With increasing concern for safeguarding equitable assets and accumulated wealth, the demand by Floridians for integrated estate plan (IEP) protection is as strong as its ever been. This is due to the dual benefit that IEP’s offer: namely, the benefit of lifetime asset protection planning alongside that of conventional estate planning. For this reason, a properly structured IEP can shield wealth from potential legal threats by transitioning ownership of property into domestic and foreign trusts, limited liability companies (LLC) and family limited partnerships (FLP) organized for purposes of planning the succession of family business in trust after life while simultaneously protecting personal wealth and business assets from the reach of existing and future creditors during life.
IEP’s are trust and estate planning structures that offer asset protection benefits for property transferred into the IEP during debtor’s life. The biggest asset protection benefits of IEP’s are attributable to the use of domestic and foreign trusts that own and manage LLC’s and FLP’s with charging order protection for members. In order to confer asset protection benefits, IEP’s must be structured to avoid the appearance of federal and state fraudulent transfer ‘badges of fraud’ before debtor’s property is transitioned into the IEP structure.
The goals of conventional estate planning are clear: to create a wealth transfer plan that ensures chosen beneficiaries will receive property with minimal interference from the probate court and the IRS. This is why traditional estate planning lays the groundwork for a smooth transition of valuable property and family business between generations. However, if planning for death is the sole focus, the benefits of lifetime asset protection with an IEP are easily overlooked.
The asset protection strength of an IEP is derived from the process of retitling asset ownership free from fraudulent transfer concerns. If an at-risk client has multiple equitable assets titled in their individual name, they are an ideal candidate for an IEP that changes title ownership of their property such that property will be owned by revocable and irrevocable trusts, as tenants by the entireties (TBE) with a spouse or in some other form of corporate ownership that offers personal liability protection, most notably LLC’s or FLP’s.
Most clients pursue IEP’s as a proactive step to deter lawsuits and decrease the likelihood of expensive ongoing litigation. In addition, clients may also seek IEP’s in order to:
- Separate liabilities and insulate risks that can arise from diverse personal and business activities.
- Create an inheritance plan that avoids forced asset distribution by state divorce and probate laws.
- Protect inheritance that would otherwise be at risk if distributed to beneficiaries.
- Shield proceeds due from a business sale in favor of trust beneficiaries.
- Plan for property distribution in response to a prenuptial or postnuptial agreement.
- Establish an alternative for protecting assets due to unavailable, unaffordable or inadequate insurance.
Implementing Trusts within an IEP
The nature and manner in which property is owned will ultimately determine its vulnerability to creditor claims. If property is transferred to trusts within an IEP, those trusts will provide a certain level of asset protection depending on whether the trust is organized as a revocable or irrevocable trust. Revocable trusts allow the trust’s creator (settlor) to amend or revoke the trust during their lifetime, as well as, to enjoy trust property during their life.
Irrevocable trusts, on the other hand, can not be modified after they are established to benefit of beneficiaries. However, they do allow the settlor to receive limited income from the trust principal and can provide a spendthrift protection that will shield trust property from the claims and judgments of beneficiaries’ creditors.
Clients can achieve maximum lifetime asset protection by transferring assets into an IEP that is controlled by a revocable trust and an irrevocable trust. This is because a revocable trust will reduce the administrative burden of managing the settlor’s assets after death and is useful for creditor protection planning if he or she is more at risk to creditors than their spouse. Irrevocable trusts offer their own protection in the form of a spendthrift provision that will limit the reach of beneficiaries’ creditors since beneficiaries will have a limited ability to own, control and assign trust assets.
Benefitting From Member Charging Order Protection
The LLC and the FLP are two of the most popular choices of entity in the United States for operating business and managing client wealth. When assets are contributed to an LLC or FLP that is owned by trusts within an IEP, the trusts become legal owners of LLC and FLP property and continue to manage property to the extent of existing charging orders filed by creditors.
A charging order is a legal remedy available to creditors of a debtor-member of an LLC or FLP that will (i) give creditors the right to collect LLC or FLP income distributed to the debtor-member, and (ii) prevent the creditor from seizing control of the debtor-member’s interest in the LLC or FLP.
In other words, a charging order limits the reach of an LLC or FLP debtor-member’s creditor to any distributions from the LLC or FLP which would otherwise be paid to the debtor-member until the judgment is paid in full. If an LLC is structured with more than one active member, the ability of non-debtor members to limit the reach of a debtor-member’s creditors to that of a charging order is particularly effective. In many cases, despite the existence of a charging order, LLC’s or FLP’s continue to thrive and perform normal business operations without any hiccups or fear of dealings with creditors that can materially affect or participate in the business.
