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KIRWAN
LAW FIRM
Worksheet Summarizing Asset Protection Techniques and In What
Situations They Are Best Suited to Protect Assets
For
a PDF version, click here to download*
This Worksheet is designed to provide an overview of the many
means of protecting your hard earned assets and to give some guidelines
as to which asset protection strategies may be appropriate given your personal
situation and asset compilation. It is intended to be used in conjunction
with the book “The Asset Protection Guide for Florida Physicians” which
provides a comprehensive explanation of each technique, the upsides and
downsides of each, and many traps for the unwary which are not presented
in the overview chart below. This book is available for purchase at http://www.KirwanLawFirm.com.
The primary overview chart gives a brief overview of the most common strategies
used to protect one’s individual assets, each strategy’s primary
upsides and downsides, the price range you should expect to implement it,
and the Chapter in the “The Asset Protection Guide for Florida Physicians” that
discusses the strategy. As noted above, the chart only provides a summary
and should not be relied on alone. Remember that the asset protection techniques
described below may not be effective if the creditor you wish to protect
against has already been identified. In addition, be aware that the two “Super
Creditors,” namely the IRS and your spouse, will not be thwarted
by most of the techniques set forth below. One final note before proceeding,
this Worksheet does not cover the topic of protecting practice assets such
as accounts receivable. I have devoted a whole chapter in my book to that
subject and suggest that you read it to get a clear understanding of the
best methods for protecting these important assets. By the way, I strongly
recommend NOT engaging in any account receivable financing structure as
it has significant downsides including income tax liability, enormous expenses
over time, and weak overall asset protection.
The process described below is designed to help you determine the most
appropriate means of protecting your assets by examining the type of asset,
your personal situation, and the value of the assets to be protected. Following
these steps will help you identify the asset protection techniques best
suited for you.
Step 1 - Identify Your Assets
The obvious beginning point is to identify
what assets you own. It is recommended that you do this in writing. You
should categorize your assets
into the following groups: (1) Primary Residence; (2) Vacation Homes (i.e.,
real estate used by you other than rental property. Property that is rented
part time and used personally part time is usually classified as Investment
Real Estate), (3) Investment Real Estate, (4) Non-Retirement Investment
Assets (i.e., stocks, bonds, mutual funds, cash, etc. NOT held in an IRA
or ERISA plan (i.e., 401k, profit sharing, money purchase, defined benefit,
etc.)), (5) Retirement Plan Assets, (6) Life Insurance and Annuities; (7)
Personal Property (i.e., Collectibles, Jewelry, Furnishings, Automobiles,
etc.), and (8) Business Interests (ownership in closely held companies).
If you find it easier, you can download an Estate Planning Questionnaire
from http://KirwanLawFirm.com which provides a means to categorize your
assets.
Step 2 - Identify Which Assets Are Already Exempt
The next step is to
identify which assets are already protected. For example, if your primary
residence falls within the constitutional acreage limitations
it is protected. Likewise, IRAs and certain (i.e.,
not all) ERISA plans
and cash value of life insurance and annuities are protected from creditor’s
claims under Florida and/or federal law. Other assets may be protected
from a physician’s potential malpractice liability but have limitations
such as assets held as Tenants by the Entireties and assets held by a lower
risk spouse. At this point, consider these assets to be unprotected. Later
in step six you will go back and review the upsides and downsides associated
with these forms of ownership to determine whether you are comfortable
with the level of protection offered by them. Now you should have eliminated
the exempt assets from your list of personal assets and are left with the
non-exempt assets (i.e., the assets that could potentially be reached by
a judgment creditor). On the last page of this worksheet, you will find
the Asset Protection Technique Elimination Worksheet. This worksheet contains
several blank charts with a blank line above each one to write in the applicable
asset class. For example, if your unprotected assets fell into the asset
classes of (1) Non-Retirement Investment Assets, (2) Personal Property,
and (3) Investment Real Estate, you would fill in the blank line after
Asset Class #1 with s with “Non-Retirement Investment Assets”,
the blank line after Asset Class #2 with “Personal Property,” etc.
Step 3 - Identify the Asset Protection Techniques Best Suited to Protect
the Asset Class
Next, use the Asset Class Table on the following page to
identify the various asset protection methods available to protect each
asset class
identified as needing protection. On your Asset Protection Technique Elimination
Worksheet, using a pencil, place an X in the box below each asset protection
technique identified in the Asset Class Table as being potentially applicable.
