Creditor Protection for Athletes

ASSET PROTECTION AND THE PROFESSIONAL ATHLETE Author: Charles D. Rubin, Esq. Managing Partner, Gutter Chaves Josepher Rubin Forman Fleisher P.A. Boca Raton, Florida 561-998-7847 c b @f r a x o – w . b ot . oso cm r i l i t . m w wr i n x l pto u n od a c u n ab g . Presentation to Sports Financial Advisors Association Conference November 8, 2008 © -------------------------------------------------CONTENTS 1. 2. 3. 4. SOURCES OF LIABILITY THREATS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 WHEN TO CONSIDER ASSET PROTECTION ISSUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 MISC. PLANNING CONCEPTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 GENERAL ASSET PROTECTION LADDER (IN ORDER OF APPROXIMATE PROTECTION, FROM WEAKEST TO STRONGEST) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34.1. In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34.2. Gifting of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -44.3. Joint Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -54.4. Use of Exemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -94.5. Foreign Life Insurance and Foreign Annuities . . . . . . . . . . . . . . . . -214.6. Liability Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -224.7. Limited Partnership and Limited Liability Companies . . . . . . . . . -234.8. Onshore/Domestic Trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -264.9. Hybrid Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -324.10. Stiftungs/Civil Foundations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -334.11. Offshore Trusts - See Below . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -344.12. Expatriation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -34OFFSHORE TRUSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -36ANCILLARY TECHNIQUES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -46FRAUDULENT TRANSFERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -47CONTEMPT OF COURT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -50PROTECTING THE PLANNER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -51- 5. 6. 7. 8. 9. ASSET PROTECTION AND THE PROFESSIONAL ATHLETE 1. SOURCES OF LIABILITY THREATS 1.1. 1.2. 1.3. 1.4. 1.5. 1.6. 1.7. 1.8. Automobile Accidents Divorce; Palimony Sexual Harrassment Contract Claims (Endorsements, Personal Appearances) Business Ventures Real Estate Dangerous Instrumentalities (boats, planes) Nuisance Suits Every business deal Estate planning Stand alone planning Well conceived plan elements A. B. C. D. 3.2. A. B. Protection provided Incentive for settlement (1) Roadblocks Tax-advantaged or tax neutral User friendly Bullet proof Limited protection against government or spousal adversaries (1) (2) C. D. E. 3.3. 3.4. (1) Including taxes Criminal sanction risks Not hiding assets 2. WHEN TO CONSIDER ASSET PROTECTION ISSUES 2.1. 2.2. 2.3. 3. MISC. PLANNING CONCEPTS & MAXIMS 3.1. What asset protection is not Not a ticket to evading existing obligations Real estate and business interests more difficult to protect Not a ticket to defraud Nest egg concept Integrate with estate planning and financial planning ASSET PROTECTION AND THE PROFESSIONAL ATHLETE 3.5. 3.6. 3.7. 3.8. 3.9. Planning must be done in advance One size does not fit all If the client can control his assets, so can his creditors - dangers of retained control Be careful that successors to assets do not have their own creditor problems or are not jointly liable for client's liabilities Bankruptcy aspects A. Discharge could be denied (1) (2) Discharge is a privilege, not a right Prepetition conversion into exempt assets may hinder discharge 3.10. Multi-jurisdictional issues A. B. C. D. Law where debtor resides Law where assets located Law of trust or other entity Other jurisdictional contacts Establish new business opportunities in protected vehicle Implement planning, but retain sufficient assets to meet current potential creditors 3.11. Planning When There Are Existing Creditor Problems A. B. 4. GENERAL ASSET PROTECTION LADDER (IN ORDER OF APPROXIMATE PROTECTION, FROM WEAKEST TO STRONGEST) 4.1. In General A. B. C. D. E. F. Ladder analogy Apply numerous levels of protection State law variations Total protection vs. negotiating position No magic bullet Multidisciplinary (legal, financial, accounting, practical business) (1) G. H. IRS Need to plan BEFORE liability event, and while solvent Legal - Business, contract, corporate/partnership, tax, estate planning, bankruptcy -3- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE 4.2. Gifting of Assets A. B. C. Description (1) Theory (1) (1) (2) D. If I don't own it, my creditors can't reach it May coincide with estate and tax planning Transfers to citizen spouses can be made without gift tax consequences Recipient may have creditor problems of their own Recipient may waste the assets Gift taxes (a) (b) (c) (4) (5) On original transfer On transfer back if funds needed by donor Available exemptions Advantages Give away assets now. Disadvantages (1) (2) (3) Loss of control of assets, including investment gains and profits of same Gifts to spouses (a) (b) (c) (d) Spouse may have own creditor problems Some jurisdictions may treat as nonmarital property in a divorce, and other loss of control in divorce Creditors may assert "resulting trust" where donor benefits from transferred assets Tax limits on gifts to noncitizen spouses (6) (7) (8) (9) (10) Loss of step-up in basis on death Where accommodation gift, donor may feel the need to perjure himself if testifying as to who really controls the assets Leaves donors with less assets for own support and future unforeseen circumstances Recipient may lose control through bankruptcy or marriage of recipient Potential change in character of relationship with donee - e.g., a -4- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE "falling out" (11) 4.3. A. B. Subject to fraudulent conveyance challenges Joint Property Description (1) (1) (2) (3) (4) C. Own property jointly with others Low effectiveness Works only with separate debts State law dependent Types (tenancy in common, tenancy with right of survivorship, tenancy by the entireties) Liquid assets - little asset protection since easily divided or partitioned Unimproved real estate - little asset protection, especially if easily subdivided Improved real property and other intangibles (a) (b) (4) Where partition would impact value of underlying property, courts may be hesitant to partition However, creditors can usually still foreclose on the debtor's interest In General Nonsurvivorship Tenancies - Types of Property (1) (2) (3) Where value of property would be diminished upon severance, this may provide some slight negotiating advantage to the debtor vis-a-vis the creditor A joint tenant whose interest is with right of survivorship has an interest that is subject to execution on a judgment lien. E.g.,McDowell v. Trailer Ranch, Inc., 421 So. 2d 751, 1982 Fla. App. LEXIS 22094 (Fla. Dist. Ct. App. 4th Dist. 1982). (a) (b) Therefore, minimal protection only And if nondebtor joint tenant predeceases the debtor joint tenant, the entire property will transfer to the debtor joint tenant and be exposed to creditor D. Joint tenants with Right of Survivorship (1) (2) Upon foreclosure, converts to tenancy in common -5- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE (3) (4) E. Where is only a lien on the debtor's interest, if the debtor dies the property may transfer to the nondebtor joint tenant free of the lien Creation can create a taxable gift, depending on the type of asset involved and consideration provided by the parties General Principles (a) A joint tenant whose interest is by the entireties does not have an interest that is subject to execution on a judgment lien. E.g., Neu v. Andrews, 528 So. 2d 1278, 1988 Fla. App. LEXIS 3334, 13 Fla. L. Weekly 1763 (Fla. Dist. Ct. App. 4th Dist. 1988). May exist in both personal and real property ! But some states may limit only to real property Tenancy by Entireties (1) (b) (2) Advantages (a) (b) (c) (d) Allows retained control Third party title holders not involved Marital deduction generally available ! caution required for noncitizen recipient spouses If transfer of property into TBE property was not fraudulent, transfers out of TBE property not subject to Florida fraudulent conveyance statute ! UFTA and Florida version of UFTA does not consider TBE property an "asset" " “] [ ninterest in property held in tenancy by the a entireties to the extent it is not subject to process by a creditor holding a claim against only one tenant." [Fla.Stats. § 726.102(2)(c)] # However, if creditor can show that the TBE property was acquired with fraudulently acquired funds, then the TBE property will be an asset for fraudulent conveyances out of TBE property [Ming Properties, Inc. v. Stardust Marine S.A., 741 So. 2d 554, 556 (Fla. 4th DCA 1999)] (3) Disadvantages (a) Client may not want to involve other spouse in ownership of -6- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE assets (b) If nondebtor spouse predeceases debtor spouse, property will be transferred back to debtor spouse and potentially into reach of his or her creditors ! (c) (d) (e) Similarly, divorce will terminate protection Does not provide protection against joint liabilities of spouses Income from the property may be treated as separate property of the spouses Can result in higher estate taxes ! Excessive utilization will lead to underfunding of unified credit shelter trust at first death between the spouses, and thus wasting a portion of the unified credit of the first spouse to die " disclaimer planning may help in this regard (f) Still potentially subject to fraudulent conveyance arguments if conveyance into TBE property was fraudulent ! Ming Properties, Inc. v. Stardust Marine S.A., 741 So. 2d 554, 556 (Fla. 4th DCA 1999) (holding that under section 726.102(2)(c), the creditor has the initial burden of proving that a tenancy by the entireties property was obtained with fraudulently acquired funds), review denied, 767 So. 2d 459 (Fla.2000) (4) Creation (a) Required Unities ! (1) unity of possession (joint ownership and control); (2) unity of interest (the interests in the account must be identical); (3) unity of title (the interests