Florida IRA Account Protection

Florida asset protection law was in flux for a long time with respect to inherited IRA accounts. A number of Florida courts had decided that an IRA inherited by anyone other than a spouse fell under the definition of “inheritance” rather than “retirement savings.” The difference between those classifications is crucial. Inheritance is not protected from creditors as an exempt asset class. Retirement accounts, on the other hand, are completely protected exempt assets that cannot be reached by creditors.  From the standpoint of Florida asset protection for IRA accounts, what we wanted was for inherited IRA accounts to be exempt as retirement savings.

Legislature Changes Florida Asset Protection Law

The Florida legislature is on a roll when it comes to asset protection legislation! Not only did the legislature address the issue of single member LLCs when it enacted a new law that partially approves the decision in Olmstead while creating absolute charging order protection for other types of limited liability companies, but they have now also addressed the issue of Florida inherited IRA accounts described above.

Florida Statutes section 222.21 has been amended and now specifically defines inherited IRA accounts as exempt property. The effect of this is very significant, especially since the new law is retroactive. Even if an IRA was inherited prior to the this new law becoming effective, the retirement account is now protected as exempt property. We love retroactive Florida asset protection legislation (even though it creates a million other questions, like what happens if someone has already lost their inherited IRA in a lawsuit?).

Here’s an example of how this new Florida asset protection law in action. If Miss Piggy is a judgment debtor – if she owes lots of money to creditors – and inherits an IRA, the creditors will not be able to reach the assets held inside that IRA. They are exempt and completely off limits to satisfy debts.

Consider Moving Your IRA to Get Florida Asset Protection

The new asset protection law applies to all IRAs inherited by residents of the State of Florida, regardless of where the deceased owner of the IRA lived. If you live in Florida and inherit an IRA, it would be wise to move the inherited account to Florida so that you get the absolute benefit of the new asset protection law. States address this issue in drastically different ways, so it’s important that you take full advantage of the opportunities open to you under Florida asset protection statutes.

Taken together with the new law that addresses the Olmstead decision, it appears that Florida is becoming an asset protection friendly state.  There’s a long way to go. I still consider any asset protection plan complete unless it involves an international asset protection trust, otherwise known as a portable offshore trust, that can be triggered to safely remove assets from the reach of U.S. courts.

Florida Asset Protection

Transferring Assets Into Your California Asset Protection Plan

For the most part, it’s pretty easy to transfer assets into a properly formed asset protection structure. That’s especially true of our asset protection plans. Nonetheless, there are some occasional complications and difficulties that arise with the funding of various California asset protection strategies. For example, California state laws present some challenging burdens compared to other states. The purpose of this article is to provide some practical tips for funding your a California asset protection plan and to offer some general advice for making sure that your plan gets funded quickly and with the lowest possible cost.

California Asset Protection & Franchise Tax

If you live in California, state law requires that you pay a franchise tax for each business entity that you own.  That’s true no matter where the business entity was formed or exists. For example, if you live in California and you form a California limited liability company, you’ll be required to submit the appropriate tax forms and remit the franchise tax payment.  The same thing is true if you own a Nevada limited liability company or limited partnership.  The tax still applies.  It’s important to keep all this in mind when formulating an asset protection strategy.

Avoiding Reassessment of Tax Base

California asset protection law is quirky in another way too. The state can can (and will) reassess the value of real estate for tax purposes upon any transfer of title. Effectively that means you could end up paying much more in taxes if you don’t fund your asset protection plan properly. Since many plans involve holding real estate in limited liability companies which are themselves owned by a Family LLC, it can be tricky to transfer property into your plan without incurring additional taxes.

