LLCs and FLPs in the new year….

The government has come up with a “permanent” estate tax solution. Does that mean you can get rid of your family limited partnerships and LLCs? What about your irrevocable trusts? There are a lot of good reasons for them!

Today we will hit on a few reasons why you should keep your family limited partnerships (or LLCs) you already have and consider adding them to your estate plan:

1) Asset protection: Entities like corporations, LLCs and limited partnerships add asset protection when proper business formalities are followed.

2) Management and control: A family entity can keep control of the family empire with mom and dad for as long as mom/dad want!

3) Income tax benefits: With the limited personal deductions available maybe you can receive income tax benefits from writing off expenses at the entity level rather than the personal level!?

There are more reasons, of course, so contact me to discuss.  -John

Advanced Estate Planning continues in the new year….

Our office did a lot of advanced estate planning late in the year. We helped clients give away tens of MILLIONS of dollars, without tax, through mediums such as family limited liability companies (FLPs), irrevocable trusts, and tenancy in common agreements.  Most experts thought the January 1, 2013 date would come with a lower gift and estate tax exemption. Maybe not the $1mil as the law was written but maybe something like $3mil or $3.5mil. However, yesterday Congress came up with a new law leaving the exemption at $5.12m, leaving portability in place and continuing the recent years of indexing the exemption. This is all good news for high net worth people. If you didn’t take action to do your estate plan, and you are high net worth, then NOW IS THE TIME! Take action now!  The law can change at any time. Most likely it will too! The government is likely, at some point, to nip at the corners. Getting rid of valuation discounts is one of the most likely places the government will attack in my opinion. Get it done while you can!  Oh ya, and happy new year!  -John

Don’t call it “asset protection”

I was just reading about a new California case that cut into the asset protection world a little bit.  It’s the case of Kilker v. Stillman, 2012 WL 5902348 (Cal.App. 4 Dist., Unpublished, Nov. 26, 2012).

Asset protection, in most cases, is simply estate or asset planning that happens to include some protection elements to it. For example, creating an irrevocable trust has some creditor protection elements to it but the purpose is NOT asset protection. Rather the purpose is tax planning generally.

If one sets up a trust for the purpose of avoiding creditors the Courts do not like that. In fact, it can be construed to be a fraudulent conveyance and the whole transaction undone.

The Kilker case involved a person that created a Nevada trust for asset protection and told everybody that was why he set it up. In fact, even on the witness stand, when being sued, that’s what he said.

Mr. Stillman also, it sounds, set up the trust himself rather than with the aid of an attorney. I don’t think I need to finish that thought for you.

So, set up irrevocable trusts, LLCs and other estate planning devices that have creditor and asset protection elements to them… but do NOT go around telling everybody that’s what you did!

If you want to talk about advanced ESTATE PLANNING let’s talk!  -John

Estate Planning with Family LLC’s (FLPs)

I met with a client recently with family assets that would be perfect for a family LLC or FLP.  The client owned three properties with their siblings. There was a valuable home and two commercial properties.  Currently each sibling owned 1/3 and thus they are a de facto “general partnership.”  This is probably not the ideal set up for many reasons but mainly liability protection and control issues if one should die or become incapacitated.

General partners or revocable “family trusts” provide no liability or asset protection for the creators of the entity. Thus all the assets are subject to creditors claims and lawsuits!

With a family LLC the family retains control at the sibling level (not kids or spouses) and they have liability protection. These are the crucial benefits of the LLC.

To take it a step further they could utilize multiple family LLC’s to create a diversified asset protection.  Some people use this system when they feel their properties have higher than average risk of liability.

Lastly, they can utilize individual revocable living trusts to hold the LLC interests. This can allow for distribution of the LLC interests at death. Of course, the living trusts would also include wills, financial powers of attorney, medical powers of attorney, and other ancillary documents.

In short, the use of family LLC’s and revocable living trusts can create a great deal of asset protection and estate planning to reduce tax, avoid probate, retain control, and create some asset protection.

If you find yourself in a similar situation to this client please contact us to discuss YOUR case!


Estate planning can provide asset protection

Estate planning is not just about giving your stuff away when you die. It’s about giving your stuff away when you die in the most efficient manner possible and providing the best protections allowable to your loved ones. This is the most simple asset protection available. Anybody that does not include some form of trust protection, for their loved ones, is missing the boat!

There is no simple way to create a trust for yourself that gives you asset protection. However, when you set up a trust up for a third party it can give them asset protection. That is, creditor protection or liability control or whatever you want to call it. This is estate planning 2.0 to use the current vernacular.

In the “old days” trusts were set up to be distributed to children at age 30 or 35 or some such randomly chosen age. Yes, 30 or 35 is far better than 18, for putting large amounts of wealth into the next generation’s hands.  However, what about putting that next generation in control at 30 or 35 BUT leave it in a trust that can give that child security and protection not otherwise afforded them if they received it free of trust? That is asset protection.

