I am seeing a massive increase in investment fraud, theft, and embezzlement among our affluent business owner clients right now. This exposure is coming from both outside sources AND partners, executives and employees of all types.
I continually post issues and warnings here, in my private email update newsletters to clients and advisors and on Twitter to try to help, but the scams evolve so fast and multiply so quickly that it's impossible to keep up with this human "virus", even with the help and tips supplied by other top pros like my friend Greg George at
GTI-ADVISORS.COM, a leading professional due diligence firm.
The list below is currently being circulated by state and local govt. nationwide and includes many of the issues that I have commented on previously including here in my previous post on Affinity Fraud taking advantage of personal, religious and cultural connections: http://tinyurl.com/kjdwxm
Please take a moment to protect yourself or your clients by taking a look at this report, it applies to EVERY city and state in the country.
LIST OF TOP TEN INVESTOR FRAUD SCHEMES:
http://www.cc.state.az.us/Divisions/Administration/news/090821Top%20Ten%20Investment%20Schemes.pdf
Thursday, August 27, 2009
Monday, August 17, 2009
LONG TERM CARE INSURANCE - CAN YOU AFFORD NOT HAVE IT?
10 Vital Points to consider about your LONG TERM CARE INSURANCE
As an Asset Protection attorney ANY avoidable source of loss, risk or exposure to my clients is unacceptable. One often overlooked area is the possibility that you or a loved one may need long term care as a result of age, illness or accidents. In cases where such care is required, the financial effects can be devastating even to the most affluent clients and are a needless expense that can be avoided.
For help in this area I turned to an expert, Dr. Jonathan Smith, M.D. a medical specialist who knows what this care costs and who now provides education and coverage to clients and advisors all over the U.S. on this easily addressed but potentially serious exposure. He shares important thoughts on this issues with us below. The insurance part is good enough, but some options are also both creditor protected AND have a return of premium guarantee if you never need it. Interestingly, even DOCTORS (who know better) often neglect this area of their own planning.
Here are Dr. Smith's points, they are tough to argue with...
1. The successes of medical science and the Medical Profession have helped people to live longer, but not necessarily healthier.
2. Women live longer than men.
3. The Federal Government says "at least 70% of the people over age 65 will require some form of Long Term Care services at some point in their lives". (1)
4. The Term Long Term Care services is applied to any 1 of 3 levels of services a person receives when that person fails to perform at least two of the six Activities of Daily Living (ADL), or is mentally incompetent.The ADLs are:
A - ambulating, walking around
B - bathing oneself
C - continence; continent of urine and/or stool
D - dressing
E – eating; feeding oneself
T - transferring; moving between bed and chair, etc
5. The inability to perform the ADLs may occur at any age.Example: as a result of a severe automobile accident, a person is left unable to walk (Ambulating). Toileting and Bathing are accompanying failures. As a result, who is going to move that person to a toilet each time there is a need to urinate?Or shall that person be left to soil him/herself?
6. The cost of care can be CATASTROPHICALLY EXPENSIVE.
Example: When the minimum wage in California is $8.00 per hour for UNSKILLED help, the cost for labor for home-help is $192.00 per day, and, if paid from a tax-deferred account, is nearly $120,000.00 per year! (assuming an overall tax rate of 40%)
7. Medicare and private health insurance programs do NOT pay for the majority of long term care services. (1)
8. Successful business owners have a special tax advantage when it comes to protecting earned assets from the aforementioned real and crippling financial losses.
9. Successful business owners can own PEACE OF MIND for themselves and their dependents, thus sparing each other the effects of the potentially devastating financial losses.
10. The successful business owner can experience the DIGNITY of receiving care at home, instead of 'spending down assets' to be eligible to be admitted to a Medicaid facility. He still has the ability to leave a LEGACY with the premium payment money returned upon his death.
It comes as a surprise to many that there is an insurance policy that has been around since HIPAA (1997) which specified Long Term Care Insurance as "A Health Benefit" in the tax code. (HIPAA LEGISLATION PUBLIC LAW 104-191 AUGUST 21, 1996 IRC Sec. 7702B)
Such a product is QUALIFIED LONG TERM CARE INSURANCE with CONTRACTUALLY-GUARANTEED FULL REFUND OF ALL PREMIUMS PAID with no reduction in the refund for benefits paid.
HOW DOES IT WORK? Money is paid to the the Insurance Company; the amount is enough to buy the Peace of Mind, the Dignity of the Insured and/or his family, and the size of intended Legacy.