must have originated in the same instrument); (4) unity of time (the interests must have commenced simultaneously); (5) survivorship; and (6) unity of marriage (the parties must be married at the time the property became titled in their joint names). Real property titled in the name of both spouses is presumptively considered to be a tenancy by the entireties as long as the other unities are established [Beal Bank, SSB v. Almand and Associates, 780 So. 2d 45 (Fla. 2001)] -7- (b) Real Property ! ASSET PROTECTION AND THE PROFESSIONAL ATHLETE (c) Personalty ! Florida law previously required that in addition to establishing the required unities, the intent of the spouses to establish ownership as tenants by the entireties must further be proved (with the burden of proof on the spouses) This difference in treatment between personalty and real property was changed by the Florida Supreme Court in 2001. Beal Bank, SSB v. Almand and Associates, 780 So. 2d 45 (Fla. 2001) expressly reversed the presumption " "as between the debtor and a third-party creditor (other than the financial institution into which the deposits have been made), if the signature card of the account does not expressly disclaim the tenancy by the entireties form of ownership, a presumption arises that a bank account titled in the names of both spouses is held as a tenancy by the entireties as long as the account is established by husband and wife in accordance with the unities of possession, interest, title, and time and with right of survivorship." [Beal Bank, SSB v. Almand and Associates, 780 So. 2d 45 (Fla. 2001)] # "The presumption we adopt is a presumption affecting the burden of proof pursuant to section 90.304, Florida Statutes (2000), thus shifting the burden to the creditor to prove by a preponderance of evidence [FN19] that a tenancy by the entireties *59 was not created." [Id. at 58] ! ! Fla.Stats. §655.79(1) now provides that for bank accounts “ n deposit or account made in the name Ay of two persons who are husband and wife shall be considered a tenancy by the entirety unless otherwise seie i w in. pc i n ri ” fd tg In U.S. v. Craft (U.S. Supreme Court 2002), U.S. Supreme Court held that IRS could reach husband-taxpayer's interest in entireties property for hsadsa ol aos ubn’t b gt n x i i -8- (d) IRS Issues ! ASSET PROTECTION AND THE PROFESSIONAL ATHLETE 4.4. Use of Exemptions A. Moving From State to State (1) Can be done, to garner benefits of more generous exemptions, but some exemptions subject to federal bankruptcy residency requirements Typical circumstances where state exemptions will not apply (a) (b) (c) (d) (e) B. (1) Tax collection Alimony & child support Purchase money creditors Mehn ’ad a r l a’ln cai s n m t im nsi s c ea e Debts for improvements (2) Federal Exemptions Bankruptcy Code (a) Opt out ! ! States can opt out of exemptions and apply solely their own If states have not opted out of Bankruptcy Code exemptions, a debtor may choose to exempt property either: " " U dr akut C d’ee p oso ne B nrp y oe xm t n,r c s i Under tes t l ee p os fh db r h t e a xm t n o t et ’ a w i e os domicile, subject to minimum days of residence requirements for certain types of exemptions ! Other than limits on the homestead exemption and some residency requirements for state exemptions, federal law does not limit the generosity or lack of it with which states may define exemptions The debtor's aggregate interest, not to exceed $18,450 (adjusted for inflation) in value, in real property or personal property that the debtor or a dependent of the debtor uses as a residence, in a cooperative that owns property that the debtor or a dependent of the debtor uses as a residence, or in a burial plot for the debtor or a dependent of the debtor. The debtor's interest, not to exceed $2,950 (adjusted -9- (b) Principal Bankruptcy Code exemptions (§522(d)) ! ! ASSET PROTECTION AND THE PROFESSIONAL ATHLETE for inflation) in one motor vehicle. ! The debtor's interest, not to exceed $400 (adjusted for inflation) in value in any particular item or $$9,850 (adjusted for inflation) in aggregate value, in household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments, that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor. The debtor's aggregate interest, not to exceed $1,225 (adjusted for inflation) in value, in jewelry held primarily for the personal, family, or household use of the debtor or a dependent of the debtor. The debtor's aggregate interest, not to exceed $1,850 (adjusted for inflation) in value, in any implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor. Any unmatured life insurance contract owned by the debtor, other than a credit life insurance contract. The debtor's aggregate interest, not to exceed in value $9,850 (adjusted for inflation) in any accrued dividend or interest under life insurance contract. Professionally prescribed health aids for the debtor or a dependent of the debtor. (10) The debtor's right to receive--(A) a social security benefit, unemployment compensation, or a local public assistance benefit; (B) a veterans' benefit; (C) a disability, illness, or unemployment benefit; (D) alimony, support, or separate maintenance, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor; (E) a payment under a stock bonus, pension, profitsharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor (with exceptions) Retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of -10- ! ! ! ! ! ! ! ASSET PROTECTION AND THE PROFESSIONAL ATHLETE the Internal Revenue Code of 1986. (2) ERISA Plans ! What plans are protected? " Plan must be subject to ERISA # 401(k) plans, profit-sharing plans, money purchase pension plans, Keogh, target benefit plans, defined benefit plans, and related plans ERISA definition is broader than the tax definition ERISA - a plan that provides retirement income [ERISA § 3(2), 29 USCA § 1002(2)] But spendthrift protection excludes plans covering only an individual owner and his or her spouse # # # " " Plan must be tax-qualified under Code § 401(a) Plan must include an antialienation provision ! Protection " " Creditor's cannot reach the beneficiary's interest while it is not in payout status If in payout status, creditor cannot obtain an order directing payment to the creditor # Absent an applicable state retirement plan exemption statute, distributions in the hands of the participant can be reached by creditors, even if in a segregated account Whether state statute will provide protection to distributions depends on whether the statute is preempted and whether it specifically mentions protecting distributions # (b) Supercreditors ! Certain creditors can overcome creditor protection aspects " " IRS Spouses (for property settlement obligations, child support obligations, and maintenance) ! The plan itself [ERISA § 206(D)(4) & (5), Code § -11- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE 401(a)(13)(c)] (c) Non-ERISA Plans ! IRAs, nonqualified plans (e.g., special deferred compensation plans, phantom stock plans), SEP plans, single-owner qualified plans under Treas. Regs. § 1.401-12 Protection provided solely by and generally subject to state law protections (but see 11 USC § 522(d)(10)(E) as to bankruptcy and IRAs, SEPS, and single-owner qualified plans) " IRA protections limited to $1 million under 2005 Act. ! (d) Welfare Benefit Plans ! ! ! Technically, not a "retirement" plan since provide health, vacation, training, or legal benefits Are covered by ERISA [ERISA § 3(1), 29 USCA § 1002(1)] If not in payout status, plan assets protected from attachment by creditors if trust has antialienation provision If in pay status, creditor may be able to obtain order directing payments out of the trust to the creditor, notwithstanding state exemptions State exemptions can be preempted by ERISA for plans and benefits covered by ERISA ! (e) Misc. ! C. Florida Exemptions (1) Life Insurance & Annuities (a) Payoff at Death ! ! Fla.Stats. § 222.13 Who is protected? " "said insurance shall inure exclusively to the benefit of the person for whose use and benefit such insurance is designated in the policy, and the proceeds thereof shall be exempt from the claims of creditors of the insured unless the insurance policy or a valid assignment thereof provides -12- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE otherwise" [Fla.Stats. § 222.13(1)] # Result can be varied by terms of policy ! Assets exposed to claims of creditors of insured if "payable to the insured or to the insured's estate or to his or her executors, administrators, or assigns" [Fla.Stats. § 222.13(1)] Applicable to Florida domiciliaries at death [Milam v. Davis, 97 Fla. 916, 123 So. 668 (1929), certiorari denied 50 S.Ct. 82, 280 U.S. 601, 74 L.Ed. 646] Fla.Stats. § 222.14 Applicable to policies on lives of citizens and residents of Florida Exemption is against creditors of insured " Unless policy effected for benefit of that creditor ! (b) Cash Surrender Value during Lifetime ! ! ! (c) Converting Other Assets to Insurance ! No dollar amount limitations of exemption under statute " However, amount invested by debtor in insurance must be considered as relevant to, though not conclusive of, issue of fraud, proof of which operates as permanent brake on misuse of exemption laws. [Slatcoff v. Dezen, 76 So. 2d 792 (1954)] # Implies a "fraud" exception ! Not entitled to claimed exemptions of cash value of life insurance policies that debtor purchased with funds obtained from sale of non- exempt property; debtor converted non-exempt property with specific intent to hinder, delay, or defraud his creditors concerning use of proceeds from property, to pay debtor's loans against cash surrender value of policies. [In re Miller, Bkrtcy.M.D.Fla.1995, 188 B.R. 302]. Fla.Stats. § 222.14 Scope " Private annuities included [In Bkrtcy.S.D.Fla.1988, 88 B.R. 436] re Mart, (d) Annuities ! ! -13- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE ! Conversion to Annuities Issues " Exemption created for annuities is creature of legislature, which may be lost if annuities were acquired with non-exempt property with specific intent of defrauding creditors, whether or not this non-exempt property was fraudulently obtained. [In re Lazin, Bkrtcy.M.D.Fla.1998, 221 B.R. 982] (e) Bankruptcy Code limits the availability of this exemption if debtor did not reside in the state for 730 days before bankruptcy petition filed. Section 522(b)(3)(A). Personal property to the value of one thousand dollars [Fla. Const. Art. X, § 4] FLORIDA CONSTITUTION - ARTICLE X MISCELLANEOUS/SECTION 4. Homestead; exemptions.