Step 4 - Identify the Asset Protection Techniques Best Suited to Your
Personal Situation
Next, use the Personal Situation Table on the following
page to identify the various asset protection methods available to protect
assets given
your personal family situation. On your Asset Protection Technique Elimination
Worksheet, ERASE the Xs previously marked under all the asset protection
techniques that are INAPPLICABLE given your personal situation.
Step 5 - Consider the Cost of the Asset Protection Techniques Relative
to the Value of Your Assets
This is the step that will require the greatest
degree of personal discretion. This stems from the fact that there are
a few ways of making an appropriate
cost-benefit analysis. First, if your unprotected assets are worth a significant
amount, the cost of any asset protection technique will be less as percentage
of the assets being protected. For example, if you have an investment portfolio
worth $2,000,000, spending $15,000 on an asset protection technique only
amounts to 0.75% of the assets being protected. On the other hand, if your
investment portfolio is worth $500,000, that money may be worth more to
you (i.e., the less one has the more it is typically worth to the owner).
Therefore, even though the same $15,000 legal fee now represents 3% of
the assets being protected, that cost may be well worth it if the $500,000
is the bulk of the physician’s retirement money. Another way to view
the cost benefit analysis is based on how rapidly your assets are growing.
I have worked with physicians who have had $300,000 to $400,000 of investment
assets at the time we met but who were saving $200,000 to $300,000 per
year. Many of these physicians have felt the fee justified the protection
since it will be protecting more and more assets over time. On the opposite
end of the spectrum, I have also worked with physicians who have had over
$5,000,000 in assets who just wanted to place assets in the spouse’s
name or use TBE ownership despite their downsides because they detested
paying for asset protection. One final word on costs, if you decide to
use insurance products to protect assets (which may make imminent sense
under certain circumstances), make sure you understand the actual cost
of doing so. The underlying mortality and administrative expenses associated
with life insurance and annuity products typically range from 1% to 3%
each year above and beyond what you would pay if those assets were invested
outside the insurance product. That can equate to an additional annual
cost of $10,000 to $30,000 for every $1 million protected every year and
there may be additional penalties if you wish to withdraw the assets. Just
make sure that you understand the underlying costs and penalties since
they are oftentimes not readily apparent.
After you determine which of the asset protection techniques are more
expensive than you feel is appropriate given the value of the assets being
protected and their importance to you, go back to your Asset Protection
Technique Elimination Worksheet and ERASE the Xs previously marked under
all the asset protection techniques that you consider excessive from a
cost standpoint.
Step 6 - Go Back and Review the Downsides
The final step is to look at
the remaining Xs on your Asset Protection Technique Elimination Worksheet
and go back and review the downsides associated
with each technique listed on the chart entitled Overview of Primary Asset
Protection Techniques. I also recommend reading the relevant chapter of
the “The Asset Protection Guide for Florida Physicians” in
order to get a complete picture of the upsides and downsides associated
with each technique since the chart simply is too small to give a complete
picture of everything you may want to know. After you have done this, return
to your Asset Protection Technique Elimination Worksheet and ERASE the
Xs previously marked under all the asset protection techniques which you
feel have too many downsides (or even one big downside you feel is very
distasteful).
Conclusion
After completing these six steps, you will be left with the
asset protection techniques that have the greatest likelihood of balancing
your desire for
asset protection with your need for planning that takes into consideration
your personal asset structure, your personal family situation, your personal
sensitivity as to cost, and your personal view as to each techniques downsides.
More importantly, you will understand why these techniques are best suited
for you and you will be armed with sufficient information to intelligently
discuss asset protection planning with your attorney. You will also want
to incorporate your estate and financial planning into your overall plan
to ensure that all your needs are being adequately met and will continue
to be met over time.
ASSET CLASS TABLE
† Note that your personal residence should never be
owned by a Revocable Trust, Family Limited Partnership, Limited Liability
Company, or anything other than an individual or individuals.
†† LLCs, however, this requires specialized planning beyond the scope
of this Worksheet.
