Category: Asset Protection and Estate Planning Blog

Death Hollow Test

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As a sequel to my previous blog entry, I wanted to provide a report of our recent trip to Death Hollow.

The first day entails a 13 mile hike in soft desert sand without any water. Last time we did this hike we almost died of dehydration. This time we left at 3am and used headlamps to light our way. Not only did we enjoy the adventure of hiking through the desert at night, we arrived at our destination early, with plenty of water remaining in our packs. The decision to leave early and hike at night was right – dead right.

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The second day requires swimming through icy water. This can be scary with shoes and a backpack. We threw ropes back to the younger boys so they could grab on if they got in trouble. This turned out to be unnecessary, but it was the right decision – dead right.

Late on the second day we found ourselves in the narrows when it started to rain. We decided to run down river and get to high ground to avoid a flash flood. No flood came on this day, but the decision to play it safe was right – dead right.

That night we slept in a cave that was sheltered from the storm outside. After we set up camp we found bear scat all over the place. We moved all the food away from our sleeping area, built a fire at the entrance to keep the bears away, and dried tons of wet firewood over the fire to give us extra fuel for a bonfire. Twice during the night we heard a large animal splashing in the river outside and we stoked up the fire really quick. The decision to prepare tons of firewood and keep the fire raging was right – dead right.

The next morning we were anxious to press on in order to get home on time, but it was raining and we decided it would be wise to wait out the storm. We witnessed a deluge of rain for five hours. Huge waterfalls poured off the canyon walls. The river rose and we watched the flash flood from the safety of our bear cave. The decision to wait out the storm was right – dead right.

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The storm passed and we finally started hiking at noon. We hiked as fast as we could to try to make it out before dark. When darkness came we pressed on with our headlamps walking down a river in the dark for four hours. We really wanted to make it to the end of the hike so we could call and let our families know we were safe, but we got lost in the darkness. We knew we were close to the parking lot but we couldn’t tell if we had passed it in the darkness, and we didn’t know which way to go. We really wanted to keep looking for the parking lot but we knew it was best to stay where we were until the morning so we didn’t get lost any further out of our way. That was the right decision – in fact, it was dead right. In the morning, we found the way and realized we never would have found it in the dark.

Death Hollow was a great adventure, one that we will never forget. I am grateful for the friends that made the trip so much fun, and for the wisdom, experience, and inspiration that helped us to make the right decisions and bring everyone home safely.

Asset Protection Trusts in Utah: What’s Best for Me?

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You may have heard about families or individuals in Utah who lost their wealth or their home due to a lawsuit or creditors. The effects of such situations can be devastating, and perhaps they’ve caused you to reflect on ways you can better protect your own assets.

To protect your home or other important assets, the best solution is an Asset Protection Trust. Not all trusts are the same, and that is also true for Asset Protection Trusts. We’ve outlined information that can help you understand more about Asset Protection Trusts in Utah and your options for establishing one:

Asset Protection Trusts Are Irrevocable (and That’s Okay)

Trusts are either revocable or irrevocable. A revocable trust is one where the Settlor (also called a Grantor or Trustor) retains powers to amend or revoke the trust. This is the most common type of trust people create for estate planning. 

An irrevocable trust is one where the Settlor does NOT retain powers to revoke or amend the trust. But this doesn’t mean that the trust cannot be modified, it just means some other mechanism is required to add flexibility to the trust. Asset protection is one of many reasons to create an irrevocable trust. When prepared properly, creditors cannot reach into the trust AND you maintain broad flexibility. 

What Is an Asset Protection Trust?

An Asset Protection Trust is an irrevocable trust established for estate planning and to protect trust assets from personal liabilities and helps influence outcomes in settlement negotiations. 

The goal of a properly prepared Asset Protection Trust is to allow the beneficiary access to the assets and funds while keeping creditors out. The most important rule of asset protection is, “If you do not own it, it cannot be taken away from you.” Timing is also crucial. Assets must be transferred to the Asset Protection Trust in advance of creditor problems. If you already have a pending claim, it’s too late. 

As the Settlor of the trust, you get to choose the beneficiaries; these can be your spouse, your children, another appointed individual, and in some cases even yourself. Successful asset protection will protect your assets against lawsuits, bankruptcies, IRS audits, and other creditors.