-(a) There shall be exempt from forced sale under process of any court, and no judgment, decree or execution shall be a lien thereon, except for the payment of taxes and assessments thereon, obligations contracted for the purchase, improvement or repair thereof, or obligations contracted for house, field or other labor performed on the realty, the following property owned by a natural person: (1) a homestead, if located outside a municipality, to the extent of one hundred sixty acres of contiguous land and improvements thereon, which shall not be reduced without the owner's consent by reason of subsequent inclusion in a municipality; or if located within a municipality, to the extent of one-half acre of contiguous land, upon which the exemption shall be limited to the residence of the owner or his family - (2) personal property to the value of one thousand dollars - (b) These exemptions shall inure to the surviving spouse or heirs of the owner; Exceptions to Protection ! Federal bankruptcy limitation: 11 U.S.C.A. 522(p) limits the monetary value of a homestead claimed to be exempt to $136,875.00, if the homestead property was acquired by the petitioner during the 1215-day period preceding the date of the filing of the bankruptcy petition. This limitation is effective on April 20, 2005. -14- (2) Personalty (a) (3) Homestead (a) (b) ASSET PROTECTION AND THE PROFESSIONAL ATHLETE " Cap imposed by the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) on state law homestead exemption that debtor can claim in residential property acquired within 1,215 days of petition date applied only to the Florida homestead exemption that Chapter 7 debtor could claim, and not to separate entireties exemption available to debtor for residential property that he owned as tenant by the entirety with his nondebtor-spouse. 11 U.S.C.A. § 522(b)(3)(A, B), (p)(1). In re Buonopane, 359 B.R. 346 (Bankr. M.D. Fla. 2007). Cap imposed without regard to residency limitations in following circumstances: # Debtor convicted of a felony demonstrating that the bankruptcy filing was abusive; Debtor owes a debt arising from any violation of federal or state securities laws or fraud, deceit, or manipulation in a fiduciary capacity; or Debtor has committed any criminal act or intentional tort that caused serious physical injury or death to another person in the preceding five years. " # # " Equity can be rolled over between residences for these purposes, but only if the former and new residences are located in the same state. ! ! ! ! Payment of taxes and assessments thereon [Fla.Stats. § 713.03] Obligations contracted for the purchase, improvement or repair thereof [Fla.Stats. § 713.05] Obligations contracted for house, field or other labor performed on the realty [Fla.Stats. § 713.06] Funds obtained through fraud or egregious conduct used to invest in, purchase, or improve the homestead [Havoco of America, Ltd. v. Hill, 790 So. 2d 1018 (Fla. 2001)] Equitable liens beyond the exceptions provided under article X, section 4 where a husband has used the homestead exemption to avoid his alimony and child -15- ! ASSET PROTECTION AND THE PROFESSIONAL ATHLETE support obligations?? " Florida Supreme Court in Havoco of America, Ltd. v. Hill, 790 So. 2d 1018 (Fla. 2001) expressly refrained from ruling on this issue ! Federal forfeiture laws [E.g., U.S. v. One Single Family Residence at 2200 SW 28th Ave., Ft. Lauderdale, Fla., 204 F.Supp.2d 1361 (S.D.Fla. May 15, 2002)] Federal taxes It is permissible to convert nonexempt assets into an exempt homestead even if constitutes a fraudulent conveyance [Havoco of America, Ltd. v. Hill, 790 So. 2d 1018 (Fla. 2001)] " However, the acquisition of the homestead could lead to denial of discharge in bankruptcy (even though the residence would be safe from creditors) [In Re Clements; In Re Pomerants, 215 BR 261 (Bankr. S.D. Fla. 1997)] ! (c) ! Fraudulent Conveyance (d) Planning ! ! ! Acquisition Pay down mortgage Watch limits on size of homestead - within or without a municipality Unclear whether ownership by a trust voids the protection Natural person owner Surviving spouse Heirs " A devisee is not an "heir" - heirs are defined as persons who can take under intestacy law if the decedent was intestate (regardless of whether he is testate) [State Department of Health v. Trammell,508 So2d 422 (1st DCA 1987)] Heir protected even if obtained the property by (e) Misc. ! (f) Who is Protected? ! ! ! " -16- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE devise [Bartlet, 579 So2d 282; Monks, 609 So2d 740] (4) Retirement Assets (a) Qualified Pension or Profit Sharing Plan and IRAs ! (b) Note federal Bankruptcy Act limitation of exemption to $1 million for IRAs. Pensioners of the U.S. Fla.Stats. § 222.11 Summary ! ! Disposable earnings of head of family less than or equal to $500 a week are exempt Disposable earnings of head of family over $500 exempt unless otherwise agreed to " Up to 15 USC § 1673 maximum amount can be exposed if agreed to (5) Wages (a) (b) ! ! Non-head of family disposable earnings only exposed up to 15 USC § 1673 amount Exempt assets deposited into financial institution are exempt for 6 months after receipt if traceable to earnings Independent Contractors " Chapter 7 debtor-private investigator's compensation as an independent contractor did not constitute "earnings" within meaning of Florida wage exemption. [In re Branscum, Bkrtcy.M.D.Fla.1999, 229 B.R. 32.] Totality of the circumstances approach is used to determine whether debtor's compensation constitutes exempt "earnings" under Florida wage exemption; debtor's label as employee or independent contractor is not dispositive. [In re Pettit, Bkrtcy.M.D.Fla.1998, 224 B.R. 834]. (c) Qualified "earnings" ! " (d) Business income " Chapter 7 debtor's compensation from his legal practice and his corporation that he controlled did not qualify as exempt earnings under Florida wage -17- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE exemption statute - from business controlled by debtor are not exempt. [In re Zamora, Bkrtcy.S.D.Fla.1995, 187 B.R. 783]. " Under Florida law, debtor that owns or controls his own business cannot exempt the funds he distributes to himself from that business simply by calling the distributions "wages"; rather, for debtor to take advantage of the Florida exemption accorded to debtor's "earnings for personal services," debtor must not only perform personal services for business, but must also receive regular compensation dictated by the terms of arms length employment agreement. [In re Harrison, Bkrtcy.S.D.Fla.1997, 216 B.R. 451]. To apply exemption under Florida statute for money due to head of family for personal labor or services, debtor must not only perform personal services to business, but he must also receive regular compensation dictated by terms of arms-length employment agreement. [In re Manning, Bkrtcy.S.D.Fla.1994, 163 B.R. 380] " (6) Misc. Exemptions (a) (b) (c) (d) (e) (f) (g) Crimes Compensation Trust Fund awards Government Employees Deferred Compensation Plans Disability Policy Income Benefits Fraternal Benefit Society Benefits Hazardous Occupations Injury Recoveries Prepaid College Trust Fund or Medical Savings Account Interest in Motor Vehicle up to $1,000 in Value Elective share rights Conversion to exempt assets ! If court determines bad intent, may deny bankruptcy discharge " The Bankruptcy Code provides that a debtor may be denied a discharge under Chapter 7 if, among other things, the debtor has transferred property "with intent to hinder, delay, or defraud a creditor" within one year before the date of the filing of the petition. 11 U.S.C. § 727(a)(2). Thus, (7) Misc. (a) (b) -18- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE if a creditor or the trustee can show extrinsic evidence of a debtor's intent to defraud creditors, a denial of the debtor's discharge would be appropriate under § 727(a)(2) of the Bankruptcy Code." [In re Levine, Bkrtcy.M.D.Fla.1992, 139 B.R. 551, on subsequent appeal 134 F.3d 1046] ! Fraudulent conversion? " Florida law provides that if property is converted to a form so as to become exempt from creditors and the debtor remains the owner of the property, and this was done with intent to hinder, delay, or defraud a creditor, then a fraudulent conversion has occurred which can be set aside. Fla.Stats. §222.30. However, an action to set it aside must be commenced within 4 years of the conversion. However, this law does not apply to constitutional homestead protection. Havoco of America, Ltd. v. Hill, 790 So.2d 1018 (2001), absent equitable lien situation where the proceeds converted into a homestead were fraudlently obtained.. " (c) Exempt funds - status after received ! Chapter 7 debtor's accumulated benefits from Social Security did not lose the exempt status to which they were allegedly entitled under nonbankruptcy federal law simply because they were received and deposited by debtor into her bank account. Social Security Act, § 207, 42 U.S.C.A. § 407 [In re Lazin, 217 B.R. 332 Bkrtcy.M.D.Fla.,1998] Annuities " Funds received from exempt annuity and funded into a segregated annuity bank account maintained their exempt status [In re Lazin, 217 B.R. 332 Bkrtcy.M.D.Fla.,1998] # Perhaps of limited use to other types of exemptions because "proceeds" of annuities specifically exempt by statute? ! " "Courts have generally held that exempt funds deposited into a bank account retain their exempt status. 