* Self-directed IRAs only
‡ Primarily for collectibles PERSONAL SITUATION TABLE
† Note that your personal residence should never be
owned by a Revocable Trust, Family Limited Partnership, Limited Liability
Company, or anything
other than an individual or individuals.
†† LLCs, however, this requires specialized planning beyond the scope
of this Worksheet.
* Self-directed IRAs only
‡ Primarily for collectibles
Overview of Primary Asset Protection Techniques
| |
General Rule |
Upsides |
Downsides |
Type of assets it can
protect |
Who Should Consider Using
It? |
Cost Range
(the price range is an average and may be more or less based on complexity
of planning). |
Chapter in Book Giving
Detailed Explanation |
#1
Homestead |
Primary residence of Florida residents that are 0.5 acres or less
(if located within in city limits) or 160 acres or less (if located
outside city limits) are protected from creditors regardless of value. |
Inexpensive;
Most physician’s own their own home.
Protection level is presently very solid.
Planning opportunities exist for sheltering liquid assets after a law
suit is brought but before judgment by paying off a mortgage or buying
a new home.
Some advanced techniques may be used to protect homes that exceed the
constitutional acreage limitations. |
Few downsides;
Potential for future law changes to limit homestead protection;
Homes that are larger than protected acreage can be subject to forced
sale.
|
Primary residence. |
All physicians who own their own homes that meet the constitutional
acreage requirements;
Any physician who has already identified a creditor and who has unprotected,
liquid assets.
NOTE that some advanced techniques may be used to protect homes that
exceed the constitutional acreage limitations.
|
Price of home. |
Chapter 8 |
#2
IRAs
|
Generally protected under Florida law. |
Protection level is strong.
Tax deduction permitted for contributions to IRAs.
Assets in IRAs grow on a tax deferred basis.
|
Limitations on amount that can be contributed to IRAs;
Penalties are generally applicable if assets are withdrawn before age
59 1/2.
|
Stocks, Bonds, and other similar investment assets;
Real Estate (only in Self-directed IRAs).
|
All physicians who (i) qualify to contribute to IRAs;
(ii) are willing to save for retirement; and
(iii) are accepting of the present limitation as to immediate access.
|
Free or very inexpensive. |
Chapter 9 |
#3
ERISA Plans |
Generally protected, except if only company owners (and spouses)
are covered. Grey area exists for plan owners even if other employees
are covered (See book). |
Protection is strong if you are a non-owner employee and most probably
very strong for owner employees provided the plan also covers non-owner
employees.
Tax deduction permitted for contributions to IRAs.
Assets in IRAs grow on a tax deferred basis.
|
Limitations on amount that can be contributed to ERISA plans;
Penalties are generally applicable if assets are withdrawn before age
59 1/2.
|
Stocks, Bonds, and other similar investment assets. |
All physicians who (i) have an established ERISA plan to contribute
to;
(ii) are willing to save for retirement;
(iii) are accepting of the present limitation as to immediate access;
and
(iv) who are not sole practitioners with no non-owner employees (note
that a spouse does not qualify as a non-owner employee).
|
Relatively inexpensive for most ERISA Plans. |
Chapter 9 |
#4
Wage Accounts |
Protects earnings of Head of Family (one who provides 50% of support
for dependent) if deposited in a Wage Account (See book on how to establish).
Earnings of a Non-Head of Family are only partially protected (75%
of earnings).
|
Inexpensive to establish.
Protection level strong;
Allows for transfer of wages to other exempt forms of property ownership
with less exposure to fraudulent transfer claims from creditors.
|
Few downsides;
Protection not complete if physician is not “head of family;”
Additional administrative burden of having wage account.
Not available to sole practitioners or physicians who own a controlling
interest in the company that employs them. Specialized planning can
sometimes be used to avoid this result.
|
Earnings in the form of wages and bonuses.