In short, there are no reassessments for “Transfers between an individual or individuals and a legal entity or between legal entities, such as a cotenancy to a partnership, or a partnership to a corporation, that results solely in a change in the method of holding title to the real property and in which proportional ownership interests of the transferors and the transferees, whether represented by stock, partnership interest, or otherwise, in each and every piece of real property transferred, remains the same after the transfer.” See https://www.boe.ca.gov/proptaxes/faqs/changeinownership.htm#4

Here’s what you need suggest for funding your California asset protection plan:

  • If you plan to transfer property into a limited liability company, make sure that company is owned by the same people and in exactly the same proportions as the property is owned right now.
  • Check with the recording clerk in the deed office to find out what (if any) disclosures are necessary.
  • Transfer the property into the limited liability company via a special warranty deed.
  • Follow-up with the clerk in the deed recording department to make sure that you have adequately disclosed to them that the property is still effectively owned by the same people and in the same proportions as it was prior to the transfer.
  • Transfer the limited liability company into your Family LLC.

The same rules apply regardless of whether you are transferring property into a limited liability company, a family limited liability company, a family limited partnership, or an asset protection trust.

By carefully following the steps outlined above, you can avoid having your property reassessed inside of a California asset protection plan, which could cost you thousands of dollars every year. If you have questions about this, call me. I’ll help you lawfully protect your hard earned assets with minimum impact in terms of tax liability.

Funding

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Deeding Your Home to an Asset Protection Trust & Due-On-Sale Clause

I’ve heard a lot of recent rumbling from clients about banks and mortgage servicers that are just plain uncooperative and unreasonable when it comes to transferring property into an asset protection trusts.  Banks seem to be doing a good job scaring people who want to refinance their homes.

A Typical Asset Protection Funding

Most scenarios go something like this: A client holds title to her home in the name of an asset protection trust. She decides to refinance while rates are at historic lows. The bank, however, has other plans.  The bank offers to refinance but only on the condition that the trust be amended to erode all of its asset protection features. It would actually be worth considering if lenders just wanted to give themselves more rights in the asset protection trust, but in most cases they insiste on completely obliterating the trust, which would open it to all future creditors. That is simply unacceptable.

My clients are savvy, so they have a better idea. Many clients simply remove the home from the asset protection trust and then refinance it. That used work just about ever time, and lenders never complained. Recently, however, lenders have been successfully scaring my clients by stating that if the home is ever deeded back to the asset protection trust, the due-on-sale clause will be triggered. Effectively, that means that the bank can accelerate the loan. In other words, they can force you to pay off the entire mortgage immediately.

It’s usually at this point that the client calls asking for help. In most cases, the bank’s behavior seems pretty insane to me. Financing a home held in an asset protection trust does not impair the bank’s rights and security interest in the home at all! It simply keeps your other creditors away from the home. In short, bank are massively wasting everyone’s time by making this an issue.

Federal Law Supports Asset Protection Trusts

The solution to the due-on-sale clause dilemma can be found in federal law. The Garn St. Germain Act, which states that a due-on-sale clause cannot be triggered when real estate is transferred “into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.” In other words, it would be unlawful for a bank to carry out the threat of triggering a due-on-sale clause if you deed your property into your asset protection trust.

How to Proceed When You Refinance

There is a simple formula you can follow when you want to refinance your home that’s held in an asset protection trust:

  1. Deed the home into your personal name.
  2. Refinance with your bank.
  3. Deed the home back to your asset protection trust, regardless of whether the bank tried to scare you with a due-on-sale clause scenario.
  4. If the bank does try to call your loan early, pass your lender a copy of the Garn St. Germain Act!

Funding

Crackdown on Offshore Accounts May Increase

If you have an offshore trust or offshore bank account, you need to appropriately report those assets on the FBAR. The IRS has an amnesty program called Offshore Voluntary Disclosure designed to provide incentives for individuals with unreported accounts to come forward.

The Government Accountability Office (the “GAO”), a government watchdog, has advised the IRS that it can do better in cracking down on offshore tax evasion. The GAO Report, Offshore Tax Evasion: The IRS Has Collected Billions of Dollars, but May Be Missing Continued Evasion, is based on several key findings:

  • Approximately 39,000 disclosures under the amnesty program have netted about $5.5 billion in tax revenue.
  • The median foreign bank account balance was $570,000 (as reported in the results of a previous amnesty program).
  • 6% of voluntary reports paid penalties in excess of $1 million. Over half of the people paying $1 million+ penalties for offshore accounts were involved with UBS.

