VI.       Other Asset Protection Strategies:

A.        General Comments:

As our Good Lord has blessed you materially, you unfortunately may become the “target” of some litigation attorney in the future.   From the 10+ years of managing my own family’s timber business, I can testify from personal experience that a business, and you personally for that matter, are subject to being sued regardless of the fact that you have not done anything wrong!  Moreover, absent further andpermanent, “pro-family” tax relief from Washington, your children, as well as their own children (your grandchildren), will be in a relatively high estate tax bracket and at risk of having a substantial portion of the assets with which your family has been blessed, going to Washington following the death of the last survivor of your self and your spouse, rather than providing for your family. 

Also, as to old adage goes, “We should be careful for what we ask!”  Under current proposals, the permanent repeal of the death tax might simple put American families “out of the pan, and into the fire!”  Currently, as noted above, there are a number of rules and techniques that allow us to greatly reduce, if not entirely avoid, federal estate taxes for your family, while at the same time affording the family to a large degree, what is called the “step up” in tax basis. 

This after-death, step up in the tax basis of your various assets gives your surviving spouse or other family members the ability to sell certain assets if necessary for their support and benefit, at no tax-costs.  However, the permanent repeal of the death tax will most likely result in the loss of such basis step-up.  Accordingly, American families could find themselves facing significant capital gains taxes for which there are no generally no “rules and techniques” for avoiding such taxes following the death of a loved one.

Asset protection planning is not based on hiding assets or an attempt to defraud existing creditors or those with pending or threatened claims against you.  Simply stated, we are attempting to protect you and your family against possible future contingencies.  Therefore, we must be cautious and avoid the negative implications that may follow from planning to protect assets other than in advance, that is, when there are known pending claims (lawsuits) by  plaintiffs and their litigation attorneys (the guys in the black hats!!!!).

The first line of defense in your overall Asset Protection Plan should consist of several alternative ownership arrangements for particular assets currently held in your name alone or jointly with your spouse.  First, we recommend that the ownership of your home be held as “tenancy in common for life with cross-contingent remainder to the survivor in fee.”  Although some attorneys advise their clients to transfer their home into the spouse’s name alone, we generally would recommend the cross-contingency remainder designation for the added security it provides from both your and your spouse's potential future creditors and their litigation attorneys. 

B.         Your Home:   

As noted above, placing the home in your spouse's name alone would provide creditor protection with respect to only your future creditors, but such an ownership arrangement would nevertheless subject your home to attachment by your spouse's creditors.  In contrast, the cross-contingent arrangement will provide that title to your home will be held in both of your names as a couple for your joint lives, with the surviving spouse becoming the sole owner after the death of the first to die. 

This arrangement provides the same survivorship rights to your home that are commonly obtained by husbands and wives owning property as "joint tenants";  however, the cross-contingent remainder provision provides the advantage of additional creditor/lawsuit protection.

Under this alternative arrangement, your home is protected and out of reach of your creditors during your spouse's lifetime, and also out of the reach of your spouse’s creditors during your lifetime. Therefore, the family is afforded dual protection from each of your individual creditors.  However, any “joint” creditor will still have the ability to attach your home for any obligation on which you and your spouse are both liable. The most common example of a joint creditor would be a bank holding the home mortgage.

More importantly, where a spouse’s health has begun to deteriorate, under current State Medicaid rules, the home can be protected from a future nursing home stay by what is generally referred to as a “life estate” deed, PROVIDED that new deed has been executed and recorded at least five (5) years before a nursing home stay becomes necessary. 

Please don’t leave your family in the unfortunately situation that we have seen happen too often.  True story:  Dad has never been sick a day in his life.  Mom unfortunately has required nursing home care for the pass several years.  Youngest daughter and her husband have remained on the homeplace and helped care for her parents and Dad had promised this daughter the property upon his death. 

You guessed it:  Despite his years of excellent health, Dad is the first parent to pass away; leaves no Will and never consulted with an elder law attorney regarding his spouse’s “special needs” situation.  Homeplace goes to the nursing home!  This daughter and her husband were forced to go to the bank, borrow the money, and “buy” her promised inheritance from the nursing home.

  C.       Life Insurance:   

As noted above, a “special needs” irrevocable trust may be created to hold any life insurance policy out of reach of your creditors as well as out of the reach of the government for estate tax purposes, AND THE NURSING HOME AS WELL.  But remember, policies currently held by you and transferred into the trust are still subject to estate taxes (and the nursing home to the extent of the policy cash surrender value) if you happen to die (or you, or your spouse, require a nursing home stay) within three (3) [NOW FIVE (5) with regards to a possible nursing home stay] years of such transfer:  Again, the lesson learned:  plan ahead; PLAN EARLY; do not delay!

D.         Land and Other Properties:   

With respect to the ownership of real estate (other than your home) and other assets such as investment accounts, you and your spouse should consider establishing a family limited partnership or an Alabama limited liability company (LLC) to own and manage such properties (as well as for any future acquired land). 

The LLC has the advantage of limited liability, as does the ownership of stock in a corporation.  But an LLC also provides certain income tax advantages otherwise obtainable only through the use of a general partnership.  However, a general partnership is still subject to the claims of each individual partner's creditors, while the LLC provides insulation from your individual creditors and those of your co-owners. 