(Note it does not protect business profits or distributions).
|
All physicians who do not own a controlling interest in the entity
that employs them. |
Free or very inexpensive. |
Chapter 10 |
#5
I Gave It To My Spouse Planning |
Property owned by spouse is generally not reachable by creditors
of the other spouse. |
Inexpensive to establish;
Protection level strong if transfer to spouse was completed before
creditor identified;
Allows for continued asset protection to physician upon death of non-physician
spouse if proper estate planning is undertaken.
|
No asset protection if “low risk” spouse is sued;
Spouse can have advantage in case of divorce from a control perspective;
If trust is not used, physician may lose control over assets in name
of spouse. |
All assets that can be owned by a non-physician, including:
Stocks, Bonds, and other similar investment assets;
Business Interests;
Real Estate; etc.
|
All physicians (i) married to “lower risk” spouses, (ii)
who consider themselves to have a low risk of divorce. |
Free if no trust is used;
If trust is used generally $2,400 to $3,000.
|
Chapter 12 |
#6
Tenants By
Entireties (TBE) |
Property owned as TBE cannot be reached by the creditors of either
spouse individually. A joint creditor of both spouses can reach TBE
property. |
Inexpensive to establish;
Protection level strong if transfer to TBE was completed before creditor
identified.
|
TBE does not protect assets from joint creditors of physician and
spouse;
Asset protection benefits lost on death of low risk spouse without
possibility of leaving assets to physician in asset protected trust;
Possible increased estate tax cost.
|
All assets that can be co-owned by a physician and a non-physician
including:
Stocks, Bonds, and other similar investment assets;
Business Interests;
Real Estate; etc.
|
All physicians (i) who do not own high risk property (i.e., such
as rental real estate) jointly with their spouse (even as TBE) and
(ii) who consider themselves to have low risk of divorce. |
Free or very inexpensive. |
Chapter 11 |
#7
Life Insurance
&
Annuities
|
Cash value of life insurance and annuities are not reachable by creditors
in Florida. The death benefit under insurance policies are not reachable
by the creditors of the decedent. |
Simple to establish if health is reasonably good;
Protection level strong if transfer to insurance product was completed
before creditor identified;
Potential for tax deferred/free investment growth;
Availability of certain investment guarantees.
|
Potentially expensive method of protecting assets especially if no
insurance need exists (an additional cost of just 1% means $10,000
per year to protect $1 Million in assets);
Potential penalties for withdrawing assets before certain dates;
Difficult to accurately determine costs and penalties associated with
insurance product.
|
Stocks, Bonds, and other similar investment assets purchased under
the terms of the relevant insurance product. |
Any physician who understands the costs, penalties, and limitations
of the insurance product from a financial perspective and finds them
to be an intelligent method for investing assets.
NOTE the associated additional costs can make perfect sense if the
physician has an insurance need or wants to take advantage of certain
investment guarantees.
|
Typically from 1% to 3% per year of assets invested in the insurance
product. |
Chapter 13 |
#8
Family Limited Partnerships and Limited Liability Companies |
These entities can protect assets by virtue of something called Charging
Order Protection. In essence, if you are sued, the creditor is typically
unable to reach partnership assets unless you decide to distribute
them. |
Asset protection can be reasonably strong depending on jurisdiction
FLP is established and quality of partnership agreement;
Creditor may be taxed on portion of FLP income if charging order is
obtained by creditor;
Ownership of assets can be separated from investment control;
Estate and gift tax discounts can ameliorate estate planning.
|
Assets can be “trapped” in FLP / LLC for duration of
judgment (20 years) if charging order is obtained by creditor;
Moderately expensive to establish and maintain;
Single member LLCs offer little to no asset protection from judgment
creditors.
|
Real Estate;
Stocks, Bonds, and other similar investment assets;
Collectibles.
|
Any physician who (i) has a spouse or at least one other person willing
to be a partner in the FLP, and (ii) who has sufficient exempt sources
of cash flow (i.e., insurance / annuity cash value, IRAs, retirement
assets, exempt wages, disability insurance proceeds, etc.) in case
a charging order is handed down and the FLP assets are unavailable
to the physician during the duration of the judgment. |
$8,000 to $10,000 to establish;
$500 to $1,000 per year to maintain.
|
Chapters 15 and 16 |
#9
Florida Trusts (i.e., Non-Self Settled Trusts) |
Certain trusts established by one person for the benefit of another
protect the trust assets from the beneficiary’s creditors. |
Can provide strong asset protection with respect to assets received
by physician by gift or inheritance;
Assets gifted by physician to others can be unreachable by physician’s
creditors if transfer is made before creditor is identified;
Numerous estate planning benefits.
|
Physician cannot be Trustee of a trust he or she is a beneficiary
of in Florida;
Assets gifted by physician are no longer available to physician.
|
All assets that can be owned by a non-physician, including:
Stocks, Bonds, and other similar investment assets;
Business Interests;
Real Estate; etc.
|
Any physician expecting to receive a large gift or inheritance from
someone willing to establish such a trust;
Any physician wishing to gift assets to another, understands that the
physician will lose access to the gifted asset, and who wants to gain
the associated estate planning benefits and/or provide the trust beneficiary
with asset protection benefits.