The premium payment may be partially tax deductible, or completely tax deductible, if paid as a benefit to employees in a C corp,{IRC Sec. 162(a) and Regulations.162-10; IRC Sec. 162(a) and ISP Coordination Paper UIL 162.35-02; IRC Sec. 7702B(a)(3) IRC Sec. 7702B(a)(1)}: and is ERISA independent (ERISA: 29 USC 1191b IRC Sec. 1167; Not subject to ERISA) (please consult your tax attorney/ accountant we never provide specific tax advice in a setting like this).
Long term care Insurance is 'purchased' for a level of benefits, and upon death of the insured, the insurance company contractually guarantees to refund all premiums paid (and this is a nontaxable event!{IRC Sec. 7702B(b)2(C)(1)(E)}
As of January 1,2010, PPA (2006) suggests a 1035 exchange from a qualified plan to Qualified Long Term Care Insurance (PENSION PROTECTION ACT PUBLIC LAW 109-280 AUGUST 17, 2006, SECTION 844)
(Sec. 844) Excludes from gross income any charge against the cash value of an annuity contract or the cash surrender value of a life insurance contract made as payment for coverage under a qualified long-term care insurance contract which is part of or a rider on such annuity or life insurance contract if the investment in the contract is reduced (but not below zero).
Requires an individual excluding such charges from gross income to file a return with the Secretary of the Treasury. (http://thomas.loc.gov/cgi-bin/bdquery/z?d109:HR00004:)
I recommend anyone interested consult a specialist; use these references for guidance:
(1). http://www.longtermcare.gov
(2) www.aarp.org/families/caregiving/state_ltc_costs.html
(3) www.dhcs.ca.gov/services/ltc/Pages/ConsAWordfromtheDirector.aspx.
About guest author Jonathan Smith, M.D.
More than a quarter century in Anesthesia practice (monitoring of people’s health, managing their risks and protecting them from death), made me aware of the financial burden on people living longer, but not necessarily healthier. I saw the need for Guaranteed Full Refund of Premium Long Term Care Insurance as a way to protect Earned Assets from the often debilitating losses to long term care, while preserving Dignity by affording home care; and capital for a Legacy. I own such a policy and advocate the concept. Clients and advisors can reach me directly at jonathan.smithmd@gmail.com for help.
As an Asset Protection attorney ANY avoidable source of loss, risk or exposure to my clients is unacceptable. One often overlooked area is the possibility that you or a loved one may need long term care as a result of age, illness or accidents. In cases where such care is required, the financial effects can be devastating even to the most affluent clients and are a needless expense that can be avoided.
For help in this area I turned to an expert, Dr. Jonathan Smith, M.D. a medical specialist who knows what this care costs and who now provides education and coverage to clients and advisors all over the U.S. on this easily addressed but potentially serious exposure. He shares important thoughts on this issues with us below. The insurance part is good enough, but some options are also both creditor protected AND have a return of premium guarantee if you never need it. Interestingly, even DOCTORS (who know better) often neglect this area of their own planning.
Here are Dr. Smith's points, they are tough to argue with...
1. The successes of medical science and the Medical Profession have helped people to live longer, but not necessarily healthier.
2. Women live longer than men.
3. The Federal Government says "at least 70% of the people over age 65 will require some form of Long Term Care services at some point in their lives". (1)
4. The Term Long Term Care services is applied to any 1 of 3 levels of services a person receives when that person fails to perform at least two of the six Activities of Daily Living (ADL), or is mentally incompetent.The ADLs are:
A - ambulating, walking around
B - bathing oneself
C - continence; continent of urine and/or stool
D - dressing
E – eating; feeding oneself
T - transferring; moving between bed and chair, etc
5. The inability to perform the ADLs may occur at any age.Example: as a result of a severe automobile accident, a person is left unable to walk (Ambulating). Toileting and Bathing are accompanying failures. As a result, who is going to move that person to a toilet each time there is a need to urinate?Or shall that person be left to soil him/herself?
6. The cost of care can be CATASTROPHICALLY EXPENSIVE.
Example: When the minimum wage in California is $8.00 per hour for UNSKILLED help, the cost for labor for home-help is $192.00 per day, and, if paid from a tax-deferred account, is nearly $120,000.00 per year! (assuming an overall tax rate of 40%)
7. Medicare and private health insurance programs do NOT pay for the majority of long term care services. (1)
8. Successful business owners have a special tax advantage when it comes to protecting earned assets from the aforementioned real and crippling financial losses.
