Dealer Insights - July/August 2011 - Shielding Your Assets: Make Moves to Protect Your Wealth
As a dealership owner, you’ve spent years making sound decisions to build your business — and, by extension, your assets. But have you made the right moves to protect them? Potential creditors, a plaintiff in a lawsuit or a business failure could threaten the wealth you’ve collected over your lifetime.
Here is a look at some of the vehicles available for shielding your assets from risks.
Family limited partnerships
Description:You establish afamily limited partnership (FLP) and then transfer assets to it, such as bank accounts, stocks and bonds. You become the general partner and have discretion over how assets and income are distributed. You then gift or sell limited partnership interests to your children or other family members. A common application is to transfer real estate to an FLP.
Pros:As general partner, you can withdraw as much as you like within the realm of the partnership agreement. In a typical scenario, though, distributions are allocated to all partners on a pro-rata basis. If the FLP agreement has been written specifically for asset protection, the assets are usually safe from plaintiffs who’ve obtained charging orders through successful litigation. If the FLP is properly structured and administered, the FLP assets will be removed from your taxable estate and transfers of FLP interests may be eligible for minority interest discounts.
Cons:Transferring ownership interests in the dealership operations may be restricted by your franchise agreement, so you may not be able to hold your dealership in an FLP. FLPs also aren’t a good choice for protecting your home. Capital gains tax exclusions and other tax advantages associated with home ownership aren’t allowed in an FLP. Finally, be cautious when you sign bank or creditor guarantees — they could undo the protective quality of the FLP.
Description:You establish a trust in a foreign country with more favorable asset protection laws than in the United States. Cash or readily movable securities typically fund offshore trusts, rather than real estate. Be aware that, while moving assets offshore generally offers more protection than keeping them in the United States, you won’t avoid paying income taxes on the trust earnings, and the trust assets can still be subject to gift or estate taxes.
Pros:Offshore trusts offer protection from U.S. legal judgments and discourage litigation because of the expense and difficulty in pursuing a case under foreign jurisdiction. The plaintiff, for example, often is forced to pay a retainer to a local lawyer, because many foreign jurisdictions prohibit contingent-fee arrangements. And other jurisdictions often require plaintiffs to post a bond that covers the defendant’s legal fees and court costs.
Cons:The coststo set up and administer offshore trusts can be high, making them a sensible choice only for individuals with sufficient net worth and risks of claims and lawsuits to warrant the expense. Because these trusts often face IRS challenges, make sure that you get solid legal and tax advice before taking the offshore route.
Description:If you gift assets to someone else, such as your children or other family members, they generally no longer will be subject to claims by your creditors. But you may not want to gift assets outright. Transferring assets to a trust and naming loved ones as beneficiaries allows you a degree of control over their access to the funds. It also can protect the assets from the beneficiaries’ creditors. A Crummey trust is one option to consider.
Pros:Normally, gifts to trusts aren’t eligible for the $13,000 (per recipient) annual gift tax exclusion because transfers have to be of a “present interest” (generally meaning the recipient has immediate access to the funds) to qualify. But in a Crummey trust, after each gift to the trust is made the beneficiaries are allowed — for a limited time period — to withdraw the just-gifted funds.
This withdrawal right allows the gift to qualify for the annual exclusion, so you don’t have to use up any of your lifetime gift tax exemption (or pay gift taxes) on the transfer. In addition, the assets, along with any future appreciation on them, are removed from your taxable estate.
Cons:After you’ve transferred assets to the Crummey trust, you no longer will have access to them. Also, there’s a risk that the beneficiary will withdraw the funds during the withdrawal period.
Other courses of action
There are a number of planning tools to protect your assets in event of a lawsuit, bankruptcy or an aggressive creditor.If you have greater liability exposure than your spouse, for example, consider transferring certain property, including your home, the dealership real estate or other real estate to him or her. Your attorney and tax advisor can provide advice on which forms of asset protection are best for you.
Before you say “I do”
Putting together a prenup may not be romantic, but it can be a prudent move when you have assets to protect. To help ensure its effectiveness, draft your prenup carefully with the assistance of your attorney and tax and financial advisors.
Your prenup should start with a financial inventory, in which both parties disclose their assets, liabilities and income sources. A prenup without an inventory could later prompt either spouse to say all the cards weren’t on the table when the agreement was signed and the prenup might not hold up in court.
Prenups also can be an important factor in estate planning, even if you have a will. They can be especially valuable if you have children from a previous marriage or wish to leave your dealership to a family member.
Dealer Insights – July/August 2011