31 Am.Jur.2d, Exemptions § 109. In the instant case, the debtor deposited the annuity payments into her checking account. At all times, the monies in the account retained their identity -19- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE and were properly traced to the annuity proceeds. So long as the funds can be properly traced into the account, and are readily accessible to the debtor, the funds retain their exempt status." [In re Benedict, Bkrtcy.M.D.Fla.1988, 88 B.R. 390] ! Life Insurance Cash Surrender Value " Cash surrender value of judgment debtor's life insurance policies was statutorily exempt from garnishment and continued to be exempt even after debtor took possession of it and converted it into another form by purchasing a bank certificate of deposit (CD) with the proceeds. [Faro v. Porchester Holdings, Inc., App. 4 Dist., 792 So. 2d 1262 (2001)] Borrowing against the policy did not make the funds available to bankruptcy trustee [In re Vaughn, S.D.Fla.1932, 2 F.Supp. 385] Bankruptcy Code limits the availability of this exemption if debtor did not reside in the state for 730 days before bankruptcy petition filed. Section 522(b)(3)(A). " " (d) Federal forfeiture law preemption ! Federal forfeiture laws preempted Florida's homestead exemption [U.S. v. Lot 5, 23 F3d 359, 363, cert. denied, 513 US 1076 (11 Cir.1994)] D. General Considerations (1) (2) (3) Converting nonexempt to exempt property Moving to a different state Determine threshold for use in a state (residency, etc.) Taxes (a) (b) (2) Minimal exemptions provided under Code § 6334 IRS authority to force sale of property [Code Sections 6321 and 6331] Federal forfeiture law preemption ! Federal forfeiture laws preempted Florida's homestead exemption [U.S. v. Lot 5, 23 F3d 359, -20- E. General Limits on Exemptions (1) Federal and state governments (a) ASSET PROTECTION AND THE PROFESSIONAL ATHLETE 363, cert. denied, 513 US 1076 (11 Cir.1994)] (3) (4) (5) (6) 4.5. A. B. Alimony and child support Debts for improvement of exempt property Purchase money creditors Mechanic's and materialman's liens Foreign Life Insurance and Foreign Annuities In General (1) (1) (2) (3) (4) (5) (6) (7) C. (1) Several foreign jurisidctions provide for creditor protection Does it fit into overall investment scheme of client? May be able to get more favorable rates on jumbo policies 1% U.S. excise tax on premiums may apply Annuity products may or may not meet U.S. annuity definitions for U.S. tax treatment purposes Irrevocable designations of beneficiaries are not flexible, and can have U.S. tax implications U.S. insurance definitions must be met to allow tax-free build-up inside policy Local fraudulent conveyance laws may apply Protection Provided (a) Revocable designation of spouse and/or descendants as beneficiary ! ! In bankruptcy, spouse and/or descendants automatically become the policyholders In nonbankruptcy, policyholder designation to irrevocable and automatically become policyholders " Gift tax consequences Misc Issues Swiss Annuities - Example may change they again (b) Irrevocable designation of spouse and/or descendants or third party as beneficiary ! Gift tax consequences Exceptions (c) -21- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE ! Fraudulent conveyance if original policyholders acquired the policy within six months of creditor attaching his assets, or the policyholder being declared bankrupt Fraudulent conveyance if policy purchased with clear intent to damage a creditor ! (2) Planning Considerations (a) Irrevocable designations and gifts may be inconsistent with estate planning objectives ! ! ! ! ! (b) Grantor giving up assets Circumstances of beneficiary may change Beneficiary may develop his or her own creditor problems Risk that asset may be nonmarital asset in event of divorce Ownership through offshore trust mitigates many of these issues Financial performance of product is always an issue investment considerations Articles 79, 80, & 81 of Swiss Insurance Act Low likelihood of failure of Swiss insurance company Often is ability to negotiate insurance terms Conflict of Laws Issues U.S. court may obtain jurisdiction if U.S. policyholder or beneficiary - therefore, better use is with offshore trust (3) Misc. (a) (b) (c) (d) (e) 4.6. Liability Insurance A. Benefits (1) (2) (3) Affordable Easy to procure Umbrella policy at a minimum (a) B. Deficiencies -22covers liabilities involving residence, real estate premises, automobiles ASSET PROTECTION AND THE PROFESSIONAL ATHLETE (1) (2) Likely will not cover punitive damages, fraud, breach of contract, intentional acts and product recall liability risks Business insurance often excludes coverage for intentional torts by owner or employee, race discrimination, events outside scope of employment, contract claims, etc. Personal liability insurance umbrella policies often exclude intentional acts, business activities, dangerous equipment, guns, lawn mowers, dogs, and dangerous sports Risk that insurance company becomes bankrupt Policy limits (3) (4) (5) 4.7. A. Limited Partnership and Limited Liability Companies Charging Order Protection (1) Charging Order - An order of the court requiring that future distributions, if any, be made to the judgment creditor (a) (b) Effect is to delay payment to the creditor until general partner makes distributions Creditor does not become a substituted partner ! Acquires no voting rights - therefore, debtor can retain legal control over the operation and distributions of the entity (2) (3) Benefit/objective is that this becomes sole remedy of creditor Query whether "non-business disturbance" policy of the charging order being the sole remedy holds water where no active business or all interests held by one person/family Some states do explicitly provide that charging order is an exclusive remedy - consider use of those jurisdictions (a) 5.5.1 ! Fla.Stats. § 620.8504(5) However, Florida law allows creditor with a charging order to "foreclose" on the debtor's interest if the court agrees, with the purchaser acquiring the rights of a transferee. Note, however, that a creditor may not want to do so since at that point the purchaser may be taxable on (phantom) income of the partnership [Fla.Stats. § 620.8504(2)] Prior to "foreclosure" of partnership interest, Florida law allows the partnership interest to be redeemed by the judgment debtor, with property other than -23- (4) ! ASSET PROTECTION AND THE PROFESSIONAL ATHLETE partnership property by the other partners, or with partnership property by the other partners with the consent of all partners whose interests are not charged with the charging order lien [Id.] (5) B. If creditor willing to "wait out" the debtor, he will get paid - therefore not a perfect asset protection mechanism Need to confirm charging order protection in the applicable jurisdiction Risk of income taxation on transfer of appreciated assets? (a) (3) (4) Awaiting issuance of regulations under Code § 721(c), but there are indications they will never be issued Foreign Partnerships and LLCs (1) (2) Cost hurdles for creditors Some jurisdictions have superior charging order protection (a) For example, in Nevis, a charging order is the sole remedy, even if an LLC is wholly owned by one member (5) (6) (7) C. Misc. (1) Watch need for “hc- e o” cekt - x election to obtain U.S. pass-throug hb status for income tax purposes. Watch U.S. tax filing and information return requirements If foreign entity nonetheless owns U.S. assets, may still be reachable by U.S. courts Partnership language should include that creditor only has an assignee interest (a) In this way, purchaser of interest upon a foreclosure of the interest has no rights of a partner, other than to receive profits, losses, and distributions Without language in the partnership agreement, assignee may be admitted as a full partner (b) (2) May be able to pay compensation to the debtor who is general partner or manager, at least if there is a long, prior history of that before the charging order is imposed (a) Such fees may be subject to self-employment taxes D. LLC vs. Partnership (1) LLC case law not as well developed as for partnerships -24- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE (2) (3) (4) E. Not all states have charging order protection Some states will impose income or franchise taxes on LLCs Single member LLCs perhaps more susceptible to alter-ego and sham attacks Unclear whether creditor, or debtor partner, is taxed on pass-through partnership income (a) Rev.Rul 77-137 addresses "assignees" and finds them to be "partners" for income tax purposes and taxable on partner income ! Thus, the argument is that the charging order creates a hot potato in the hands of the creditor - he can't demand distributions, but is currently taxable on income of partnership (i.e., on phantom income), which should encourage him to favorably settle his claim " However, a charging order is in the nature of a lien - it is not an assignment of a partner's interest. Therefore, there is a strong possibility that the debtor partner will remain taxable on his share of partnership income, thus creating a hot potato in his hands, not the creditor's hands! Therefore, this planning is a double-edged sword, depending on who is taxable Weaknesses (1) " (2) (3) (4) (5) States becoming more liberal in allowing a foreclosure sale of the partnership interest Charging order could be crafted in a manner that unduly restricts the partnership and all other partners Remote risk that court could order a dissolution of the partnership Adverse income tax consequences (a) (b) (c) No deferred income for annuities ! Code § 72(u) Subchapter S stock difficulties Investment partnership rules ! ! If not observed, can trigger taxable gain on funding At issue where is diversification of ownership in marketable securities -25- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE (d) (e) (f) If basis of contributed property is less than liabilities attached to property, can result in potential gain on contribution Distributions of marketable securities can result in taxable gain under Code § 731(c) Ownership of principal residence is not consistent with Code § 121 gain exclusion on sales of principal residences and Code § 163(h)(3) personal residence mortgage interest deduction. (6) (7) Potential separate gift treatment between spouses upon divorce If creditor obtains control of general partner through foreclosure on stock of debtor in corporate general partner, then can control distributions from the partnership (a) Therefore, use of corporate general partner is discouraged Without due observation of formalities, limited partnership limitations on creditors may be avoided by sham or alter-ego argument There are issues in some states whether charging order protection applies