Your situation and assets are unique, and your Asset Protection Trust should be individually tailored to suit your needs. The following two types of Asset Protection Trust fit most needs and both can be specifically tailored to you. 

Utah Domestic Asset Protection Trust (UDAPT)

A Utah Domestic Asset Protection Trust (UDAPT) is a self-settled spendthrift trust. Self-settled means that you are the beneficiary of a trust which you created and funded. Generations of laws previously stated that your creditor can get access assets in your trust to the extent that you’re a beneficiary. 

Utah is one of a minority of US States that turned the tables allowing creditor protection for a self-settled trust (a trust whose settlor is also a permissible beneficiary). UDAPTs work well in many situations, and have many advantages as well as possible disadvantages. It is advisable to consult your attorney before deciding on this as your choice of asset protection.

541 TrustⓇ 

A 541 TrustⓇ is a third-party irrevocable trust (non-self-settled) meaning that it is established by the Settlor and names individuals other than themself as the beneficiaries. This type of trust works in all 50 States and under the Federal Bankruptcy Code. A 541 TrustⓇ allows the Settlor enormous flexibility to change the terms of the trust while maintaining maximum asset protection. It is simple to understand, modify, and even unwind. 

There are many ways to protect your assets. At McCullough, we work to tailor a unique strategy that suits you and your assets. We specialize in creating customized plans and flexible irrevocable trusts. Protect your assets for you and your future generations by contacting us today. 

Tips Series: Asset Protection Tips for Your Home

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Your primary residence is likely one of your most essential assets. The safety, sense of family togetherness, security, and community provided by your home makes it your most treasured belonging.

Protecting your home provides significant peace of mind. Without asset protection, you could become the victim of a lawsuit or experience an unexpected loss of your home.

We’ve put together a list of good, better, and best tips for asset protection when it comes to your residence:

1. A Good Idea: Invest in Insurance

You should definitely have general homeowner’s liability insurance. Additionally, you should consider an umbrella policy. Umbrella liability coverage refers to coverage that protects beyond the existing coverage and limits of other policies. This personal liability insurance covers injuries to other people that occur in your home. It also protects the damage caused to their belongings while in your primary residence.

For instance, if your neighbor is over and trips on a toy left on the ground, they may be unable to work for some time, making you responsible for compensation for their injury. While the liability limits in your home insurance coverage may not be enough to cover the medical expenses, umbrella liability insurance can protect you from these additional costs. We recommend that everyone consider an umbrella policy because it provides additional protection and is relatively inexpensive. That said, insurance doesn’t offer full asset protection for your home.

2. A Better Idea: Transfer Ownership to Lower Your Risk

One of the fundamental rules of asset protection is, in the words of John D. Rockefeller, “Own nothing, but control everything.” If married, placing your home under the name of the less-at-risk spouse can keep your home safer from your individual liability exposure. Even better, separate revocable trusts are beneficial to married couples in terms of separating ownership while incorporating estate planning benefits.

For instance, if you are at a high risk of facing a lawsuit due to your profession, you should consider transferring the ownership of your home to your less risky spouse (or the less risky spouse’s trust). When done right, this ensures full protection from the creditors of the spouse at risk. It’s important to keep in mind, however, that this strategy has limitations and may fail if the less-at-risk spouse incurs a liability, is sued, etc.

3. The Best Idea: Get an Asset Protection Trust

The best option to provide reliable protection to your home is to seek the help of an attorney to prepare an effective Asset Protection Trust. This trust protects your home from creditors and involves transferring the asset to a trustee to manage it on your behalf. Since your home is under the ownership of someone else, your creditors cannot seize the asset. This goes back to that fundamental rule—own nothing, control everything.

It’s critical to make sure you seek asset protection services from a law firm that you trust, as well as invest in an Asset Protection Trust that corresponds to your asset protection needs and is relevant to your situation. Asset Protection Trusts are a good option for most. When done properly, they are simple and protect your assets from potential liability. You should also remember to transfer these assets in advance of a creditor problem.