9. Successful business owners can own PEACE OF MIND for themselves and their dependents, thus sparing each other the effects of the potentially devastating financial losses.
10. The successful business owner can experience the DIGNITY of receiving care at home, instead of 'spending down assets' to be eligible to be admitted to a Medicaid facility. He still has the ability to leave a LEGACY with the premium payment money returned upon his death.
It comes as a surprise to many that there is an insurance policy that has been around since HIPAA (1997) which specified Long Term Care Insurance as "A Health Benefit" in the tax code. (HIPAA LEGISLATION PUBLIC LAW 104-191 AUGUST 21, 1996 IRC Sec. 7702B)
Such a product is QUALIFIED LONG TERM CARE INSURANCE with CONTRACTUALLY-GUARANTEED FULL REFUND OF ALL PREMIUMS PAID with no reduction in the refund for benefits paid.
HOW DOES IT WORK? Money is paid to the the Insurance Company; the amount is enough to buy the Peace of Mind, the Dignity of the Insured and/or his family, and the size of intended Legacy.
The premium payment may be partially tax deductible, or completely tax deductible, if paid as a benefit to employees in a C corp,{IRC Sec. 162(a) and Regulations.162-10; IRC Sec. 162(a) and ISP Coordination Paper UIL 162.35-02; IRC Sec. 7702B(a)(3) IRC Sec. 7702B(a)(1)}: and is ERISA independent (ERISA: 29 USC 1191b IRC Sec. 1167; Not subject to ERISA) (please consult your tax attorney/ accountant we never provide specific tax advice in a setting like this).
Long term care Insurance is 'purchased' for a level of benefits, and upon death of the insured, the insurance company contractually guarantees to refund all premiums paid (and this is a nontaxable event!{IRC Sec. 7702B(b)2(C)(1)(E)}
As of January 1,2010, PPA (2006) suggests a 1035 exchange from a qualified plan to Qualified Long Term Care Insurance (PENSION PROTECTION ACT PUBLIC LAW 109-280 AUGUST 17, 2006, SECTION 844)
(Sec. 844) Excludes from gross income any charge against the cash value of an annuity contract or the cash surrender value of a life insurance contract made as payment for coverage under a qualified long-term care insurance contract which is part of or a rider on such annuity or life insurance contract if the investment in the contract is reduced (but not below zero).
Requires an individual excluding such charges from gross income to file a return with the Secretary of the Treasury. (http://thomas.loc.gov/cgi-bin/bdquery/z?d109:HR00004:)
I recommend anyone interested consult a specialist; use these references for guidance:
(1). http://www.longtermcare.gov
(2) www.aarp.org/families/caregiving/state_ltc_costs.html
(3) www.dhcs.ca.gov/services/ltc/Pages/ConsAWordfromtheDirector.aspx.
About guest author Jonathan Smith, M.D.
More than a quarter century in Anesthesia practice (monitoring of people’s health, managing their risks and protecting them from death), made me aware of the financial burden on people living longer, but not necessarily healthier. I saw the need for Guaranteed Full Refund of Premium Long Term Care Insurance as a way to protect Earned Assets from the often debilitating losses to long term care, while preserving Dignity by affording home care; and capital for a Legacy. I own such a policy and advocate the concept. Clients and advisors can reach me directly at jonathan.smithmd@gmail.com for help.
Wednesday, August 12, 2009
THE ROLE OF "SECRECY" IN ASSET PROTECTION
The Excerpts and Links below emphasize yet another reason that the
best Asset Protection plans are:
1. Tax Neutral;
2. Involve paying and reporting taxable income from all sources;
3. Are drafted by a professional with experience in such issues;
4. AND DON'T RELY ON SECRECY
I tell our clients this:
Secrecy is hiding something and “hoping” no one finds it. Hope is not a plan as we have learned since the last election. Secrecy based plans rely purely on that hope of secrecy and your willingness to perjure yourself before the courts.
Have a real plan that is tax neutral and which you CAN disclose without fear.
The Cost Of Secrecy
By Barbara T. Kaplan
On February 18, something happened that should be taken as a wake-up call by investors with secret foreign bank accounts: UBS AG signed a deferred prosecution agreement with the U.S. Department of Justice that resulted in the names and private Swiss account records of 300 U.S. taxpayers being released to the IRS. A second agreement announced this month is expected to result in UBS turning over thousands of more names.