A properly drafted trust will allow your child or other loved one to do the following:

– Have complete discretion on investments;

– Have complete discretion on distributions during their lifetime;

– Have complete discretion on where the money goes when they die.

That sounds a lot like if the assets were not in trust and didn’t have creditor protection!? That’s right!  A properly drafted trust gives all the flexibility but with some protections around it.

The key is to work with an experienced estate planning attorney to get this done right!

Good luck with your family wealth planning!

Using Trusts for Asset Protection

Estate planning is more than planning for after death. You can use trusts, and other entities, to create asset protection.  The key is planning AHEAD. Do not wait until you have a problem. Take reasonable precautions by planning ahead.  You can use revocable trusts to create creditor protection for your kids.  You can use irrevocable trusts to create creditor protection for you and your spouse.  Let’s talk about some options for you.  -John

Easy Asset Protection

Some things you can do to protect your assets for your family are easy to do and some are very difficult.  Why not do the easy ones?

First of all you have to remember there are no simple magic trusts.  If there was a magic trust that insulated a person from creditors and liabilities most people would get it.  With asset protection you want to take steps to make you less of a target. You want to make it harder for creditors to get at your assets. It’s not going to a wall but rather you are placing hurdles. If you place enough hurdles you will be able to preserve your assets!

Here are a few easy things you can do:

1) FILE A HOMESTEAD EXEMPTION ON YOUR HOUSE –  Though it’s not a huge number a homestead exemption protects equity in your home. Just get the form and file with the county recorder’s office.

2) CHANGE THE NAME OF YOUR TRUST – Don’t name your trust in your name. Put it in some other generic name. Call it the “Main Street Trust” or the “Blue Jeans Trust” or the “ABC Trust.”  Call it anything but don’t put your name on the trust. Remember a lot of real estate databases that people use to look up targets for lawsuits are driven by names. If your name isn’t on your house it will be much harder to find!

3) SET UP A SPEND THRIFT TRUST FOR YOUR FAMILY – Though you can’t set up a magic trust for yourself you can set up a magic trust for your family.  Most people do this for their kids to receive their assets after death. However, you can do it during life also. There is certainly more trust involved when you do it during life as you have to “give away” the assets but you can build in some protections.

4) SET UP A CORPORATION OR LLC – A business provides good asset protection and is very easy to set up. If you have a legitimate business, rental properties, or other such assets set up a legal entity and run it like a true business entity!

5) SET UP AN IRREVOCABLE HOUSE TRUST – It’s one of the simplest irrevocable trusts there are. A Qualified Personal Residence Trust (“QPRT”) is a great way to protect a valuable home for your loved ones!

I have other tricks and tools. Let’s talk about how I can help protect YOUR assets!


Asset Protection Trusts After Mortensen

The federal bankruptcy Court recently came out with a big ruling in the asset protection world. It’s called the “Mortensen case” or more officially known as:

Battley v. Mortensen, Adv. D.Alaska, No. A09-90036-DMD, May 26, 2011 (Original Memorandum) and July 18, 2011 (Memorandum Denying Motion For Reconsideration).

In this case Mr. Mortensen set up an Alaskan asset protection trust in 2005.  He filed bankruptcy in 2009.  The trust was designed to protect his assets from creditors including bankruptcy. However, one has to remember there is a connection between the Federal bankruptcy laws and the state trust laws.  That is, you need to keep the Federal laws in mind when implimenting a state asset protection trust. In particular, Mr. Mortensen filed his bankruptcy without the aid of an attorney. This was likely his fatal flaw. This is because there is a well known federal bankruptcy law which is called a “clawback” and allows the bankruptcy trustee to claw back assets that were given away (including to a creditor protection trust) within 10 years. If Mr. Mortensen had hired an attorney they probably would have told him to wait a few years before filing for bankruptcy. If he had done that his asset protection trust would have protected him as he desired.

The key point is that YES domestic asset protections trusts are still a great tool for some clients to use.  However, this is for experienced estate planning lawyers to set up.  There are several states that have domestic asset protection trusts though California is not one of them. However, California residents can get protection from other state’s laws if they set their affairs up properly.

If you want to talk about domestic asset protection contact an experienced California estate planning lawyer like John Palley!  -John

P.S. The federal bankruptcy law referred to above, 11 U.S.C. section 548(e) provides in part:

(1) In addition to any transfer that the trustee may otherwise avoid, the trustee may avoid any transfer of an interest of the debtor in property that was made on or within 10 years before the date of the filing of the petition, if–

(A) such transfer was made to a self-settled trust or similar device;

(B) such transfer was by the debtor;

(C) the debtor is a beneficiary of such trust or similar device; and

(D) the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.

