What an open question it is to ask: What is Asset Protection?

Has anyone asked you that question before? If not you are like 99% of the rest of the American public who are also not asset protected.

Core asset protection revolves around protecting yourself from future creditors who can sue you typically for negligence.

My definition of asset protection is different than anyone else in the country. My definition is:

“Asset protection is protecting your wealth from anyone or anything that can take your money.”

Who does this include that you normally have not thought of before?

• The US and State Government through income taxes
• The US and State Government through estate taxes
• The stock market when it declines
• Medical expenses like the inevitable long term care expenses everyone will have in retirement.
• The US and State Government through capital gains taxes

Think about it, who is your number one guaranteed creditor every year? The US Government.

When the stock market in 2000-2002 went in the tank, did you lose money? Is that more likely to happen in any given year than a lawsuit?

When clients pay $4,500 a month to stay in a nursing home, does that expense decrease their family’s wealth?

Same question for estate taxes and capital gains taxes.

If there were simple and legal ways for you to lower your income taxes, invest in the stock market where you could receive the gains without fear of losing principal in down markets, if you could mitigate your long term care costs, if you could defer or avoid capital gains taxes when selling an appreciated asset, wouldn’t you want to know about those solutions?

Those are just some of the topics I’ll be talking about in my periodic newsletters. In addition to that I consider myself a “domestic” asset protection planner and will be educating you on how to use domestic planning strategies for asset protection.

Summary

If you have any amount of wealth, you do need asset protection. Asset protection can be simple or complicated, expensive or not expensive. Your eyes will be opened up to the liabilities that could cause you to lose your money to creditors and the tools to protect yourself. When you become educated on the concept of global asset protection, then you can decide what, if anything, you need to do to protect yourself and your family.

Regards,

Bob J. Baker
Asset Strategies, LLC
www.assetstrategiesonline.com

Circular 230 Disclaimer
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. Federal tax advice contained in this email (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

© 2008 Asset Strategies, LLC

U.S. citizens don’t have to pay taxes?

Mr. Snipes, unfortunately, got hooked up with a couple of first-class tax fraud promoters by the last names of Kahn and Rosile. Their system relied on what’s known as the “861 argument”─a fringe interpretation of the federal tax code that holds that U.S. citizens don’t have to pay taxes on wages they earn within this country. It has been continually rejected as frivolous by judges and the IRS but is still used by some tax protesters.

It appears that Mr. Snipes’ tax advisors charged him a fee to become part of their tax-dodger group and took 20% of any tax returns generated due to their advice.

If Mr. Snipes would have done his homework, he would have found out that Rosile, a former certified public accountant, lost his licenses in Ohio and Florida and Kahn previously served a prison term for a tax-related crime in Texas.

Due to the advice of his new tax team, Mr. Snipes not only stopped filing his tax returns but also started filing false forms on taxes previously paid. In April 2000, Snipes sent in a fraudulent claim for $4 million he paid in 1996, prosecutors said.

The next April he allegedly filed for more refunds─$7.4 million from 1997 wages─while failing to file for the previous year.

The final outcome for Mr. Snipes

Mr. Snipes was convicted and will have to pay millions more in back taxes, penalties, and interest. The final bill could total $20 million. Additionally, he has been sentenced to 3 years in a federal jail.

The moral of the story? There are a few:

1. Do some research on the people with whom you work. With a little background search, Mr. Snipes would have found out the past indiscretions of his new advisors.
2. Never try to cheat the Federal Government. There are plenty of legal ways to reduce/mitigate taxes. Clients do not have to cheat in order to achieve a favorable income, capital gains, and estate tax plan.
3. If it sounds too good to be true, it probably is.

Let me focus on 3) for a minute before concluding this briefer than normal newsletter.

Since I’ve been dealing with “advanced” planning for 20 years now, I’ve seen a lot of scams. A few of my favorite ones that didn’t pass the smell test and advisors with any common sense should have stayed away from are:

1. Irish Leasing Companies (ILC) – Lease yourself as an employee to an ILC which can withhold any amount of income tax-free from your paycheck for as long as you want and let that money grow tax-free until you desire it in retirement. This was all the rage several years ago, and it stunk from the beginning. The outcome was that the IRS shut it down and put it on the listed transaction list.
2. 419A(f)5 union plans. This one never made any sense to me. Advisors would run around telling small companies that never typically unionized (like medical practices) to go ahead and unionize all the employees (except the owners) so the owners could then be carved out into their own deferred compensation plan. Because the employees were unionized, they were not eligible for the deferred compensation plan the owners were implementing. The IRS also put this on the listed tax transaction list.

By the way, you should know that there still is a version of the union carve-out plan being pitched in the 412(i) pension market (unionize the employee so they won’t be eligible for the company’s newly created 412(i) plan. Then only the eligible employees would be the owners who would sock away hundreds of thousands of dollars into the plan with NO employee contributions). I strongly recommend you stay away from this plan.

