FAQS: High Net Worth Individuals and Business Owners
Q: I've heard business colleagues talk about asset protection trusts. Would this vehicle make sense for me?
A: Asset protection trusts are highly customized and technically demanding plans. You may want to consider one if your net worth exceeds $500,000. (Remember, houses, cash in the bank, investment portfolios, insurance policies and retirement savings all contribute to your net worth.) If it's more than $1 million, you should definitely look into the benefits.
Q: I'm getting married next year. What specific protections can I put in place for my future spouse and children?
A: Congratulations! For structuring a child's inheritance, a trust is the simplest solution. You can make specific provisions, including the age at which your child will receive the inheritance. Unlike a will, a trust can also specify that children receive only income from the assets in the trust until they turn a certain age or ensure the assets remain protected from if your child is every sued. You can also specify to spread out payments over a number of years, or to require children to reach certain milestones before receiving any payments.
The McLawhorn Firm can also help you implement asset protection or estate planning trusts that consider the future protection and distribution of assets and benefits of both parties. These trusts may also be used in addition to, or in lieu of, a prenuptial agreement to protect certain types of assets.
Q: Would a Qualified Terminable Interest Property (QTIP) Trust be useful?
A: A QTIP Trust lets you provide for a surviving spouse and also maintain control of how your assets are distributed once your surviving spouse has also died. This type of trust is often used to ensure assets go to children from a prior marriage or to ensure that your assets remain within your family if your spouse remarries.
Q: I've started a foundation to support youth mentorship in my old neighborhood. How much can I, or others, give to it each year and still receive a tax deduction (without incurring a gift tax)?
A: Generally, donors (including you) can make cash contributions of up to 30% of their adjusted gross income (AGI) and receive an itemized deduction in the same tax year. For gifts of property and contributions of appreciated securities held for more than one year, deductions are limited to 20% of the donor's AGI. You can carry any excess amount forward for deduction in the five-year period after your contribution. As always, you should consult The McLawhorn Firm or your tax advisor for more information about your personal situation.
Q: Are there estate planning techniques I can use to loan money to family members?
A: Yes, but you have to be careful to make sure you avoid taxes imposed on you or the family member you loan to. The IRS lets you loan money through an intra-family loan at the Applicable Federal Rate, which the government sets each month. It's much cheaper than a bank rate. If family borrowers make wise investments with your loan, they may be able to generate income after paying you back.
Here's an example. You could loan a relative money to buy property (a boutique, a bed and breakfast, a home to retire in) at a low mortgage rate. As long as the property appreciates by more than this rate each year, your relative will profit from your loan. You could even reduce your relative's debt and your estate tax bill at the same time by giving your relative $13,000 -the maximum gift allowed without a tax penalty-every year to pay down the principal.
Q: I have liability insurance. Is that enough to protect my assets from lawsuits?
A: Adequate insurance is a good first defense against liability. But insurance policies often don't cover you for punitive damages or intentional wrongdoing. Potential lawsuits can also involve amounts that exceed your insurance coverage-a common predicament for physicians.
For example, the average medical malpractice policy is $1MM, whereas the average national malpractice award is about $3.9 million. This leaves the physician holding the bag for the other several million dollars. Could you survive that kind of a loss and still maintain your financial goals? Probably not.
Q: Are my retirement assets protected from creditors?
A: Federal law does not allow creditors to touch assets held in a retirement plan. Examples of protected assets include profit sharing, pensions and 401(k) plans. Laws protecting IRAs vary from state to state.
Q. What is a Family Limited Partnership?
A: While family limited partnerships ("FLP") are probably best known for the valuation discounts available when valuing an undivided interest in an FLP for federal gift and estate tax purposes, FLPs can also be used to protect assets from law-suits and creditor claims. Otherwise attractive and valuable assets to a creditor are made less so when they are transferred to, and held by, a FLP. Assuming the partners have respected the FLP as a separate and distinct legal entity separate from themselves, a creditor of one or more partners will be unable to reach partnership assets to satisfy its claim against any of its partners since the assets of the partnership are owned by the partnership, not the individual partners.
Additionally, should the creditor attempt to instead seize the debtor partners' interest in the FLP, the "charging order" limitation found in virtually all state limited partnership laws will likewise frustrate a creditor's efforts. The FLP can be amended to respond to changing business, family and legal needs. This flexibility allows the FLP to be drafted to facilitate the preservation and orderly transition of family wealth and managerial control from one generation to the next while protecting your assets.
Have questions of your own? Contact The McLawhorn Firm today for a consultation.
IRS CIRCULAR 230 DISCLOSURE: Unless expressly stated otherwise, any U.S. federal tax advice contained in this website is not intended or written by THE MCLAWHORN FIRM to be used, and any such tax advice cannot be used, for the purpose of avoiding penalties that may be imposed by the Internal Revenue Service.