SEE THE WHOLE STORY HERE: http://tinyurl.com/lt8kc3
STORY #2
U.S., Swiss nail deal on secret bank accounts The Swiss and U.S. governments announced a deal Wednesday to settle American demands for the identities of suspected tax dodgers, despite Switzerland's vaunted bank secrecy.
http://www.msnbc.msn.com/id/32386100/ns/business-world_business/from/ET
STORY#3
Days of Secret Swiss Bank Accounts May Be Numbered
http://www.cnbc.com/id/32389493
best Asset Protection plans are:
1. Tax Neutral;
2. Involve paying and reporting taxable income from all sources;
3. Are drafted by a professional with experience in such issues;
4. AND DON'T RELY ON SECRECY
I tell our clients this:
Secrecy is hiding something and “hoping” no one finds it. Hope is not a plan as we have learned since the last election. Secrecy based plans rely purely on that hope of secrecy and your willingness to perjure yourself before the courts.
Have a real plan that is tax neutral and which you CAN disclose without fear.
The Cost Of Secrecy
By Barbara T. Kaplan
On February 18, something happened that should be taken as a wake-up call by investors with secret foreign bank accounts: UBS AG signed a deferred prosecution agreement with the U.S. Department of Justice that resulted in the names and private Swiss account records of 300 U.S. taxpayers being released to the IRS. A second agreement announced this month is expected to result in UBS turning over thousands of more names.
SEE THE WHOLE STORY HERE: http://tinyurl.com/lt8kc3
STORY #2
U.S., Swiss nail deal on secret bank accounts The Swiss and U.S. governments announced a deal Wednesday to settle American demands for the identities of suspected tax dodgers, despite Switzerland's vaunted bank secrecy.
http://www.msnbc.msn.com/id/32386100/ns/business-world_business/from/ET
STORY#3
Days of Secret Swiss Bank Accounts May Be Numbered
http://www.cnbc.com/id/32389493
Liability Insurance and Why the Wealthy are Under-Insured
The excerpt and link below are from a great article on liability insurance and why so many affluent people are under-insured and exposed. I write on this topic myself extensively and I warn clients like this:
Buy as much liability insurance as you can afford, assume it won't work, apply or be sufficient and have a solid back-up plan. If for no other reason I want to see the insurance there to catch the bullet on the legal defense fees, which on their own can be devastating.
Ike
“Liability”—the responsibility for injury, death or damages to another—is a word that sends chills down people’s spines. Anyone who owns a home, drives a vehicle, operates a business or engages in any number of normal pursuits faces liability exposure.
If one is proved liable for an accident, the consequences can be devastating financially unless you are properly protected. Wealthy individuals face a disproportionate amount of exposure because they often own multiple homes and automobiles, investment properties, private aircraft and yachts.
Wealth management professionals are getting better at including property and casualty specialists in their practices to address such liability exposure, yet statistics show that many high-net-worth individuals still carry low liability coverage in their personal insurance. Why do successful people do this when it obviously puts their wealth at risk?
SEE THE ENTIRE ARTICLE HERE: http://tinyurl.com/mrcef3
Buy as much liability insurance as you can afford, assume it won't work, apply or be sufficient and have a solid back-up plan. If for no other reason I want to see the insurance there to catch the bullet on the legal defense fees, which on their own can be devastating.
Ike
“Liability”—the responsibility for injury, death or damages to another—is a word that sends chills down people’s spines. Anyone who owns a home, drives a vehicle, operates a business or engages in any number of normal pursuits faces liability exposure.
If one is proved liable for an accident, the consequences can be devastating financially unless you are properly protected. Wealthy individuals face a disproportionate amount of exposure because they often own multiple homes and automobiles, investment properties, private aircraft and yachts.
Wealth management professionals are getting better at including property and casualty specialists in their practices to address such liability exposure, yet statistics show that many high-net-worth individuals still carry low liability coverage in their personal insurance. Why do successful people do this when it obviously puts their wealth at risk?
SEE THE ENTIRE ARTICLE HERE: http://tinyurl.com/mrcef3
Tuesday, August 11, 2009
MEDICAL PRACTICE - DISPUTES AMONG PARTNERS CAN BE FATAL TO THE PRACTICE
As you likely know, I have always felt that basic rules of self defense apply almost perfectly to good legal and financial planning.