It may not be absolutely necessary, based on your current asset values, that you proceed at this time with the establishment of a LLC, since you may be able to adequately protect your family from estate taxes, under current law, with the Wills and Insurance Trusts mentioned above.  However, the IRS literally hates the estate tax savings currently available through use of LLCs.  Because we certainly anticipate the Good Lord continuing to bless you and your family materially, your need for an LLC is not going away.  The availability to use a LLC, on the other hand, might soon vanish. 

This type of an arrangement provides maximum creditor protection without giving up control of your property (as contrasted with the use of an irrevocable trust) and also makes significant income tax advantages possible.  The costs associated with implementing this phase of your overall Asset Protection Plan alone could be a relatively significant sum. In many cases, there might also be a need for appraisals should be performed on all properties being transferred into the LLC.  However, in view of the substantial tax savings currently available with the LLC, not to mention the critically important benefit of insulating your property from potential lawsuits, this strategy should be viewed as a real bargain.

Of course, from an economic perspective, you should also weigh these minimum costs against the anticipated amounts and risk of claims associated with unfavorable individual ownership of your property.  Bottom line, if there is a substantial risk that a claim against you might exceed your liability coverage in an amount greater than $3,500 (perhaps the amount of any deductible for which you would be responsible under your current liability insurance policy), or your current plan or lack thereof, would pass such property “through” a special needs loved one straight into the open hands of that nursing home, then an LLC should be well worth the investment.

E.         Periodic Reassessment:    

Looking toward the future, you should periodically review your overall Asset Protection Plan as you and your family continue to be blessed materially.

F.         Closing Comments

Although the legal fees associated with an updated estate/asset protection plan might sound somewhat high at first glance, we trust you will take into account the substantial federal estate tax (and potential future Alabama inheritance tax) liability your family will otherwise be facing, which your Asset Protection Plan is designed to substantially reduce or eliminate.  And, please keep in mind, your comprehensive Asset Protection Plan will provide significant creditor (lawsuit) (nursing home) protection, as well as these tax savings and financial security benefits for you and your family for years to come.  It is difficult to put a price on the peace of mind with which you and your family will be provided through the proper implementation of your comprehensive Asset Protection Plan.  

If you do not have a current legal advisor or your attorney has indicated that he or she does not handle tax matters, we would welcome the opportunity to meet with you and your spouse to discuss the benefits to be derived from implementation of an overall asset protection plan for you and your family.  Of course, we will be more than happy to work with your current, local attorney and financial advisor to discuss these benefits as well. This outline should give you both an “advance look” at those issues that should be addressed before that unfortunate legal “complication” visits upon your doorstep. Your comments and any questions or requests for further information are welcomed and you may contact us by phone at (205)-349-1910; or please feel free to give us a call on our cell (205) 792-7304 which should be a local call for you in the 205 area; or, if you prefer, our email address is chip@cbrowderlaw.com 

HERBERT E. “Chip” BROWDER, was born in Montgomery, Alabama, on September 11, 1953; Chip was admitted to practice law in the State of Alabama in 1991; and is also admitted before the U.S. Tax Court, U.S. Court of Federal Claims and the U.S. Court of Appeals for the Eleventh Circuit in Atlanta.  Education:  University of Alabama (B.S. in Accounting, magna cum laude, 1975; M.A. in Accounting, 1977; J.D., 1991); New York University (LL.M. in Taxation, 1992).  Estate Planning Faculty Member, Alabama Bar Institute and University of Alabama School of Law, Bridge the Gap Seminars (1998 – 2007); Outstanding Third Year Editorial Board Member Award and Senior Lead Articles Editor, Alabama Law Review, 1990-1991.  Law School Recipient of: Richard S. Manley Local Government Law Award; American Bar Association Section Urban, State and Local Government Law Certificate of Recognition; University of Alabama Federal Tax Clinic Award; Prentice-Hall Federal Tax Award.  Chip is a member of the Tuscaloosa County, Alabama, and American Bar Associations (Sections on: Closely-Held Businesses; Probate and Real Property; Taxation; and, Trusts).

Chip has been an annual lecturer for the past number of years on Estates and Trusts at the University of Alabama Law School’s Annual “Bridge the Gap” Seminar for young lawyers in our state and a frequent seminar speaker. Chip’s law practice is concentrated in the areas of: Choice of Business Entities; Corporate, Individual and Partnership Taxation; Employee Benefits and Retirement Planning; Estate Tax and Business Succession Planning; Elder Law; Probate and Trusts; IRS Tax Dispute Resolution; Mergers and Business Acquisitions/Sales and Disputes; and, State and Local Tax Planning. 

Chip also has an extensive business management background, having managed his family’s hardwood veneer business and timber investments for over ten years, from 1977 through 1987, before returning to law school.

The sending or other provision of these seminar materials and the comments of your presenter are not privileged communications and do not create an attorney-client relationship. Please take note that the information provided is of a general nature and should not be relied upon without further consultation based upon your own particular factual situation and circumstances.  Also, the Alabama State Bar rules requires inclusion of the following:  “No representation is made that the quality of legal services to be performed is greater than the quality of legal services performed by other lawyers.” IRS Circular 230 Notice: Pursuant to IRS requirements, we are required to inform you that any federal tax advice whether written or verbal, provided during this presentation, is not intended to be used, and cannot be used, for purposes of (i) avoiding penalties under the Internal Revenue Code or, (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

 Copyright © 2013 Herbert E. “Chip” Browder.