to single member LLCs, since no other partners/members to protect (8) (9) 4.8. Onshore/Domestic Trusts A. Self-Settled Trusts in General (1) Spendthrift clauses do not usually protect the grantor (a) (b) (2) (3) (4) Even if wholly discretionary trust Creditor can generally reach the maximum amount that the trustee could pay the settlor Creditors can also force exercise by grantor or powers to revoke or appoint assets for benefit of creditor If grantor can receive assets only on an ascertainable standard, rights of creditors against entire trust may be limited If grantor has no rights or interest in principal, the principal may be protected (a) only income interest should be reachable ! (b) Restatement of Trusts 2d, § 156, and Scott, The Law of Trusts, § 156 (4th edition 1987) with special power of appointment over principal to avoid completed gift -26- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE ! Absent a fraudulent conveyance, the transferred property is unreachable by the creditors of the holder, even though the power holder may be the grantor of the trust (Restatement 2nd Property, § 13.1) " " A court may not be able to compel a power holder to exercise the special power May not hold true in all states ! SPA could be exercised in a revocable manner, so it could be reversed later " but could trigger gift by terminating settlor's SPA B. Trusts Funded by Third Parties (1) Benefits (a) (b) Spendthrift clause protects beneficiary from attack by beneficiary's creditors Protection recognized under federal bankruptcy law [11 USCA § 541(c)(2)] ! Subject to distributions made within 180 days after declaration of bankruptcy being part of the bankruptcy estate [11 USCA § 541(a)(5)(A)] Post-petition claims may also be payable out of post-petition distributions ! (2) Planning (a) Since under common law a spendthrift trust cannot be created for oneself, it needs to be funded by third parties for the protected party Beneficiary should not have any powers to appoint assets to himself, spouses, or creditors ! Limit to special power of appointment or have no power of appointment (b) (c) Consider making distributions purely discretionary to limit distributions that can be reached by a creditor ! State law variations in ability of court to force trustee to exercise discretionary powers (d) Spendthrift clause should provide for prohibition on attachment of, forced sale of, or levies against, the interest of the beneficiary, and should restrict sale, assignment, pledge, etc. of the beneficial interest -27- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE (e) Since creditor may be able to reach payments once they are in the hands of the beneficiary, allow for distributions "for the benefit" of the beneficiary, not just "to" the beneficiary Unresolved issues regarding effectiveness of transfer from one spouse to another which spouse creates a spendthrift trust for original transferring spouse, or from TBE property to one spouse who creates a spendthrift trust for the other spouse, or from one spouse to a trust with temporary general power of appointment in other spouse with remainder trust back to originally grantor spouse, as to whether the resulting trust for benefit of spouse is entitled to spendthrift protection General estate planning considerations ! ! ! Avoid spousal testamentary transfers coming to debtor spouse outright Encourage elder parents to leave assets in trust for children Employ foregoing considerations if there is a creditor issue in regard to any beneficiary (f) (g) C. Special Domestic Self-Settled Trust Jurisdictions (1) Advantages (a) Principal benefit is allows grantor to be a discretionary beneficiary and creditors of the grantor cannot reach the trust assets ! (b) Under usual common law rule, creditors in this situation would be able to reach the trust assets allows for a completed gift to occur even if grantor is a discretionary beneficiary ! under normal tax rules, since creditors can reach trust assets in this situation outside of special jurisdictions, there would be an incomplete transfer for estate and gift tax purposes (c) (d) (e) (2) Typically have no Rule against Perpetuities Avoids foreign trust reporting rules Avoids attendant difficulties and discomfort of using a foreign trust Disadvantages -28- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE (a) 2005 Bankruptcy Act provides that transfers to self-settled trusts can be voided if the transfer was made within 10 years before the bankruptcy petition is filed and there was actual intent to hinder, delay, or defraud a creditor (therefore, will still provide protection for future potential creditors) Not applicable for real property in non-similarly protected states - in rem jurisdiction in state of the real property may void trust situs state creditor protections Constitutional full faith and credit clause issues ! U.S. Constitution requires each state to give full faith and credit to the judgments of another state " Unless an imperative state policy is at risk [U.S. Const., Art. IV, § 1] (b) (c) ! Risk is that judgment in another state that a distribution be made out of the trust will be enforceable under this clause against the trust Trustee could argue that other states cannot obtain in personam jurisdiction over it, but query whether that is the case if trustee markets into other states ! (d) (e) (f) Without more, can create a completed gift (Rev.Rul. 76-103) U.S. treaties may obligate a state court to recognize and/or enforce a foreign judgment U.S. Constitution supremacy clause issues ! e.g., an order of a U.S. court in bankruptcy proceeding presumably would override state law (g) (h) (i) Alter ego and sham exposures States outside the domiciliary state may assert in rem jurisdiction over assets in their jurisdictions Choice of law issues, especially where grantor and beneficiaries are not residents of the domiciliary state ! Uncertainty over which state law a bankruptcy court may look to in determining the enforceability of a spendthrift clause Necessity for local trustee ! (j) Transfers into the trust may still be subject to fraudulent conveyance attack -29- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE (k) (3) Extensive retained powers by grantor may make trust subject to attack Grantor generally retains testamentary power of appointment and is a discretionary beneficiary ! ! ! Testamentary power of appointment avoids completed gift Will be included in gross estate of grantor for estate tax purposes Can avoid estate tax and incomplete gift probably by not having testamentary power of appointment, since if creditor protection valid then Code § 2036 does not apply " " But absent other powers of grantor, there will be a completed gift If subsequent rulings find these trusts vulnerable to creditors, Code § 2036 inclusion will apply Structure (a) ! by not using the power of appointment, arguably have a completed gift while still retaining a discretionary beneficial interest, which may be a tax planning objective (4) Jurisdictions (a) Alaska ! At least some of the trust assets must be deposited and administered in Alaska, either in a checking, brokerage, or similar account, and at least one trustee must be a "qualified Person" which is a resident of Alaska or a bank or trust company with a principal place of business there Subject to fraudulent conveyance exceptions " General four year statute of limitation, but extended an additional year after the transfer was or could have been discovered by the creditor ! ! (b) ! Subject to child support limitations Similar to Alaska, but has additional classes of creditors who are not barred against the trust -30- Delaware ASSET PROTECTION AND THE PROFESSIONAL ATHLETE (c) Nevada ! Has a shorter statute of limitations than Alaska or Delaware " A person who is a creditor when a transfer is made to the trust may not bring an action unless the action is commenced within two years after the transfer is made; or six months after he discovers or reasonably should have discovered the transfer, whichever is later. A person who becomes a creditor after the transfer is made may not bring an action unless the action is commenced within two years after the transfer is made (d) (e) (f) (g) Rhode Island Missouri Utah Different states have different levels of protection - issues to review ! ! ! ! ! ! ! ! ! ! ! Statutory authority allowing grantor to be a beneficiary? Statute of limitations period for challenging the trust? Extended period possible if based on when creditor finds out, or should have found out, about the trust Recognition of foreign judgments Standards of proof and periods of limitation for fraudulent conveyance challenges Who has burden of proof What is the burden of proof Statutory authority as to extent of control that can be retained by grantor Veto power over trustee decisions? Power to remove and replace trustees? Required nexus (need for local trustees, assets, etc.) D. Special Trusts (1) Qualified Personal Residence Trust -31- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE (a) Somewhat effective in that creditor can typically only obtain a term of years interest in the residence, which is something the creditor may not have an interest in Perhaps conversion of trust to qualified annuity may provide state law annuity protection Creditor can only reach lead interest of noncharitable beneficiary Annuity interest may qualify for state law exemption Similar benefits and risks of gift to spouse (b) (2) Charitable Remainder Trust (a) (b) (3) E. Marital Deduction Trust (a) Limitations on protection (1) Creditors that may still be able to reach trust assets (a) (b) (c) (d) (2) (3) (4) Tort claimants, at least as to intentional or gross negligence tort claimants Government claims Child support claimants Persons providing "necessities" for beneficiary may be able to reach trust assets Fraudulent conveyance limitations may apply Sham or alter-ego arguments Too much power in the grantor may open the trust up to grantor's creditors (a) (b) Power to revoke Power of appointment 4.9. Hybrid Companies A. Basic Structure (1) Voting shareholders (a) (b) (c) (d) Typically, a foreign trust company No rights to assets or property Manage the assets by electing directors Actions may be subject to veto by special