset held in a tenancy by the entireties is not reachable by the creditors of either spouse. However, if a husband and wife are jointly obligated on a debt, the creditor may reach entireties' property to satisfy the debt. (This is why most banks require a spouse's signature on unsecured promissory notes.) This form of ownership is the most desirable from a wealth preservation perspective, but it is obviously only available to persons who are currently married. To date, about half of the states (including Florida) recognize tenancy by the entireties. Please be advised that there have been two recent bankruptcy cases in Florida, a recent Michigan bankruptcy case and a United States Supreme Court case that has found that tenancy by the entireties property may be accessible by the creditors of one spouse.
- Entity Planning:
The Limited Liability Company ("LLC") is a more recent popular tool that has been used in the areas of wealth preservation and general estate planning due to lower filing fees and more flexibility in the way they are taxed. When properly structured, a member's assets in an LLC may be protected from his or her creditors. Generally, a creditor may attach a member’s interest in the LLC, but such attachment only allows the creditor a right to distributions from the LLC to the debtor member. There is no right to "liquidate" the member's interest to satisfy the debt. Moreover, the creditor may neither foreclose the member's interest, nor participate in the management of the LLC. In order to levy on (i.e., attach) a member’s interest, a creditor must resort to a cumbersome, expensive, and time-consuming proceeding called a "proceeding supplementary to execution," which involves a "mini-trial" to establish that creditor's right to a "charging lien" on the member’s interest. Additionally, there is an IRS ruling that states that if a creditor perfects a charging lien, the creditor must recognize the taxable income earned in the LLC and must pay taxes on their interest even if they have received no assets. For those reasons, most creditors will not usually pursue the charging lien.
- Wage Account:
Florida Statute 222.11 permits the wages of a head of a household to be protected from the claims of creditors, attachment and garnishment. A head of a household is defined as an individual who is providing more than 50 percent of the support of another individual. Case law has evolved where wages will fall within the statutory protection so long as it is pursuant to an employment agreement and deposited into a wage account. A wage account is a specific account, solely in the name of the employee, where only wages are deposited. This does not include corporate or partnership distributions. The wages will be exempt from claims for a period of six months after payment. No other names may be on the account; however, another may be added as a Power of Attorney. Regular monthly expenses should be paid from this account. The account should be swept on a quarterly basis and may be moved to other exempt assets to avoid creditors’ claims.
- Revocable Trust:
A Revocable Trust is a fundamental component of an estate plan. It is created by an individual (also known as the Grantor) during his or her lifetime, and can be revoked or amended by the Grantor at any time he or she is living and not incapacitated. While a Revocable Trust does not provide for current asset protection from the Grantor’s creditors, Morris Law Group can custom-design a Revocable Trust that includes generational spanning trusts to benefit your heirs, which would provide creditor protection for your heirs.
- Irrevocable Trust:
An individual may completely shield an asset from the claims of his or her creditors and remove assets from his or her taxable estate by placing an asset in an Irrevocable Trust (usually for the spouse and children). However, the individual will, by such transfer, lose ownership and control of the asset, as an Irrevocable Trust may not be set up for the Transferor's own benefit, and the Transferor may not serve as Trustee (with a few exceptions). Generally, an Irrevocable Trust will provide protection from attachment of trust assets by creditors of the trust beneficiary (called a "spendthrift clause").
- Domestic Asset Protection Trust (“DAPT”):
A relatively recent estate planning and wealth preservation technique available is a DAPT. Without delving into great detail, these trusts offer many of the same benefits that an Offshore Trust would offer, except that the client is not subjecting his or her assets to many of the risks associated with Offshore Trusts. To date, only a limited number of states have passed laws that make it difficult for a creditor to attach to the assets held in a qualified trust. A DAPT was designed to provide an alternative from offshore trusts, which up until now had been the only viable alternative for clients wishing to “judgment proof” themselves to the extent possible under the law. In general, state law that provides for the creation of a DAPT (the “Act”) provides that creditors who exist after the creation and funding of the trust cannot attach to the assets of the trust so long as the trust terms are consistent with the Act. Although the DAPT is irrevocable, it may be covered under the Act even if it empowers the Grantor to veto distributions, gives the Grantor a special testamentary power of appointment over the trust assets to state how the assets shall be distributed, and authorizes the Grantor to receive discretionary income and principal distributions. DAPTs may be structured to be a completed gift for federal gift tax purposes and to be excluded from the Grantor's gross estate for federal estate tax purposes. It may be effective for S-corporation shares and assets which you would otherwise own individually but fund in a DAPT in order to add an additional layer of protection between you and your assets.
- Offshore Trust:
An Offshore Trust, often called a Foreign Trust, is an Irrevocable Trust formed and governed under the laws of a foreign jurisdiction, unlike a DAPT, which is governed by U.S. law. Assets placed into the Offshore Trust are considered gifts and generally cannot be removed at a later date. When a creditor pursues the assets of an Offshore Trust, the creditor must post a bond to sure the trust, pay all legal fees unless they are successful, and such pursuit of a lawsuit is without a contingency fee agreement. While Offshore Trust protection currently remains stronger, DAPTs are less expensive and also provide considerable creditor protection.
The experienced attorneys of Morris Law Group create unique Wealth Preservation Solutions tailored to meet the needs of each client. However, once your solution is created, it is not complete. This is an ongoing process and the attorneys at Morris Law Group will continue oversight and maintenance of your Wealth Preservation Solution to make sure it is aligned with your changing goals and objectives.
Interested in learning more? Contact us today.
** Disclaimer Required by IRS Circular 230** Unless otherwise expressly approved in advance by the undersigned, any discussion of federal tax matters herein is not intended and cannot be used 1) to avoid penalties under the Federal tax laws, or 2) to promote, market or recommend to another party any transaction or tax-related matter addressed.