Cutting Edge Estate and Asset Protection Plans

Chris Paul Headshot
Christopher R. Paul
Director and Vice-Chair, Trusts & Estates Department
Published: New Hampshire Business Review
December 3, 2011

Cutting Edge i.e., State of the art, the highest level of development, as of a device, technique, or scientific field.

Over time, estate and asset protection plans lose their Cutting Edge.  Our current federal and state legal landscape is changing at an unprecedented pace. As a result, opportunities to protect wealth are vanishing just as new ones emerge.

For example, generous temporary Federal estate, gift and generation-skipping transfer tax laws came into effect on January 1, 2011. Interest rates are at historic lows, but have shown recent signs of moving higher.  Moreover, State trust and asset protection laws are rapidly evolving.

Below, we discuss but a few examples of how these changes can affect previously well thought out plans. Now is the time to review those plans and make sure they are again, Cutting Edge.

Federal Law: The United States Congress Joint Select Committee on Deficit Reduction a/k/a/ The “Super Committee”

Beginning January 1, 2011 taxpayers may take advantage of the increased $5 million gift and generation skipping tax exemption amounts ($5.12 million in 2012). Importantly, under current law, the exemption drops to $1 million beginning in 2013.

These temporary larger exemption amounts have prompted many to consider establishing Qualified Personal Residence Trusts with large remainder interests, gifting business interests creating minority and lack of marketability discounts and establishing multi-generational education trusts.

However, this window opportunity may be shorter than anticipated. Many believe that the opportunity make large lifetime gifts without payment of federal gift and generation-skipping taxes may disappear sooner than current law provides. As we write this article, some members of the Super Committee are considering a recommendation that would decrease the federal gift tax exemption from its current $5 million before the end of 2012. In addition, the IRS published the December interest rates used in gift planning and intra-family loans showing an increase from historic November, 2011 lows. Increasing interest rates could make certain gifting strategies less attractive.

If your plan calls for lifetime gifts before the end of 2012, to be Cutting Edge, you may wish gift sooner rather than later.

State Law: Protecting Your Assets After You Are Gone.

Under the New Hampshire Uniform Trust Code (“UTC”), there are now unprecedented Cutting Edge planning and asset protection opportunities, such as dynastic, “perpetual” trusts, self-settled asset protection trusts and an “open architecture” directed trust structure allowing for administrative and management flexibility and control – both during and after lifetime.

This summer, New Hampshire enacted new legislation further enhancing the UTC and strengthening New Hampshire’s position as a leading trust jurisdiction. Specifically, the UTC now requires trustees (and judges) to interpret the construction of trust provisions through the lens of the “settlor’s (grantor’s) intent,” rather than apply a subjective “benefit of the beneficiaries” standard.

Estate plans can now be designed to hold an undiversified portfolio with concentrated investment risk – such as your closely held businesses – with much less risk that a beneficiary can force its sale. Trustees can be directed to hold “unproductive” assets such as collectables or non-rental real estate (a “family compound”).

The UTC now codifies “no contest clauses” in trusts (and wills) providing the grantor (and testator) a clear procedure for reducing the likelihood of post-mortem litigation – especially important in second family situations or when your business succession plan may call for unequal distributions amongst beneficiaries or legatees.

You now have ability to form and fund modern, Cutting Edge trusts and enjoy the benefits of the New Hampshire “Advantage.”

Asset Protection: Is The Single-Member LLC Vulnerable?

Two of the main reasons to have a Limited Liability Company (“LLC”) are to shield the members from the “downstream” liability exposure of the debts and obligations of the business as well as to protect business assets from the “upstream” exposure to the personal liability of members.  With a properly formed and administered LLC, a member’s personal exposure to the LLC’s creditors is limited and well understood.

Similarly, in the case of a multi-member LLC, statutory “charging order” protection gives the members peace of mind that a member’s judgment creditors cannot disrupt the business by becoming a substitute member or by forcing the sale of business asset. If a charging order is the exclusive creditor remedy, the creditor must simply wait for distributions to be made to the member.

Recent court rulings in Florida, Colorado and Kansas cast serious doubt on whether a charging order is the exclusive remedy of a creditor of a single-member LLC.

The Florida court forced the member of a single-member LLC to transfer his LLC interest to the creditor, rejecting the member’s argument that the charging order should be the exclusive remedy to the creditor. The court reasoned that the charging order is intended to protect the other members of an LLC.  When an LLC has no other members, there is no policy ground for protecting the LLC interest or the underlying assets from the reach of legitimate judgment creditors.

Owners of single-member LLCs should analyze the addition of a second member with legally and economically valid membership rights to protect against creditors seeking to liquidate the single-member LLCs.

Action Needed:

Whether an entrepreneur, business owner, or a person trying to preserve family wealth, individuals need to monitor changes in the law and personal circumstances to remain in the vanguard, to continually evolve with the environment and to stay state-of-the art. In other words, planning needs to be Cutting Edge.  So does your law firm. The lawyers at The McLane Law Firm have been providing clients with customized Cutting Edge trust, estate planning and asset protection solutions since 1919.