shareholder or consultant -32- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE ! (2) (a) (b) (c) (d) (e) (f) (g) B. C. Advantages (1) (1) (2) (3) (4) 4.10. A. But not in all jurisdictions Guarantee members Typically subject to transfer restrictions Analogous to beneficiary of discretionary trust Provide the capital "Guarantee" aspect is the obligation to contribute a de minimis of assets if the company becomes insolvent No voting rights or rights to participate in management May be broken into different classes, enabling different distributions to different classes May have interests that automatically terminate upon death or insolvency Requiring foreign litigation Uncertainty of how will be taxed by U.S. Check-the-box election not available if treated by U.S. as a trust Unclear whether U.S. court would uphold anti-assignment provisions as to guarantee members Uncertainty of treatment by U.S. courts Disadvantages Stiftungs/Civil Foundations Structure (1) (2) (3) (4) Managed by a foundation council for the benefit of beneficiaries Grantor may retain rights to remove and/or replace Generally registered with host country (a) (a) (b) (c) (5) In Liechtenstein, only the deed is deposited Typically do not allow for grantor to revoke or amend Typically give the council discretion over distributions Grantor will not usually serve on council Established by deed - Articles/By-laws govern the foundation While civil law foundations usually have fixed beneficial interests, more desirable that beneficiaries given only discretionary interests -33- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE B. Jurisdictions (1) (2) Favorable jurisdictions - Liechtenstein, Germany, Panama, Switzerland Some jurisdictions allow to be formed for family purposes - others may only allow for charitable, religious, educations, artistic, or scientific purposes Panama and Liechtenstein incorporate some asset protection concepts Factors in selecting a jurisdiction (a) (b) (c) (d) (e) (f) (g) (h) (i) Grantor control Powers to revoke, amend, appoint, appoint and remove council members, etc. Allowable purposes Government supervision Limited in Liechtenstein and Panama Supervision not generally welcome, per privacy concerns and ability to freely exercise provisions of the Articles Asset protection features Ability to appoint a protector (e.g., Liechtenstein) Spendthrift provisions (3) (4) C. D. Advantages (1) (1) (2) (3) (4) (5) Some statutory protections for beneficiaries U.S. income tax status unclear - private letter ruling may be needed for certainty More difficult to use with U.S. banks and brokerage houses due to unfamiliarity Local taxation issues Subject to jurisdiction of host country courts Forced heirship issues Disadvantages 4.11. 4.12. Offshore Trusts - See Below Expatriation A. Advantages (1) Litigation hurdles -34- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE (a) (b) (2) (a) (b) (3) (4) B. In personam jurisdiction of U.S. courts requires requisite "minimum contacts" with the U.S. And proper service on debtor costs due to location Local law restrictions on volume of discovery Increased international discovery hurdles Difficulties in enforcing U.S. judgment in foreign jurisdictions Potential avoidance or reduction in U.S. income, estate and gift taxes if citizenship surrendered Need to watch in rem jurisdiction exposures Planning needed to avoid return of assets to U.S. at death of grantor if U.S. beneficiaries Necessity of physically residing abroad (a) Potential immigration issues - free movement into and out of U.S. may be impaired, especially if citizenship surrendered for tax-motivated purposes [Illegal Immigration Reform and Immigration Responsibility Act of 1996] Disadvantages (1) (2) (3) (4) (5) (6) (7) (8) C. Income tax issues, including taxation by new home jurisdiction, exit tax and continued U.S. transfer taxes for transfers to U.S. persons Loss of U.S. citizenship benefits Subchapter S corporation issues, since nonresident alien of the U.S. is not a qualified shareholder Reduced U.S. estate tax unified credit Restrictions on transfers to noncitizen spouses in regard to use of transfer tax marital deduction U.S. tax reach may be extended where U.S. community property concepts implicated Potential avoidance or reduction in U.S. income, estate and gift taxes if citizenship surrendered (a) (b) Exit tax - deemed sale of all assets To avoid U.S. worldwide income taxes, expatriate will need to spend on average less than 122 days per year in the U.S. Tax Issues (1) (2) -35- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE (c) To avoid U.S. worldwide transfer taxes, expatriate will need to establish domicile in a foreign jurisdiction ! Generally established by residing in a jurisdiction, and having the intent to reside their indefinitely, at the same point in time Still taxed on transfers to U.S. persons ! (d) Asset protection benefits (but not U.S. tax benefits) may be available by shifting residence out of the U.S. but not surrendering U.S. citizenship ! Although citizens working abroad may obtain some income tax benefits, too [Code § 911] " " Foreign earned income exclusion Housing cost allowance 5. OFFSHORE TRUSTS 5.1. General Benefits A. Creating significant and costly hurdles to collection (1) (2) (3) Need for local counsel - additional attorneys fees Difficult to obtain evidence Legal obstacles (a) Need to obtain judgment in the foreign jurisdiction since U.S. judgment not enforceable ! ! Potentially need a new trial in the foreign jurisdiction Attendant costs of bringing witnesses and evidence abroad, and lack of attorneys willing to take matter on contingency basis Foreign jurisdiction may not recognize punitive or other types of damages ! (4) Collection hurdles (a) Bond requirements imposed in some jurisdictions before an action can be brought ! (b) ! E.g., Nevis And often at the high "beyond a reasonable doubt" standard -36Burden of proof standards imposed on creditors ASSET PROTECTION AND THE PROFESSIONAL ATHLETE (c) Statutes of limitations on challenging transfers often begin to run only on the date of transfer, not date of discovery of transfer or claim ! And short period (5) B. 5.2. A. Overall (a) Creating a ripe environment for favorable settlement Self-settled trust statutes allowing grantor to be a beneficiary of the trust Legal Considerations (1) (2) (3) (4) (5) (6) (7) Statute of Elizabeth override (a) As to issue of which future creditors cannot be exempted Statute of Limitations for Fraudulent Conveyance Insolvency Definitions Attorneys Available General Climate Local tax issues Nonrecognition of foreign judgments (a) Confirm that level of protection is that cause of action must be retried, as opposed to merely commencing an action to collect on the foreign judgment Choosing the Jurisdiction (8) (9) (10) Express provisions allowing grantor to be a beneficiary Anti-forced heirship provisions Standards of Proof in Fraudulent Conveyance Claim (a) Preponderance of the evidence vs. clear and convincing vs. beyond a reasonable doubt (11) (12) (13) (14) (15) (16) B. Best Who has burden of proof in fraudulent conveyance claim Protection for redomiciled trusts Favorable standards restricting freezing of assets Favorable statutory choice of law provisions Favorable anti-forced heirship provisions Favorable exchange controls -37- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE (1) Cook Islands (a) (b) no Rule against Perpetuities Fraudulent conveyance ! ! ! must provide beyond a reasonable doubt trust must be established to defraud that specific creditor no fraud if settled " " more than two years after that c d o’cause of r ir et s action accrued; or if ste bfr toya a e t c d o’ e l eoe w er f r h r i r td s t e et s cause of action accrued, creditor must commence action within one year of settlement; or if settled before cause of action accrued " ! (c) (d) (e) (f) (g) (h) (i) (2) (a) Statute of Elizabeth specifically repealed no enforcement of exemplary, vindictive, retributory or punitive damages grantor specifically authorized to retain certain powers over the trust and be a beneficiary no enforcement of foreign judgments no respect of non-Cook Island forced heirship rights general two year statute of limitation relating to date of settlement or disposition of trust registration allows confirmation that covered by international trust provisions of Cook Islands law allows for advisors to the trustee and protectors A creditor cannot reach trust assets on fraudulent transfer grounds if, at the date of settlement of the trust, the settlor was solvent, did not become insolvent by virtue of the settlement, and properly registers the trust Similar to Cook Islands legislation Imposes $25,000 bond requirement before commencing an action in Nevis Gibraltar (3) Nevis (a) (b) -38- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE (c) (4) (5) C. (1) (2) D. (1) (2) (3) (4) (5) (6) 5.3. A. Duress (1) Belize Has LLC provisions similar to RULPA, including charging order limitations Liechtenstein Full Faith & Credit Clause issues Assets and Trustees within reach of court Political stability Exchange controls Legal framework Common law jurisdiction Language Transportation facilities Stateside alternative Other Considerations Misc. Provisions for the Trust Instrument Per In re Lawrence, 279 F.3d 1294 (C.A.11 (Fla.)), the decision of whether duress exists should be exclusively that of the trustee (and perhaps the protector) - leave the grantor out of it. B. C. D. E. Flight Investment Managers Irrevocable Letter of Wishes can be problematic in trying to demonstrate lack of control of grantor in a contempt proceeding (1) If used, should be nonbinding and entered into after trust established Grantor? (a) (2) This was a problem for the grantor in In re Lawrence, 279 F.3d 1294 (C.A.11 (Fla.)) Powers to remove trustee and replace with nongrantor (1) F. Protector G. H. Do not pour assets over to estate Do not have trust responsible for obligations of decedent grantor -39- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE I. Inter vivos or testamentary limited power of appointment in grantor (1) (2) Allows planning flexibility Avoids gift tax on funding collapse in assets fire grantor from misc. management roles of subsidiary entities Change