Asset Protection Strategies Presented by:

Reasons For Considering Asset Protection Strategies We live in a litigious society: lawsuits against professionals, business owners, executives and institutions have simply become a cost of doing business. When markets decline, lawsuits tend to increase. Increased media attention on asset protection. Increased availability of asset protection tools and strategies.

Asset Protection Events Bankruptcy Chapter 7 “liquidation” Chapter 13 “reorganization” Judgment creditors attempting to enforce a judgment as a result of winning lawsuit.

Asset Protection Strategies Life insurance Annuities Qualified retirement plans IRA’s Homestead exemptions Self-settled trusts Q-PERT’s GRAT’s Account Receivable Factoring

Life Insurance: Non-Bankruptcy Context All states exempt life insurance cash value and death benefits: In some states the exemption is unlimited, absent a fraudulent conveyance. In other states, the death benefit and cash value exemption are capped. In still others, the exemption is available only for proceeds payable to a spouse, child, parent or other dependent. Term, whole life, variable and universal life all qualify. The exemption applies only for personally-owned policies; corporate-owned policies don’t qualify. Click this link to learn more:

Non-Qualified Deferred Annuities: Non-Bankruptcy Context All states exempt cash value and death benefits in non- qualified deferred annuities: In some states the exemption is unlimited, absent a fraudulent conveyance. In other states, the death benefit and cash value exemption are capped. In still others, the exemption is available only for proceeds payable to a spouse, child, parent or other dependent. Click this link to learn more:

State Exemption Statutes & Bankruptcy The 2005 Bankruptcy Act requires a 730 day (2 year) waiting period before a debtor may use his state's exemptions in a federal bankruptcy filing. Where a debtor fails to live continuously in one state for 730 days, the debtor must select the exemptions for the state where he lived the greatest part of the 180 days preceding the 730 day period before filing. Should the prior state laws prevent him from using all of that state's exemptions, the debtor would be able to claim federal exemptions. Definitions of federal exempt property and the valuation rules for that property are also more precisely defined in a manner favorable to creditors compared to old law.

Qualified Retirement Plans Qualified retirement plans are exempt from the claims of creditors in bankruptcy and from judgment creditors. These so-called ERISA plans are required to include an anti-alienation clause that protects the interest from creditors. The list of ERISA plans includes: Defined benefit & defined contribution plans Profit sharing plans 403(b) tax sheltered annuities 401(k) plans 457 plans sponsored by state & local governments & tax-exempt organizations

Special Limits for IRA’s & Roth IRA’s The 2005 Bankruptcy Act limits the bankruptcy exemption for IRA’s & Roth IRA’s to $1 million, adjusted for inflation. The cap does not apply to rollovers from other plans to IRA’s, SEP IRA’s and SIMPLE IRA’s!

IRA’s In Non- Bankruptcy Contexts In non-bankruptcy situations, state law governs how much of an IRA is protected from judgment creditors. Some states provide an unlimited exemption for IRA’s: Florida, Illinois, Texas, New Jersey and Kansas Planning tip: if the state exemption doesn’t fully protect the IRA, consider rolling the unprotected amount to a fully protected ERISA plan.

Homestead Exemptions The 2005 Bankruptcy Act cuts back on generous homestead exemptions available under prior law. The new rules impose a $125,000 limit on the value of a homestead acquired 1,215 days before filing a bankruptcy petition. Interests exceeding $125,000 that are acquired within the 1,215 day period are no longer protected! You can no loner pay down your mortgage at the last minute and have the home equity >$125,000 protected! Home value >$125,000 will not be exempt if the Bankruptcy Court determines that the filing was abusive, if the debtor was involved in securities fraud or criminal activity that caused serious injury or death.

Self-Settled, “Asset Protection Trusts” Until the late 1990’s, states prohibited a settlor from creating a trust that protected trust assets from the claims of the settlor’s creditors where the settlor was a trust beneficiary. In the 1990’s, foreign countries modified their trust law to permit “self-settled” trusts. In response, a number of states followed suit and adopted laws that permitted self-settled “Asset Protection Trusts” Alaska, Delaware, Nevada The 2005 Bankruptcy Act cut back on the ability to use these Asset Protection Trusts.

“Asset Protection Trusts” & New Section 548(e) of the Bankruptcy Code The 2005 Bankruptcy Act added new section 548(e) that allows the trustee to avoid the transfer of property to a trust if: The transfer was made on or within 10 years before the filing of the bankruptcy petition; The transfer was made to a “self-settled trust or similar device” The transfer was made with the intent to hinder, delay or defraud a creditor. Bottom line: Asset protection trusts will not protect property transfers made within 10 years of the date of the filing of the bankruptcy petition.

Remainder Interests Q-PERTs & GRATs Q-PERT = Qualified Personal Residence Trust GRAT = Grantor Retained Annuity Trust Both are short term trusts that all for an interest in property to be retained by the grantor. Q-PERTs allowed the grantor to live in the house for a set # of years, after which time full ownership of the house (i.e., the remainder interest) typically passes to younger family members. GRATs allow the grantor to retain the income from the trust’s property for a set # of years after which time full ownership of the property (i.e., the remainder interest) typically passes to younger family members.

Can Creditors Attach Remainder Interests in Q-PERTs & GRATs? In the case of In Re Livingston (804F.2d 1219, 1986) ruled that a bankruptcy trustee did not have the power to sell a remainder interest in an asset in which the debtor held a life estate. The same logic should apply to remainder interests in Q- PERTs and GRATs, if there was no intent to hinder, delay or defraud creditors.

Account Receivable Factoring The goal: to place a professional’s receivables out of reach from creditors. The transaction steps: 1.The professional borrows an amount equal to his/her share of the firm’s accounts receivable; 2.The loan proceeds are used to buy a single premium immediate annuity (SPIA) and a life insurance policy, both of which are pledged to the lender to secure the loan; 3.Loan interest is paid by the employer and taxed to the professional; 4.At retirement the loan is repaid from the receivables.

Account Receivable Factoring: Does It Work? Receivables may not be reachable by creditors since the bank holds a prior lien on them. Thus, creditors may have “subordinated” liens which may not be attractive. The SPIA and the life policy should avoid attachment under state exemption statutes. Disadvantages: The ER is taxed on the receivables as they are paid; If the ER is a pass through entity, the professional will pay his/her share of income tax on the K-1 distribution.

Disclaimer This seminar is for Broker-Dealer Use Only. Not for use with the general public. It is intended to be accurate and authoritative in regard to the subject matter covered. It is presented with the understanding that I am not engaged in rendering legal or tax advice. Ogilvie Security Advisors Corp and Gentry Partners Ltd., provides the sales concepts discussed for informational purposes only. While this seminar discusses general tax aspects and concepts of planning with insurance, we make no representations as to suitability for individual clients. Interested parties should be strongly encouraged to seek separate tax and legal advice before implementing a plan of the type described in this presentation. Any discussion pertaining to taxes in this communication (including attachments) may be part of a promotion or marketing effort. As provided for in government regulations, advice (if any) related to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. Individuals should seek advice based on their own particular circumstances from an independent tax advisor.