California Asset Protection

Let me start by saying there is no magic trust. As I often tell clients if there was a magic creditor protection trust we could all get one, stop paying for car insurance, and leave reckless lives. Not saying we all would but a lot of people would. Though there is no magic trust there are steps you can take to make your assets protected, at least to some degree, from creditors and liabilities.

The first step is PLAN AHEAD. You can not do asset protection when you have a lawsuit coming. That is when you know, or should know, you are about to get sued you can’t set up asset protection. Well, you can but it can easily be defeated as it would likely be construed as a fraudulent conveyance or fraudulent transfer.  When I speak of estate planning this would include giving assets away when you know you are in trouble. That’s generally not the best move to make. There are exceptions to this rule like OJ Simpson for example. It is my belief that OJ mortgaged his house in Brentwood to the greatest extent he could and then moved the money to a lawless island nation somewhere.  He also moved any other assets (stocks, bonds, cash) to the lawless island nation.  His NFL pension was already creditor protected so he didn’t have to worry about it.

The second step is to consider what’s practical for your assets and your situation. OJ was an extreme situation as he knew was in deep trouble and he probably had extensive assets. He probably spent many tens (if not hundreds) of thousands of dollars to set up the most complex asset protection he could.  As stated above he probably created an off-shore trust in some lawless island nation… or more likely multiple off-shore trusts at multiple lawless island nations. I point out them being lawless as you have to move control of your assets to a place that won’t honor the US laws… and thus how do you know they won’t just steal your assets from you!?  Obviously most people aren’t in as much trouble as OJ and probably don’t have as much in the way of assets. Thus, what’s practical for YOU?

I have discussed the topics before so today will just mention them briefly. In coming days I will give more details. Starting with the simplest to the most complex here are some things you can do with your estate planning to create creditor protection.

First, a revocable trust provides no actual creditor protection. However, what if that trust has a name other than your own name?  I have seen people name there trusts after a street, a family member, their maiden name, their dog, or just a generally pleasant name (i.e. The Oak Hills Trust). Again, this provides no actual protection but can make it harder for potential creditors to know what you have.

Second, an irrevocable life insurance trust. Don’t own your life insurance yourself. Instead put it into an “ILIT” which can create creditor protection and tax savings. Plus, it can create a totally protected trust for your spouse or loved one who receives the money after you die.

Third, a Qualified Personal Residence Trust. A “QPRT” is a dynamite way of protecting your house from creditors. It’s simple, not too expensive, and we believe provides solid protection for your personal residence or a non-rental vacation home.

Fourth, a Family Limited Liability Company or Family Limited Partnership.  A “FLiP” is a common vehicle to hold rental properties, other real estate and even stocks, bonds and investments. It’s a great way of muddying the waters!

There are more options but the above are the basic ones that can be done without too great of cost. They can be implamented by middle class families who are concerned about losing their hard earned assets. They are not impervious but they are better than doing nothing!

Contact me to discuss these and other options or visit our home page at

How simple is a simple trust?

I am preparing some notes for a presentation I am making next week to some CFP students at UC Davis Extension. I have taught the whole 10 week class, in estate planning,  before.  This time I will be a guest lecturer in the tax class for CFP students. I will talking about the taxation of trusts and estates. One chapter I will be lecturing on is entitled “Simple v. Complex Trusts.”  Now most of my clients do not consider these issues at least not by these terms. However, your attorney may discuss it with you or, at least, they will think about it when they set up your trust… or at least they should. Let’s discuss….

When you write a trust there are two main ways to handle the distribution of income from the trust. This is typically an issue for after you die and how money should be distributed to your children or other loved ones. The distribution can say that “all income shall be distributed” at least annually or that “all income may be distributed” at least annually.  Wait a minute you say… what’s the difference!?  “May” v. “shall” is the difference.

Yes, it’s really that simple.  The issue of simple v. complex has nothing to do with how many pages your trust is, or how much legalese is used, but rather these simple little words.  In a simple trust all income SHALL be distributed at least annually. By distributing all income the trustee files a 1041 fiduciary income tax return and sends out a K-1. The K-1 will show all income being attributed to the underlying beneficiary and will be reported on their 1040. In a complex trust the trustee has the option to distribute the income and thus the income is taxed within the trust at the trust tax rates.  These rates are higher than the individual income tax rates.

If the income tax rates are higher why would anybody do a complex trust? There are many reasons but most notably it provides better asset protection. If the trustee is required to distribute the income there is no asset protection for those distributions and thus the trustee could be required to distribute them to your creditors.  On the other hand, if the trustee has the option of distributing the income that means she has the option to NOT distribute the money and thus opt to NOT pay a creditor that is hounding you. There may be other reasons but to me this is the most significant.

Yes, it’s that simple!

Send me an email or call me with any questions, be it simple or complex!


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