The best way to avoid losing a lawsuit, for instance, is to never be in one in the first place.
The simple article below addresses conflicts between partners and ways to avoid or handle them. We have seen this issue create devastating results to the detriment of all parties involved. Your partners are smart, financially able to cause you harm, and likely know more about you and your assets than your own spouse. This is all bad news. Cooperation, communication and proactive conflict resolution is key.
Please take a few minutes to review this and pass it on to your friends in the business.
Yours, Ike
DOCTORS: How to Talk to Your Partners; How to effectively diffuse disagreements and preempt disputes. http://tinyurl.com/mkh4ak
The best way to avoid losing a lawsuit, for instance, is to never be in one in the first place.
The simple article below addresses conflicts between partners and ways to avoid or handle them. We have seen this issue create devastating results to the detriment of all parties involved. Your partners are smart, financially able to cause you harm, and likely know more about you and your assets than your own spouse. This is all bad news. Cooperation, communication and proactive conflict resolution is key.
Please take a few minutes to review this and pass it on to your friends in the business.
Yours, Ike
DOCTORS: How to Talk to Your Partners; How to effectively diffuse disagreements and preempt disputes. http://tinyurl.com/mkh4ak
Monday, August 10, 2009
Interesting VIDEO interview with Publisher of WORTH Magazine.
I was recently featured by WORTH magazine as one of their "Leading Wealth and Legal Advisors", I am one of only 3 in Arizona and 24 in the U.S. This is an interview with the Publisher Patrick Williams about the magazine and how it picked and vetted us to be part of the group and who gets the magazine and why.http://tinyurl.com/kw69bv
Wednesday, August 5, 2009
19 TIPS FOR MANAGING YOUR LIMITED PARTNERSHIP SAFELY AND EFFECTIVELY
© 2009 Ike Z. Devji, J.D.
One common and well placed tool for estate planning and Asset Protection is known as a “Limited Partnership”, also commonly called an Asset Management Limited Partnership or Family Limited Partnership (LP).
The tool is one part of a set of tools that forms an individually tailored system. The LP IS NOT a miracle cure that can answer all your problems and hold any kind of asset you care to stuff into it, contrary to what you might read on the websites of amateurs and Nevada LLC and LP mills that are not staffed by attorneys and which are rarely drafted for a particular purpose like ours are. Remember, there is no one size fits all plan in Asset Protection. Every plan must be tailored to your unique assets, exposures and business needs.
Below are some simple tips for managing your LP, safely, legally and effectively. The LP was created for you as an Asset Protection and Estate Planning vehicle and is officially in the business of “managing your assets and investments” and must act like it to attain the full benefit and protection of the law.
The tool itself, like all of the best Asset Protection tools, is tax neutral. While this planning has incidental tax and estate reduction benefits, we suggest that our clients tread lightly in those areas, and utilize the services of appropriate tax, accounting and legal experts when making decisions regarding these benefits.
1. Make sure that assets transferred into the LP are properly re-titled to reflect the LP’s ownership. Your interest in real estate (properly insulated in an LLC); personal property (transferred through a bill of sale) and marketable securities should be properly transferred to the LP and recorded as soon as possible so that the LP will be the proper titleholder when income is received from these assets. Records of all such transfers should be maintained with your LP records.
2. Risky assets should NEVER be put directly into your LP. They should be safety wrapped in LLCs or other vehicles so that real property liability is one arm’s length removed from the LP itself, this includes raw land. Safe assets, on the other hand, may be directly titled in the name of the LP. Examples of safe assets include stocks, bonds, securities CDs and money market accounts, to name a few.
3. Maintain comprehensive business records. All business receipts should be deposited into the LP account and all LP expenses should be paid from it. Make sure that all federal and state income tax returns are timely filed and accurately prepared. If possible, a monthly accounting of all partnership income and expenses should be maintained.
4. Separate tax returns are not always required for your LP. You may not need to file a separate tax return for your LP. For instance in Arizona, unless you have income that was generated within the state of Arizona they don’t want a tax return. Our client’s LP papers include a letter from the Arizona Department of Revenue to this effect, advise your accountant accordingly and always check with your attorney and/or CPA for specific tax advice – which I am NOT providing here.
5. Assets required for living expenses should remain outside the LP. Those assets necessary for your daily living expenses should be kept outside the LP so that it does not create the appearance that the LP is merely a personal account holding any given partner’s personal assets. If a major contributing partner finds it necessary to dip into the LP due to the nature and level of their contributions, it may lead to a direct piercing by either a judgment creditor of the LP, by a reverse piercing of the LP veil by a judgment creditor of that partner(s), or even by the IRS at the time of that partner’s death.