Quiet Disclosure of Offshore Accounts Rampant

One problem is that many people aren’t reporting their offshore accounts through the IRS’s Offshore Voluntary Disclosure program. Rather, they are “quietly reporting” their offshore accounts by amending past tax returns and FBARs with the hope of avoiding Offshore Voluntary Disclosure penalties. One thing is clear. Quiet disclosure is not good enough in the eyes of the IRS.

IRS Knows About Offshore Account Quiet Disclosures

In reviewing amended tax returns from 2003 to 2008, the GAO found more quiet disclosures than the IRS by matching first time offshore account disclosures with actual offshore accounts. The GAO stressed the need for the IRS to find these quietly disclosed offshore accounts rather than let them slip through the cracks. Voluntary reports of offshore accounts doubled during the period spanning from 2007 to 2010. The total number of offshore accounts is now estimated at 516,000. If only 39,000 people have reported under the Offshore Voluntary Disclosure amnesty program, it stands to reason that hundreds of thousands have not reported.

The GAO made other suggestions as to how the IRS can crackdown on penalties due for unreported offshore accounts. Specifically, the GAO suggested that the IRS can effectively analyze first time reports of offshore accounts for trends that point to people who are potentially trying to avoid past penalties by complying prospectively – from this time forward.

Specifically, the GAO suggested that the IRS should simply identify which tax returns report foreign accounts or file and FBAR and look at the previous year. If no FBAR was filed or foreign account disclosed in the previous year, the IRS will likely catch a huge number of quiet disclosures. That could potentially mean tens of billions of dollars in new tax revenue. While the IRS is free to enforce the tax code in any manner it sees fit, the GAO’s recommendations were quickly adopted. We’ll just have to wait and see how aggressively the IRS implements audits and investigations of those who have disclosed offshore accounts.

Offshore Protection

75% Effective Tax Rate on Marijuana Sales through 280E?

In the 1980’s, a convicted drug trafficker tried to avoid an Al Capone-like issue with the I.R.S. by actually paying taxes on his drug trafficking activities. This character wisely deducted the expenses incurred in operating his illegal business. You know, typical drug trafficking expenses for things like yachts, airplanes, weapons, and bribes.

IRS Response & Unintended Consequences

In response, Congress passed section 280E of the Tax Code, which limits deductions for anyone trafficking in illegal substances. This law, which targeted cocaine smugglers, is now impacting sellers of medical (and recreational) marijuana in states were such substances are legal. Section 280E applies to legal sellers of marijuana simply because marijuana is considered a controlled substance under Federal law. The result is effective tax rates as high as 75% for businesses legally selling marijuana.

Revisit Existing Legislation

If you’re concerned about asset protection, it’s also likely that you’re worried about taxes. This fact pattern highlights an important issue. In essence, an existing statute is now impacting factual circumstances that didn’t exist and weren’t considered at the time when the statute when passed. When this happens, no matter what the circumstances, our lawmakers should revisit their previous decisions, rather than just use existing legislation to their advantage for political gain. That would be good policy.

For two good articles on this subject, check out:

Harvard law school’s new course on getting around marijuana taxes, and

CNN Money

Pirate Asset Protection

Salvation for Domestic Asset Protection Trust?

A Domestic Asset Protection Trust (DAPT) is a type of trust that allows you to protect assets that are held for your own benefit. These trusts are irrevocable and they have spendthrift provisions. That simply means that the assets held in a DAPT are not available to creditors of the beneficiaries (who, in this case, are also trust creators). There is one big problem with Domestic Asset Protection Trust. Namely, most states do not have statutes that allow for creditor protection or spendthrift provisions in self-settled trusts.