Two types of asset protection trusts:

    1. Domestic Asset Protection Trust (DAPT):A Domestic Asset Protection Trust is an irrevocable trust where the person who establishes the trust (the Settlor) is an eligible beneficiary. This is often called a Self-settled Spendthrift Trust. It is a relatively new strategy and works in specific circumstances and is only permitted in a handful of US States. When this trust is appropriate, it works very well and can be flexible.Here are the states that currently permit DAPTs:
      • Alaska
      • Delaware
      • Hawaii
      • Michigan
      • Mississippi
      • Missouri
      • Nevada
      • New Hampshire
      • Ohio
      • Oklahoma
      • Rhode Island
      • South Dakota
      • Tennessee
      • Utah
      • Virginia
      • West Virginia
      • Wyoming

       

    2. 541 TrustⓇ: A 541 Trust is an irrevocable trust where the Settlor establishes and funds the trust and names another as the beneficiary (e.g. Settlor establishes the trust for spouse and descendants). This strategy works in all 50 states and provides the best protection for your home. It is easy to understand, operate, modify, or even unwind. More than 200 years of court cases and statutes support this strategy

    Keep Your Home Safe with Asset Protection

    It is important to stay informed and aware of the risk that your primary residence faces as an asset. Understanding that risk can help you decide on the best asset protection strategies that suit your specific needs. Taking simple steps now can protect you from potential future creditor attacks.

    Looking for more information? Reach out to our asset protection attorneys today and choose a trust that best works for you.

Common Questions About Estate Planning Answered

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The topic of estate planning and creating a Will can sometimes be a difficult subject to bring up, but it’s a very important topic to discuss with your loved ones, and with an experienced estate planning attorney. Estate planning, when done properly, can ensure that your affairs are handled properly after you pass on, that your family is taken care of, and the inheritance and property is shielded from unnecessary taxes and fines.

What is a Will?

A Will is a document designed to instruct your heirs how to divide and dispose of your tangible personal property and other assets when you pass away. A Will also designates guardians for minors. Television series often portray having a Will as the most important document to govern the administration of your estate when you pass away. This is mostly true—but if you own real estate, your Will has to go through probate. But again, guardians are elected in your Will and it is a necessary document.

What is a Trust?

A Trust is one of the most common estate planning techniques available. While there are many different variations of Trusts, they all share the same basic structure. The creator of the Trust is called the grantor who signs an agreement with a trustee who agrees to hold assets in Trust for the grantor’s chosen beneficiaries. Sometimes the grantor and the trustee are actually the same person.

Think of the Trust like a bucket. The grantor creates a bucket and puts assets into it, such as bank accounts and a home. The trustee’s job is to hold the bucket handle and the assets “in trust” for the beneficiaries named by the grantor. The trustee administers the trust according to the rules laid out by the grantor including how and when to take assets out of the bucket and give them to the beneficiaries.

The benefits of Trusts can include:

  • Probate avoidance;
  • Flexibility;
  • Cost savings;
  • Tax planning;
  • Privacy; and
  • Peace of mind.

Do I Need a Will or a Trust?

Both Wills and Trusts can be commonly used estate planning tools, and you may want to have both depending on your situation. The main differences that you will find between the two are that Wills are only effective after your death, whereas Trusts can become effective immediately (or at a specified time in the future); Wills are directives used to distribute property or appoint a legal representative after your death, whereas Trusts can distribute property at any time prior to or after your death; Wills cover all of your assets, whereas Trusts only cover items that are specifically placed in the Trust; and finally, Wills are public documents while Trusts can remain private if you choose. An experienced estate planning attorney can help you decide which is right for you.

How Important is Power of Attorney or Health Care Directive?

Granting someone “power of attorney” (POA) is a very important step in estate planning because it designates someone who can make legal decisions for you in the event you are unable to make them on your own. These can include financial decisions as well as medical or legal ones, so the person you appoint to this duty should be someone you trust and someone who knows what you would want. Without POA, these decisions could be left up to a judge in the courts, who is likely a stranger and will have no idea what you would have wanted.

A Health Care Directive (HCD) is designed to instruct medical caregivers and doctors how you want to be cared for in the event of incapacitation. Incapacity most commonly includes a coma or dementia. This document covers your Living Will wishes, which are your wishes if you are in a state of unawareness with little or no hope of recovery. You choose your own healthcare agents and tell through this document your wishes. You can revoke this document at any time while you’re competent to make decisions for yourself. 