Today, however, most of the plans that I think are not on the up and up have more to do with the way they are sold and a lot less to do with the actual transactions themselves.

Equity Harvesting

Most people who read the books, Missed Fortune 101 or Stop Sitting on Your Assets, come away thinking there has to be more to the story. If building wealth were as easy as described in either book, everyone would be doing it; and the lawsuits that are flying in the insurance industry wouldn’t be flying like they are today. The fact of the matter is that there is nothing wrong with building wealth using Equity Harvesting. However, there is something very wrong with advisors selling the concept based on books with “fuzzy” math that distorts and ignores the tax code.

To read what’s wrong with both the above named books, go to http://www.www-missedfortune101.com/ and/or http://www.www-stopsittingonyourassets.com/.

Mortgage Acceleration Plans

Most people who run into the $3,500 mortgage acceleration plan that is spreading like wild fire through the financial services, insurance, mortgage, and realtor industries (using a modified MLM compensation model) also get the feeling that there is something missing from the sales pitch. In fact, there is NO need for clients to pay $3,500 to implement a mortgage acceleration plan; and there is NO such thing as “magic” software that helps clients pay off their mortgage early. An advisor can help a client implement H.E.A.P.™ and literally charge him/her nothing.

What’s my point?

My point with this newsletter is to remind readers not to get sucked into a marketing platform or sales scheme that will put your clients at risk as well as your reputation. No amount of money is worth it.

As I’ve found out by working with hundreds of advisors over the last many years, those who always try to do “right” by their clients seem to almost never lose them, receive many client referrals, and always seem to somehow do well financially. It’s sort of the good guy finally gets ahead story.

Sure, those who go with scammer concepts can make a real good living off of ignorant clients; but that is usually short lived and ultimately will drive the advisor from the business in the end.

Regards,

Bob J. Baker
Asset Strategies, LLC
www.assetstrategiesonline.com

Circular 230 Disclaimer
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. Federal tax advice contained in this email (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

© 2008 Asset Strategies, LLC

Have you ever heard the comment that the only clients who buy long-term care insurance are the ones who have had a family member who needed it and didn’t have it?

Why is that? Because they have had a real life experience that motivated them.

The same unfortunately holds true for asset protection planning. Many clients know they need to become asset protected but for some reason can’t motivate themselves to move forward (although it’s also true to state that most clients don’t understand how at risk there assets are or why they need to be protected).

If you’ve been ignoring that little voice that’s been telling you to become asset protected, maybe this newsletter can help.

Story Time

I usually laugh a bit before telling my stories because I always say that “I’ve got some good stories for you.” In fact, the stories are terrible ones, but they are good to “motivate” and that’s what I am trying to do, e.g. motivate readers to do what they should do which is to protect their assets.

Story Number 1—The Teenage Child (my personal favorite)

If you have teenage children, chances are at some point you and your spouse will go out of town and your children will be left at home (the 15-17 year olds). Imagine telling your teenage child on Friday morning that you are going out that evening to see an out-of-town football game or play, and that you won’t be back until sometime after midnight.

What’s going to happen Friday afternoon at school? The teenage child will pass around a note to all of his/her friends telling them that the party tonight is at his/her house because the parents are out of town. The note also says that the party is not “BYOB” because their parents have plenty of alcohol in the house for the teenagers to drink!

Friday 5:00 p.m. comes, and you leave. Who is walking in the back door? Fifty teenagers looking to drink your alcohol and have a good time. What happens when midnight rolls around and everyone is told that the parents (you and your spouse) will be home shortly? The now severely drunk teenagers pile into their cars to drive home.

What happens next? Four of the teenagers who got into their car drove down the road and hit a tree. What kind of injuries do they sustain? The typical outcome is death, but that’s not what happens. Let’s assume they all become quadriplegics.

The first question you need to ask yourself is who is liable? The teenage driver? Sure. But that driver and his parents are poor and have no auto insurance. What about the homeowner where the party was held and whose alcohol was consumed? Absolutely. The homeowner is going to be sued, and the personal injury attorney is going to go after everything the homeowner owns, including their personal residence.

If you think you are protected because you purchased a $1,000,000 umbrella liability policy on your home, how helpful do you think that will be when you are sued for $10,000,000-plus in the above example?

Example 2—Clients who drink and drive

While we all know it is not right to drink and drive, many people do it. This probably rings true for many people with wealth who like to go to dinner and have a bottle of wine. With blood-alcohol legal limits going down each year, it does not take much to be seen as legally drunk in the eyes of the law.

What if you had thee glasses of wine at dinner and while driving home accidentally dropped the cell phone in the middle of a conversation? What if you tried to pick up the cell phone and inadvertently crossed the center line and hit an oncoming car? The damages and lawsuit will be large, but the problem will be compounded because when your blood is taken you will have let’s say a blood alcohol content of .08 (legally drunk).

While the drinking had nothing to do with the crash, you are now a bad actor and the jury verdict will be even higher. ALL of your personal assets are now at risk.