jurisdictions J. Powers of Trustees (1) (2) (3) 5.4. Other Planning Variations and Issues A. Encumber U.S. assets with mortgages (1) B. C. D. Licensed lenders likely to be afforded greater respect in creating valid liens than nonlicensed lenders Limit investments in U.S. Indemnification from trust fund for planners and advisors Dual Trustee Arrangement (1) In lieu of only a foreign trustee, can have a co-trustee who is domestic (including being the grantor) (a) (b) Domestic trustee can act unilaterally, so long as advises foreign trustee of his or her activities Foreign trustee has ability to "fire" domestic trustee, which will occur if legal threat arises ! (2) (3) Advantages (a) (a) Greater control in settlor Potentially increased likelihood of contempt of court finding - may weaken "impossibility" defense Disadvantages Perhaps only with consent of protector E. Protector (1) Typical powers (a) (b) Veto power over investment decisions and distribution decisions Ability to remove and replace trustees ! Advantages " Control aspects -40- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE ! Disadvantages " Careful planning to avoid giving power that creditor or a court can exploit (2) F. Li it “eav” n nt fr av pw r t ao poi n m to ngt e ad o a i t e o e o vi rv i i fm i s d dg ability of court to compel protector to act affirmatively Grantor as general partner or controlling general partner - trust holds grantor's limited partnership interest - limited partners granted power to remove and replace general partner (a) Corporate general partner controlled by grantor not recommended ! Allows creditor to foreclose on stock of corporate general partner and thus obtain control of partnership and its distributions If general partner interest directly held, creditor may be limited to charging lien remedy [e.g., Fla.Stats. § 620.8504] " And even if statute allows for foreclosure of charging lien, statute may provide for redemption of the interest by debtor or other partners U.S. Limited Partnership Holding Structure (1) ! (b) Advantages ! ! Grantor as general partner controls investments and distributions from the partnership Ability to isolate high-liability assets in a limited liability vehicle U.S. situs assets still in reach of U.S. courts Too far removal of assets from control of trustee can create an issue as to existence of true trust relationship Residence " " To allow use of gain exclusions without issue under Code § 121 To allow deduction of interest without issue under Code § 163 (c) Disadvantages ! ! (d) Some assets should not be held in the partnership ! ! Subchapter S stock -41- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE " Partnership is not a qualified shareholder ! Tax-deferred annuities " Partnership is not a qualified owner under Code § 72(u) ! G. (1) Code § 1244 stock not purchased by partnership Use of Trust as Pourover Receptacle for Assets at Death of Decedent Then used as typical testamentary estate planning vehicle (a) however, use of foreign nongrantor trusts can have income tax complexities H. Multiple Foreign Trusts (1) (2) In different jurisdictions to multiply costs for potential creditors Separate high-liability assets from low-liability assets Single member is the trust to avoid income tax issues Grantor can be a manager, subject to being fired by trust (a) Ideally, only a co-manager I. Non-U.S. LLC as Investment Vehicle (1) (2) J. Assets (1) Problem assets (a) Assets that can generate their own liabilities, such as real estate ! (2) (a) (b) (3) (a) General partnership interests Less Desirable Assets Real property located in the U.S. Other assets in the U.S. Liquid assets and marketable securities Best assets K. Powers for Grantor (1) Veto Powers (a) (b) (2) veto over new trustees veto over distributions no control 5.5. Tax Issues -42- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE A. Grantor Trust (1) Where grantor is a discretionary income and principal beneficiary, should be completely a grantor trust per Sec. 676 & 677 as long as trustee/protector not adverse party Treas. Regs. Section 1.684-3(c) provides that the general rule of gain recognition on transfers to foreign trusts by U.S. persons shall not apply to any transfer of property by reason of death of the U.S. transferor if the basis of the property in the hands of the foreign trust is determined under section 1014(a). (a) (2) Applicability if estate tax repealed? Regs. §1.684-3(g) (Ex. 2) extends the application of this Regulation to the situation of a foreign grantor trust funded prior to grantor's death, the assets of which are includible in the gross estate of the grantor at his death Apply to foreign trusts Capital gains that are not distributed currently can lose their character as such, as well as other types of income Can minimize adverse effects by current distributions B. Gain (1) C. Throw-back rules (1) (2) (3) D. E. F. Accumulation trusts interest charges (IRC Section 668) U.S. withholding taxes Estate tax (1) Property of trust typically included in grantor's estate due to incomplete gift aspects of the trust CFC, FPHC, PFIC, etc. While a foreign trust: (a) Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts ! ! ! Report transfers to the trust Report distributions to U.S. beneficiaries Report conversion of domestic trust to foreign trust G. H. Foreign corporate holdings - complications (1) (1) Reporting -43- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE ! ! (b) Due by April 15 of next succeeding year, or extending due date of taxpayer's income tax return 35% penalty (on value of transferred assets) if not reported Form 3520-A, Annual Information Return of Foreign Trust with U.S. Owner ! ! ! Requires income statement and balance sheet Due March 15 of following year 5% of assets penalty Trust must provide statements to U.S. beneficiaries of their share of tax items [Code § 6034A(a)] (c) Required beneficiary statements ! (d) (2) Appointment of U.S. agent required for U.S. tax purposes [Code § 6048(b)(2)] Foreign trust reporting during lifetime of grantor can be avoided by having the trust qualified as a domestic trust through use of U.S. co-trustee and U.S. law provisions during non-troublesome times (a) Form 1041 required notwithstanding "domestic" status if foreign situs or has foreign situs assets [Treas.Regs. § 1.671-4(b)(1) and (6)(ii)] (3) (4) (5) Gifts to trust, even if incomplete, may require gift tax return [Treas. Regs. § 25.2511-2(j)] Reporting of foreign bank and financial accounts - Form TD F 90-22.1 If trust owns agricultural or farmland - Form AGCS-153, U.S. Department of Agricultural Foreign Investment Disclosure Act Report If property transferred to foreign corporation - Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation If partnership involved, Form 1065, U.S. Partnership Return of Income If foreign corporation involved, Form 1120-F U.S. Income Tax Return of a Foreign Corporation (a) And Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations (6) (7) (8) -44- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE (9) Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business Form 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships Property of trust typically included in grantor's estate due to incomplete gift aspects of the trust Therefore, apply typical estate tax planning concepts of basis step-up, use of unified credit against estate tax, marital deduction planning, and use of GST exemptions With considerations in regard to advisability of returning trust onshore, or to bear the complexities of a foreign nongrantor trust (10) I. Integration with Estate Planning (1) (2) (3) J. Avoiding current gift generally accomplished by donor retaining power to change the interests of the beneficiaries [Treas.Regs. § 25.2511-2(c)] (1) Power in grantor to name charitable beneficiaries [typically both inter vivos and testamentary] (a) (b) (2) Will result in gross estate inclusion Testamentary power likely enough Gifts complete when amounts paid out to nongrantor K. 5.6. A. Issues of foreign trust subject to death of grantor Local court may not respect choice of law provisions in trust instrument (1) E.g., In Re Portnoy, 201 BR 685 (Bankr. S.D.N.Y.1996) (applying New York spendthrift trust law in lieu of Jersey law) Misc. Exposures B. 5.7. A. B. Tut m l aac -eri t m ai o t w r “ ut rs e a esne l n gh en g fh od t s e f a n e n e r ” Impossibility defense for contempt of court Timing (1) (2) no current creditor problems solvent Misc. Considerations C. D. nest egg amount Grantor is a beneficiary? (1) ideal situation is that grantor is not a beneficiary -45- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE E. F. G. H. I. J. K. L. M. Trustee selection (1) Avoid trustee with U.S. offices or exposures Don't fund with assets that are otherwise exempt Obtain opinion of local counsel as to local taxes and existence of trust Necessity to respect trust and entity formalities (1) Minutes, where appropriate Limit direct payment of personal items Pro rata distributions from entities In distributing from entities, do not "skip over" the trust Consider distributions to other beneficiaries to add estate planning credence to structure The future - how can they be stopped? (1) probably only by the imposition of criminal sanctions (a) e.g., California has criminalized some fraudulent conveyances 6. ANCILLARY TECHNIQUES 6.1. Encumber the Property A. B. Works well with real estate, accounts receivable, equipment, etc. Need to protect the borrowed funds (1) (2) Hold in offshore asset protection trust Convert to exempt asset (a) (b) (3) C. (a) Disadvantages (1) (2) 6.2. A. B. C. Interests costs Equity build-up exposed Less protection than use of offshore trust Fraudulent conveyance issues May be able to fund the lender for a small spread in the lender Ideally, want to use an unrelated lender Sale of Property Ideally, combine with transfer of note or proceeds to offshore trust seller can be a defective trust to avoid gain Misc. Effects -46- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE (1) sale itself not a fraudulent conveyance, only the transfer of the note/proceeds to foreign trust- therefore, future appreciation should be protected may accomplish an estate tax freeze typically, no adjusted basis step-up similar issues to mortgaging property as to what to do with the proceeds of sale gain may result (2) (3) (4) (5) D. 6.3. 