In other words, the law in most states is that if you create a trust for your own benefit, then assets held in the trust can be accessed by your creditors. For instance, California Probate Code section 15304 provides the following:

(a) If the settlor is a beneficiary of a trust created by the settlor and the settlor’s interest is subject to a provision restraining the voluntary or involuntary transfer of the settlor’s interest, the restraint is invalid against transferees or creditors of the settlor. The invalidity of the restraint on transfer does not affect the validity of the trust. (b) If the settlor is the beneficiary of a trust created by the settlor and the trust instrument provides that the trustee shall pay income or principal or both for the education or support of the beneficiary or gives the trustee discretion to determine the amount of income or principal or both to be paid to or for the benefit of the settlor, a transferee or creditor of the settlor may reach the maximum amount that the trustee could pay to or for the benefit of the settlor under the trust instrument, not exceeding the amount of the settlor’s proportionate contribution to the trust.

Asset protection laws in California, Texas, Florida, New York, and New Jersey do not provide protection for assets held in self-settled DAPT trusts.

Domestic Asset Protection Trust States

The laws of some states do, however, protect assets held in self-settled spendthrift DAPT trusts. These states include Tennessee, Ohio, Wyoming, Nevada, and Alaska. If you live in one of these states, then you can put your wealth into a DAPT to protect assets, so long as the creation and funding of the asset protection trust is not a fraudulent transfer. What if you don’t live in DAPT state? Can you still take advantage of the laws of states that offer domestic asset protection trust statutes? The answer is “maybe.” The problem is that laws of the state where you live typically apply to situations where creditors are trying to access your assets. Again, since most states don’t recognize DAPTs, in most cases you’ll be out of luck.

Getting DAPT Laws to Apply and Protect

There is one obvious way to get around this issue. One can simply move to the DAPT state where their asset protection plan was formed prior to the time when creditors attempt to execute on a judgment. In that case, it’s likely that a DAPT will be upheld. Another interesting theory is to create a domestic asset protection trust, place assets under the control of a trustee in the state with DAPT legislation, and create the DAPT with language that prohibits removal of the assets from the DAPT state.

This is an interesting concept that has yet to be tested in court. In a sense, this potentially gives domestic irrevocable trusts the same level of protection as offshore trusts. What’s clear is that assets in a non-DAPT state can’t readily be protected. In other words, if you own a house or have cash in a bank account in a non-DAPT state, the courts in the non-DAPT has jurisdiction over those assets and are very unlikely to apply rules in favor of asset protection.

A recent theory has been going around that if a creditor seeks to enforce a judgment against property located in a non-DAPT state (let’s say Texas), which is owned by a trustee in a DAPT state (e.g. Wyoming), the trustee could commence an action for a Declaratory Judgment in the DAPT state. In that scenario, if the trustee “wins first” (i.e. if the trustee obtains the Declaratory Judgment before the creditor can execute on the property in the non-DAPT state) , then the Declaratory Judgment can be domesticated in the non-DAPT jurisdiction. Then, under the Full Faith and Credit Clause of the U.S. Constitution, the non-DAPT state would be forced to honor the judgment.

Problems with Declaratory Judgments and DAPTs

There are two problems with this theory:

  • Lack of personal jurisdiction, and
  • Federal Anti-Injunction Act

First, in order to obtain a Declaratory Judgment in a DAPT state, the DAPT state itself would have to legally be able to exercise personal jurisdiction over the creditor. In many (if not most) cases, that will be easier said than done. Then, even if personal jurisdiction can be established, the creditor could make a motion to remove the case to Federal court, in which case 28 U.S.C. § 2283 would prevent any sort of declaratory judgment from being entered, as it provides:

A court of the United States may not grant an injunction to stay proceedings in a State court except as expressly authorized by Act of Congress, or where necessary in aid of its jurisdiction, or to protect or effectuate its judgments.

I’m aware of at least one case where section 2283 was successfully used by a creditor in an asset protection context. So the use of a Declaratory Judgment in this scenario isn’t really interesting, since there are too many problems with involving the creditor. What is interesting is the idea of using a declaratory judgment vis-a-vis the beneficiary of a DAPT and the trustee.

In other words, if the beneficiary (and creator) of a properly created trust institutes a declaratory action against his or her own trustee for a distribution of assets to the creditor in the DAPT state, then that declaratory judgment could potentially be domesticated in the non-DAPT state, which would keep the beneficiary (you) from a contempt of court finding and protect your assets.

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