Example 3— Boats, Automobiles, Snowmobiles, Planes, and other toys

I’ve never met a boater or snow mobile rider who didn’t drink. Heck, boating is an excuse to get together with friends to drink. Where do people snowmobile? For the most part, snowmobiling revolves around driving from bar to bar to bar. To do otherwise would be boring.

There are many paralyzing crashes involving boats, wave runners, snowmobiles etc. I know of a family whose son had a friend over to snowmobile on his property and the friend was killed in a snowmobile accident. The family was worth over 20 million dollars and did have $2,000,000 worth of home owners insurance, However, he had to come out of pocket in the amount of $2,000,000 to settle the case for $4,000,000. He was not asset protected.

Summary

The point with this newsletter is not to scare you but simply to motivate you to take a serious look at asset protection planning. My goal is to get your attention so you can be motivated to move forward and do the right thing (protect your assets).

If you would like to have help determining if your assets are at risk to creditors and how to protect those assets, please contact our office to setup a time for us to meet in person or discuss your situation over the phone.

Regards,

Bob J. Baker
Asset Strategies, LLC
www.assetstrategiesonline.com

Circular 230 Disclaimer
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. Federal tax advice contained in this email (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

© 2008 Asset Strategies, LLC

What is “domestic” asset protection?

The obvious answer is asset protection that is not done “offshore.”

Domestic asset protection comes in many flavors. When you have an asset protection question, you will get a different answer depending on who you talk with.

See if the following makes sense.

If you ask insurance agents about asset protection (in many states), their answer is to put your money into life insurance and annuities.

If you ask pension consultants about asset protection, their answer is to put as much money as possible in an ERISA qualified plan.

If you ask the typical CPA/accountant or attorney about asset protection (as a general statement) they may tell you that they don’t really understand the question or that they remember reading something about using LLCs for “asset protection.”

As a general statement, domestic asset protection revolves around the concept that you should never own valuable assets in your own name (bank/brokerage accounts, real estate, private stock, etc). Much of proper domestic planning revolves around the use of family limited partnerships (FLPs) and limited liability companies (LLCs).

Why not a C- or S-Corporation?

Because of the remedy a creditor can obtain when asking a judge to make a debtor pay off a judgment or settlement.

IF assets are owned by a properly structured LLC or FLP in the correct jurisdiction, a creditor that is asking the court to have those assets turned over to the creditor should only be able to obtain a “charging order” from the court.

What can’t a creditor get with a charging order?

1. A charging order does not transfer the interest in the LLC to the creditor or force the debtor to sell his/her interest and turn over the sale proceeds to the creditor.
2. A creditor cannot force the LLC to sell assets.
3. A creditor cannot force an LLC to distribute income.
4. A creditor is not able to vote or participate in management of the FLP/LLC (or otherwise control the entity).

What does a creditor get with a charging order?

1. The right to pay income taxes on income generated in the LLC or FLP, even if the profits are NOT distributed. This is known as “phantom income” which, as you can guess, is quite undesirable.

   There was a revenue ruling issued in 1977 (77-173) which states that a creditor who obtains a charging order can be treated as a partner for federal income tax purposes There has been no case law yet on the charging order, but it is still a nice deterrent.

What if assets are owned by the client individually or by a C- or S-Corporation?

The judge can direct the debtor (you) to hand over assets in your own name directly to the creditor (i.e. no asset protection).

What if you have your assets are owned by an S- or C-Corporation?

The judge can:

1. Make you liquidate your interest and give the proceeds to the creditor.
2. Make you transfer your interest in the C- or S-Corporation to the creditor.
3. Let the creditor vote your interest in the company and participate in its affairs.

Basically a C- or S-Corporation is NOT a good tool when trying to protect personal assets such as the following from a personal liability suit (which differs from an entity/corporate level suit):

Family Home or Condominium
Rental Property
Non-Rental Property
IRA
Stocks or Mutual Funds
Life Insurance
Bank Account or CD’s
Planes, Boats, Automobiles, Waverunners or Motorcycles
Other business entity (especially S or C-Corp stock)
Any other collectible items that have value

If you have any assets that you own in your own name (or that of your spouse or co-owned with your spouse), they are at risk from creditors. If you are sued and lose, you stand to lose all such assets.

Summary on “core” Domestic Asset Protection

99%+ of the people with money in this country are not asset protected correctly. While the topics of domestic asset protection merits 50+ pages, the above is a quick little summary of the bread and butter asset protection tool (which is an FLP or LLC).

While an FLP or LLC is not a magic pill to be used as a cure-all, it is the foundation for any domestic asset protection plan and something that can start all clients on their way to protecting themselves from both business creditors and personal creditors.

Regards,

Bob J. Baker
Asset Strategies, LLC
www.assetstrategiesonline.com

Circular 230 Disclaimer
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. Federal tax advice contained in this email (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

© 2008 Asset Strategies, LLC