6.4. 6.5. 6.6. Offshore LI Variation is to sell assets to offshore trust in exchange for exempt annuity Divert business opportunities to protected vehicles before they become a property right Have third parties fund spendthrift trusts Use of Disclaimers A. To avoid assets passing to debtors (1) (2) risk that debtor will be incompetent at time disclaimer to be exercised May be ineffective if disclaimant is insolvent at time of exercise [Fla.Stats. §732.801(6)] 7. FRAUDULENT TRANSFERS 7.1. Effect if Fraudulent Conveyance A. B. C. Transfer voidable by creditor (1) Still a valid transfer - only a remedy for a creditor May result in denial of bankruptcy discharge Criminal sanctions under federal statutes (1) IRC §§ 7206 and 7212 may provide grounds for criminal liability on one who assists a taxpayer in avoiding the tax collection efforts of the IRS As to exemptions provided in Florida Statutes Chapter 222. [Fla.Stats. Sec. 222.29] Creditor can reach converted property. [Fla.Stats. Sec. 222.30] Four year statute of limitations where is a fraudulent conversion. [Fla.Stats. Sec. 222.30] D. Will void exemptions where property converted into exempt assets (1) (2) (3) -47- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE 7.2. Types of creditors A. Present creditor (1) (2) (3) (4) (5) B. (1) (2) (3) Generally protected by fraudulent transfer law Existing contractual obligation at time of transfer Breach of contract prior to transfer Tort occurs before transfer Entering of judgment not determinative Generally protected by fraudulent transfer law This term generally not defined in UFTA and UFCA Case law generally requires some close nexus in time between time of the transfer and when creditor appears (a) C. (1) (2) (3) Reasonably foreseen as arising in the immediate future Future creditor Future potential creditors Not protected by fraudulent transfer law Theoretically, this category must exist or all transfers done with intent to limit liability to third parties would be fraudulent "per se" While there is case law recognizing the distinction between "future creditors" and "future potential creditors," the distinction between the two is not unequivocally established so all asset protection planning is subject to this uncertainty 7.3. Sources of law A. B. C. Uniform Fraudulent Conveyance Act (UFCA) Uniform Fraudulent Transfer Act (UFTA) (1) (1) Florida Seven paragraph Act that precludes fraudulent conveyances conveyances, alienations, etc. designed to "delay, hinder, or defraud creditors" are declared "utterly void" - the Act includes criminal and civil penalties Statute of Elizabeth derivatives 7.4. Intent A. Intent to hinder, delay or defraud any creditor generally required (1) Does not have to be limited to the specific creditor at issue -48- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE (a) (2) Although in many non-U.S. jurisdictions, you do have to show intent as to that specific creditor Fla.Stats. Section 726.105(2) - "(a) The transfer or obligation was to an insider. (b) The debtor retained possession or control of the property transferred after the transfer. (c) The transfer or obligation was disclosed or concealed. (d) Before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit. (e) The transfer was of substantially all the debtor's assets. (f) The debtor absconded. (g) The debtor removed or concealed assets. (h) The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred. The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred. (j) The transfer occurred shortly before or shortly after a substantial debt was incurred. (k) The debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor. " Statutory list is not exclusive list of factors Badges of fraud are evidence of intent (a) (b) B. May be found where constructive fraud, without regard to actual intent to hinder, delay or defraud (1) (2) Transfer without adequate consideration, and Debtor left with unreasonably small amount of assets for his business; debtor intended to incur, or believed he would incur, more debts than he or she would be able to pay; or debtor insolvent at time of transfer or as a result of the transfer (a) (3) As to insolvency, this is available only to a current and not a future creditor Fla.Stats. Section 726.105(1)(b) - "Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor: 1. Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or 2. Intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due." 7.5. Bankruptcy Code provisions -49- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE A. B. Has both fraudulent conveyance provisions and pre-bankruptcy transfer provisions 2005 Act provides that transfers to self-settled trusts can be voided if the transfer was made within 10 years before the bankruptcy petition is filed and there was actual intent to hinder, delay, or defraud a creditor Distinctions between fraudulent conveyance, which may not require fraudulent intent, and fraud (which typically involves some element of lying) Tenancy by entireties property generally not covered (1) If transfer of property into TBE property was not fraudulent, transfers out of TBE property not subject to Florida fraudulent conveyance statute (a) UFTA and Florida version of UFTA does not consider TBE property an "asset" ! "[a]n interest in property held in tenancy by the entireties to the extent it is not subject to process by a creditor holding a claim against only one tenant." [726.102(2)(c)] " However, if creditor can show that the TBE property was acquired with fraudulently acquired funds, then the TBE property will be an asset for fraudulent conveyances out of TBE property [Ming Properties, Inc. v. Stardust Marine S.A., 741 So. 2d 554, 556 (Fla. 4th DCA 1999)] 7.6. Misc A. B. C. Attachment Provisions (1) Some states permit existing creditors to seek to attach property on a debt NOT due if debtor is removing property out of state or secreting it to avoid payment 8. CONTEMPT OF COURT 8.1. 8.2. Legal niceties may be for naught with angry court Types A. Civil - purpose is to coerce the contemnor to comply with a court order (1) (2) Generally, clear and convincing evidence standard In In re Lawrence, 279 F.3d 1294 (C.A.11 (Fla.)), the court provided: “ the bankruptcy judge determines that, although Lawrence has the I f ability to turn over the Trust res, he will steadfastly refuse to do so, -50- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE the judge will be obligated to release Lawrence because the subject i a e t n ol n l gre eh c iproe for o” n r r i w u o o esr t i l ups o ce i c c ao d n v e v cn B. C. 8.3. A. Criminal - punishment for past conduct (1) Defenses Generally, impossibility is a defense, unless the condition of impossibility is self-created (1) Purpose of civil contempt is to compel a reluctant party to do what a court requires of him - if obedience is not possible, there should be no penalty Time nexus is important - key factor is when the impossibility was created, not the mere fact that it was self-created (a) 8.4. Planning Aspects A. Encourages use of "negative" instead of "positive" powers in persons subject to court's jurisdiction (1) This distinction was recognized in Anderson (Federal Trade Commission v. Affordable Media, LLC, 179 F3d 1228 (9th Cir. 1999)) Done at a time when debtor knew or should have known that a court order or subpoena would be entered or be issued Beyond a reasonable doubt standard The distinction between civil and criminal has been blurred (2) B. C. 9. 9.1. Foreign trustee may be able to obtain a ruling from its local court that it should not comply with the demand of the U.S. court Anti-duress clauses are helpful PROTECTING THE PLANNER Interview Issues A. B. C. D. 9.2. Pending, threatened, or expected claims Contemplation of bankruptcy Determination of what scope of transfers that can be made without rendering client insolvent Level of regulation of business (1) A. To determine likelihood of government creditor in the future Recommendations Solvency and Creditor Affidavit -51- ASSET PROTECTION AND THE PROFESSIONAL ATHLETE (1) (2) B. C. D. E. Consider having CPA prepare pre- and post-funding balance sheets Consider doing your own judgment and creditor search Financial Statements Tax Returns Public records searches for conveyances, liens, judgements, etc. Disclosure of risks document (1) (2) (3) (4) CYA that this type of planning is not bullet proof Disclose areas it will not protect against Advise in writing that exemptions are not 100% Explain sliding scale of protection (a) Control issues ! (b) The more retained control built in, the less effective the planning The more convenience features built in, the less effective the planning Convenience issues ! F. Engagement letter/fee agreement (1) Consider including provisions that define a fraudulent conveyance, that provide the consequences of one, that the attorney will not assist in a fraudulent conveyance, that the attorney is relying on disclosures of the client in this regard, and that the attorney may resign if he or she feels she is not getting full and honest disclosure, including continuing disclosure as needed G. H. 9.3. A. B. C. D. E. F. G. Watch conflict of interest in representing spouses Obtain personal references Tax law Creditor's rights Estate planning Trust law Criminal statutes International tax planning Bankruptcy -52- Areas of law involved ASSET PROTECTION AND THE PROFESSIONAL ATHLETE H. 9.4. A. Conflict of laws Money Laundering Control Act (1) (2) Civil and criminal penalties Crime to be knowingly involved in any transaction with respect to which the source of the funds is derived from a specified unlawful activity Connection between the transaction and the specified unlawful activity can be proved circumstantially 18 USC §§ 1956 & 1957 Crime to use mail or wire to defraud others [18 USC § 1341] Exposures (3) (4) B. C. D. E. (1) Mail & Wire Fraud State crimes Tax Fraud (1) (1) (2) (3) Transfers made to defraud the IRS [Code § 7206(4)] Conduct involving dishonesty, fraud, misrepresentation or deceit Conduct prejudicial to the administration of justice Assistance in conduct that is fraudulent or criminal Ethical Violations -53-