6. Refrain from co-mingling partnership and personal funds. Once the partnership has been fully formed, and an EIN (tax number) obtained, the LP should establish a separate Money Market account/ and or investment account.
7. Do not have the LP pay personal expenses directly. Instead, make a formal pro-rata distribution from the partnership to all partners if you need to withdraw cash from it. Then use the distribution to pay for the expense.
8. When possible, avoid “non-pro-rata” distributions to any one partner. Instead, make a proportionate distribution to all partners based on their percentage of ownership. These kind of distributions are better structured as a "loan" secured by a note with interest back to the partnership.
9. Consider having each partner make a capital contribution to the LP upon formation. This supports the idea and reality of the LP being a joint enterprise to which all partners have contributed.
10. Operate the LP in accordance with the terms of the partnership agreement. If this proves to impractical or if the LP’s needs change, amend the partnership agreement to accommodate the changes required in the LP’s operation in order to avoid an administrative dissolution of the LP.
11. Make sure that the LP should comply with all organization and filing requirements and other formalities requited by state law. This will help ensure that your LP maintains all required records and will help avoid any proposed administrative dissolution. Strict adherence to all sate law requirements is necessary to meet the stringent scrutiny of the IRS. In your case, you can be assured the LP was properly formed if created for you by us.
12. Do not transfer personal (non-business) assets into your LP. Your LP must have a valid business purpose, in the case of such partnerships we create the business purpose is the management of your assets and investments. The FATAL flaw of transferring non-income producing assets, such as your personal residence, furniture, and personal automobiles creates the appearance that the LP is being used for personal, as opposed to business purposes. More importantly, it carries the liability that each of those items may carry into the LP, defeating the essential purpose for which it was created.
13. Transfer business and income producing assets into the partnership. In addition to stocks and bonds your LP may hold your interest in income producing real-estate (if properly insulated in one or more LLC’s), personally owned office and business equipment, and any equipment necessary to operate a lab, records business or related enterprise. If any of these items are capable of generating liability they too should be isolated in an LLC, and that interest assigned to the LP, as you would with real-estate. Having your LP engage in multiple revenue generating and asset holding activities (i.e. real estate and equipment leasing, stock portfolio management) helps support the fact that this is a valid business that is a legitimate arms length joint enterprise.
14. Use the expertise of investment advisors to find safe growth vehicles for your investments. For instance, a combination of dividend paying stocks and interest bearing bonds could generate immediate, steady, and relatively determinable income that will both increase the value of your assets and prove the fact that the LP is indeed a for-profit business entity as opposed to a mere holding vehicle.
15. Do not transfer assets required to meet your fixed daily living expenses into the LP. Such items would include your personal revolving checking account; this is akin to co-mingling funds. If a court were to find that these assets were required or were used to meet your daily expenses it could include them in your estate thereby weakening the strength of your LP.
16. Make your LP act like a separate business entity. You can get cards and stationery in the name of the LP to help establish a business identity for the LP separate and apart from yourself. More importantly, the partnership should hold an annual meeting and should maintain the minutes of those meetings. In the case of LP’s created and maintained for you by us, we include that service. This is an important reason to schedule and follow-through with your “Annual Review” with a member of our firm. Upon the completion of your review the firm will re-assess the planning we have in place for you, recommend any changes or additions necessary, and generate meeting minutes that you may add to your LP’s records.
17. Memorialize lease agreements in writing. All real estate and equipment held by the LP (through an LLC) should have leases drawn up which are supported by billing invoices to the lessee (usually yourself or the business you own). This both supports the valid business purpose of the LP, the write-offs you may choose to claim (consult your accountant) for payments to the LP for such leases, and makes your accounting process much clearer.
18. File any required gift tax returns in a timely manner. While the planning we create is tax neutral, it does have incidental tax benefits and implications, including those pertaining to “gifting”, the transfer of a portion of your interest in the LP to a family member or other beneficiary. Should you choose to avail of these benefits, please do so with the guidance of a professional accountant familiar with such a process. A federal gift tax return utilizing IRS FORM 709 should be filed with your personal tax returns. Even if no tax is actually owed, the filing of such a return with full and proper disclosures may be of benefit, as it starts a 3-year statute of limitations, after which the IRS is precluded from challenging the valuation and assignment of said gifts.