Note that the beneficiary can sometimes be the physician’s spouse.
|
$1,000 to $3,000 to establish. |
Chapter 17 |
#10
Delaware Trusts (i.e., Self Settled Trusts) |
Protects trust assets from the claims of creditors of the person
creating the trust if they are a discretionary beneficiary. Administration
and assets are typically held in the United States. |
Can provide strong asset protection especially if coupled with FLP
or spousal planning;
Can protect assets of unmarried physicians;
Significant flexibility and ability to control management of trust
assets;
Expensive for plaintiff to try and collect judgment with no guarantee
of success;
Can be drafted to terminate upon retirement from medicine.
|
Cost to establish and maintain on the moderate to high end of the
cost spectrum;
To date, domestic self-settled asset protection laws have yet to be
tested;
|
All assets that can be owned by a non-physician, including:
Stocks, Bonds, and other similar investment assets;
Business Interests;
Real Estate; etc.
|
Any physician wishing to gain greater asset protection, who does
not wish to place assets beyond their ultimate reach, who wishes to
maintain investment control over the trust assets, and who understands
the methods of ameliorating the protection offered by these trusts
by mitigating the downsides associated with the untested nature of
the domestic self-settled trust laws. |
$14,000 to $16,000 to establish.
$3,000 to $3,500 per year to maintain.
|
Chapter 18 |
#11
Offshore Trusts |
Protects trust assets from the claims of creditors of the person
creating the trust if they are a discretionary beneficiary. Administration
and assets are typically held outside the United States. |
Can provide very strong asset protection for investment assets capable
of being held outside the United States;
Trust assets beyond the control of United States courts;
Significant flexibility and ability to control management of trust
assets;
Expensive for plaintiff to try and collect judgment with no guarantee
of success;
Can be drafted to terminate upon retirement from medicine.
|
Cost to establish and maintain on the moderate to high end of the
cost spectrum; Unless properly structured, and timely funded, potential
risk of being jailed for contempt of court. |
All assets that can be owned by a non-physician, including:
Stocks, Bonds, and other similar investment assets;
Business Interests;
Real Estate; etc.
NOTE that if the asset cannot be held outside the boundaries of the
United States, the asset protection will not be as strong with respect
to those assets.
|
Any physician wishing to gain greater asset protection, who does
not wish to place assets beyond their ultimate reach, who wishes to
maintain investment control over the trust assets, who is comfortable
having assets held in a Swiss bank or other offshore financial institution,
and who understands the methods of ameliorating the protection offered
by these trusts by mitigating the downsides associated with the potential
contempt of court risks. |
$20,000 to $30,000 to establish.
$3,000 to $4,000 per year to maintain.
|
Chapter 19 |
The above chart is designed to give an overview of many, but
not all, methods of protecting one’s assets from the claims of judgment
creditors. Greater asset protection is oftentimes obtained by combining
techniques (one example is combining an FLP or LLC with a Domestic or Offshore
Asset Protection Trust), and using techniques beyond the scope of this
Worksheet. In addition, much of a plan’s overall effectiveness stems
from the manner in which the documents are drafted and the plan is funded
(e.g., funding asset protection structures with exempt assets such as TBE
property, for example). Many trusts, partnership agreements, and other
legal documents I have reviewed offer very little protection because the
attorney or planner did not fully understand the nuances of the technique
or the oftentimes hidden traps for the unwary. Please ensure the person
you choose to implement your asset protection plan can fully explain the
upsides and downsides of the recommendations
they are making (and there is always a downside) and intelligently integrates
it with your estate
and financial plan. If you do not understand a technique’s downsides,
you should not implement it as part of your planning.
ASSET PROTECTION TECHNIQUE ELIMINATION WORKSHEET
Asset Class #1
Asset Class #2
Asset Class #3
Asset Class #4
For more resources from the Kirwan Law Firm, visit their website at www.kirwanlawfirm.com
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