19. Qualified tax and pension plans, such as IRA’s, should not go into your LP. These types of assets are usually referred to as “qualified plans or accounts” and often have tax benefits that will be negated by changing title away from yourself. Perhaps more importantly, this transfer will destroy the well established stautory protecetion those types of accounts and plans have in place by law.
This is meant to be a helpful introduction, the uses and benefits of the LP go far beyond what I have covered here. As always, call or email with specific questions or to see if this tool should be part of your personal planning.
CIRCULAR 230 NOTICE: To comply with U.S. Treasury Department and IRS regulations, we are required to advise you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this article, including is not intended or written to be used, and cannot be used, by any person for the purpose of (1) avoiding penalties under the U.S. Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed in this e-mail or attachment. ALWAYS GET PROFESSIONAL TAX ADVICE.
One common and well placed tool for estate planning and Asset Protection is known as a “Limited Partnership”, also commonly called an Asset Management Limited Partnership or Family Limited Partnership (LP).
The tool is one part of a set of tools that forms an individually tailored system. The LP IS NOT a miracle cure that can answer all your problems and hold any kind of asset you care to stuff into it, contrary to what you might read on the websites of amateurs and Nevada LLC and LP mills that are not staffed by attorneys and which are rarely drafted for a particular purpose like ours are. Remember, there is no one size fits all plan in Asset Protection. Every plan must be tailored to your unique assets, exposures and business needs.
Below are some simple tips for managing your LP, safely, legally and effectively. The LP was created for you as an Asset Protection and Estate Planning vehicle and is officially in the business of “managing your assets and investments” and must act like it to attain the full benefit and protection of the law.
The tool itself, like all of the best Asset Protection tools, is tax neutral. While this planning has incidental tax and estate reduction benefits, we suggest that our clients tread lightly in those areas, and utilize the services of appropriate tax, accounting and legal experts when making decisions regarding these benefits.
1. Make sure that assets transferred into the LP are properly re-titled to reflect the LP’s ownership. Your interest in real estate (properly insulated in an LLC); personal property (transferred through a bill of sale) and marketable securities should be properly transferred to the LP and recorded as soon as possible so that the LP will be the proper titleholder when income is received from these assets. Records of all such transfers should be maintained with your LP records.
2. Risky assets should NEVER be put directly into your LP. They should be safety wrapped in LLCs or other vehicles so that real property liability is one arm’s length removed from the LP itself, this includes raw land. Safe assets, on the other hand, may be directly titled in the name of the LP. Examples of safe assets include stocks, bonds, securities CDs and money market accounts, to name a few.
3. Maintain comprehensive business records. All business receipts should be deposited into the LP account and all LP expenses should be paid from it. Make sure that all federal and state income tax returns are timely filed and accurately prepared. If possible, a monthly accounting of all partnership income and expenses should be maintained.
4. Separate tax returns are not always required for your LP. You may not need to file a separate tax return for your LP. For instance in Arizona, unless you have income that was generated within the state of Arizona they don’t want a tax return. Our client’s LP papers include a letter from the Arizona Department of Revenue to this effect, advise your accountant accordingly and always check with your attorney and/or CPA for specific tax advice – which I am NOT providing here.
5. Assets required for living expenses should remain outside the LP. Those assets necessary for your daily living expenses should be kept outside the LP so that it does not create the appearance that the LP is merely a personal account holding any given partner’s personal assets. If a major contributing partner finds it necessary to dip into the LP due to the nature and level of their contributions, it may lead to a direct piercing by either a judgment creditor of the LP, by a reverse piercing of the LP veil by a judgment creditor of that partner(s), or even by the IRS at the time of that partner’s death.
6. Refrain from co-mingling partnership and personal funds. Once the partnership has been fully formed, and an EIN (tax number) obtained, the LP should establish a separate Money Market account/ and or investment account.
7. Do not have the LP pay personal expenses directly. Instead, make a formal pro-rata distribution from the partnership to all partners if you need to withdraw cash from it. Then use the distribution to pay for the expense.
8. When possible, avoid “non-pro-rata” distributions to any one partner. Instead, make a proportionate distribution to all partners based on their percentage of ownership. These kind of distributions are better structured as a "loan" secured by a note with interest back to the partnership.
9. Consider having each partner make a capital contribution to the LP upon formation. This supports the idea and reality of the LP being a joint enterprise to which all partners have contributed.
10. Operate the LP in accordance with the terms of the partnership agreement. If this proves to impractical or if the LP’s needs change, amend the partnership agreement to accommodate the changes required in the LP’s operation in order to avoid an administrative dissolution of the LP.
11. Make sure that the LP should comply with all organization and filing requirements and other formalities requited by state law. This will help ensure that your LP maintains all required records and will help avoid any proposed administrative dissolution. Strict adherence to all sate law requirements is necessary to meet the stringent scrutiny of the IRS. In your case, you can be assured the LP was properly formed if created for you by us.
12. Do not transfer personal (non-business) assets into your LP. Your LP must have a valid business purpose, in the case of such partnerships we create the business purpose is the management of your assets and investments. The FATAL flaw of transferring non-income producing assets, such as your personal residence, furniture, and personal automobiles creates the appearance that the LP is being used for personal, as opposed to business purposes. More importantly, it carries the liability that each of those items may carry into the LP, defeating the essential purpose for which it was created.
13. Transfer business and income producing assets into the partnership. In addition to stocks and bonds your LP may hold your interest in income producing real-estate (if properly insulated in one or more LLC’s), personally owned office and business equipment, and any equipment necessary to operate a lab, records business or related enterprise. If any of these items are capable of generating liability they too should be isolated in an LLC, and that interest assigned to the LP, as you would with real-estate. Having your LP engage in multiple revenue generating and asset holding activities (i.e. real estate and equipment leasing, stock portfolio management) helps support the fact that this is a valid business that is a legitimate arms length joint enterprise.
14. Use the expertise of investment advisors to find safe growth vehicles for your investments. For instance, a combination of dividend paying stocks and interest bearing bonds could generate immediate, steady, and relatively determinable income that will both increase the value of your assets and prove the fact that the LP is indeed a for-profit business entity as opposed to a mere holding vehicle.
15. Do not transfer assets required to meet your fixed daily living expenses into the LP. Such items would include your personal revolving checking account; this is akin to co-mingling funds. If a court were to find that these assets were required or were used to meet your daily expenses it could include them in your estate thereby weakening the strength of your LP.
16. Make your LP act like a separate business entity. You can get cards and stationery in the name of the LP to help establish a business identity for the LP separate and apart from yourself. More importantly, the partnership should hold an annual meeting and should maintain the minutes of those meetings. In the case of LP’s created and maintained for you by us, we include that service. This is an important reason to schedule and follow-through with your “Annual Review” with a member of our firm. Upon the completion of your review the firm will re-assess the planning we have in place for you, recommend any changes or additions necessary, and generate meeting minutes that you may add to your LP’s records.
17. Memorialize lease agreements in writing. All real estate and equipment held by the LP (through an LLC) should have leases drawn up which are supported by billing invoices to the lessee (usually yourself or the business you own). This both supports the valid business purpose of the LP, the write-offs you may choose to claim (consult your accountant) for payments to the LP for such leases, and makes your accounting process much clearer.
18. File any required gift tax returns in a timely manner. While the planning we create is tax neutral, it does have incidental tax benefits and implications, including those pertaining to “gifting”, the transfer of a portion of your interest in the LP to a family member or other beneficiary. Should you choose to avail of these benefits, please do so with the guidance of a professional accountant familiar with such a process. A federal gift tax return utilizing IRS FORM 709 should be filed with your personal tax returns. Even if no tax is actually owed, the filing of such a return with full and proper disclosures may be of benefit, as it starts a 3-year statute of limitations, after which the IRS is precluded from challenging the valuation and assignment of said gifts.
19. Qualified tax and pension plans, such as IRA’s, should not go into your LP. These types of assets are usually referred to as “qualified plans or accounts” and often have tax benefits that will be negated by changing title away from yourself. Perhaps more importantly, this transfer will destroy the well established stautory protecetion those types of accounts and plans have in place by law.
This is meant to be a helpful introduction, the uses and benefits of the LP go far beyond what I have covered here. As always, call or email with specific questions or to see if this tool should be part of your personal planning.
CIRCULAR 230 NOTICE: To comply with U.S. Treasury Department and IRS regulations, we are required to advise you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this article, including is not intended or written to be used, and cannot be used, by any person for the purpose of (1) avoiding penalties under the U.S. Internal Revenue Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed in this e-mail or attachment. ALWAYS GET PROFESSIONAL TAX ADVICE.
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