How Often Should I Update an Estate Plan?

The best answer to this question is: as often as you need to. While there is no set time frame for updating your documents, you should make sure to revisit them any time you have a significant life event take place. This might include things like:

  • Marriage or divorce
  • Additional children, whether by birth, adoption, or marriage
  • Death of a spouse
  • Significant changes to your assets
  • Relocation
  • Changes to tax laws, or the status of guardians, trustees, or executors

Since you may not know when the tax laws change, in the absence of any of the other events, it’s a good idea to visit with an estate planning attorney in Utah about once every five years to be sure yours is up to date.

What Happens if My Family Contests My Will?

The death of a family member can be a very difficult time, and sometimes other issues within the family spillover when settling an estate plan. Fortunately there are things you can do to protect the directives spelled out in your Will, even in the face of a legal challenge after your death. Having a plan that is created and properly executed by an estate planning attorney is the best way to protect against this. It’s also helpful to discuss your wishes and plans with family members while you are alive to avoid surprises.

Estate planning can be complicated, so to answer all your questions and get started on your estate plan, call an experienced attorney today.

2012 Tax Law Means You May Need to Amend Your Revocable Trust

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In 2012 Congress passed The American Taxpayer Relief Act, a new tax law that included 2 major changes.

  1. Estate/Gift Tax Exemption increased to $5 million each (adjusted for inflation). The individual exemption for 2015 is $5.43 million.
  2. The Estate Tax Exemption was made portable between spouses.

While both of these changes are beneficial they triggered a need to update most estate plans that were created prior to the 2012 law (and some trusts created after 2012). Revocable trusts created for a married person prior to 2012 likely have an outdated allocation formula.

Under the new law this old formula is now inapplicable and can have negative consequences. The old formula requires the funding of a bypass trust after the first spouse dies and re-titling assets.  Under the new portability laws, this is no longer necessary. If a trust isn’t properly updated it could result in the following consequences:

  • Excess administrative costs
  • Extra income tax return each year
  • All trust assets must be re-titled (real property, accounts, etc.)
  • Higher tax rates
  • Additional exposure to the 3.8% surtax
  • Loss of step-up in income tax basis on the death of the second spouse

We recommend that every revocable trust for a married couple that was created prior to 2012 be amended to include a more efficient allocation formula.

With our amendment we will simplify the trust formula so that it will not require re-titling of assets. It also limits exposure to higher tax rates and the 3.8 surtax on investment income, and may reduce the number of tax returns.  Our updated formula provides additional flexibility while simplifying administration and capturing the tax benefits of the new law.  We are unique in providing a formula that provides all possible tax benefits without requiring a re-titling of all of your assets after the death of a spouse.

Call us at 801-765-0279 for a free review of your revocable trust.

Piercing the Corporate Veil: Corporate Formalities and Business Records

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Corporations are generally treated to be a separate entity from its owners.[1] However, the owners of a corporation (i.e. shareholders) might be held personally responsible for the debts of the corporation. Generally, this can happen when a court allows creditors to “pierce the corporate veil” or the protection offered by a corporation is destroyed by the court. A common deficiency that might lead to piercing the veil is the failure to follow corporate formalities.

Small businesses are less likely to follow corporate formalities or the steps required by the government to be shielded by the corporate veil. These entities are more at risk of having the corporate veil pierced. Corporations should comply with all contractual and statutory formalities, including, but not limited to the following:

  • Hold annual meetings of directors and shareholders;
  • Keep accurate and detailed “minutes” that document the decisions and issues addressed during a meeting;
  • Adopt and maintain company bylaws;
  • Make sure that the officers, agents, directors, and shareholders abide by the bylaws;
  • Ensure the formation documents were properly filed and recorded;
  • Renew the entity and update the public record on a timely basis to avoid any lapse in registration; and
  • Maintain separate accounts and do not commingle the entity’s financial assets with the owners’ personal assets or make them available for personal use.

Following the formalities of a corporation is important to defend against an attack that tries to pierce the corporate veil. Ultimately, a court might consider various factors when determining to pierce the corporate veil, such as evaluating whether: (1) a corporation was engaged in fraud or promotes injustice; (2) an entity was inadequately capitalized; (3) an entity is an alter ego of another individual or group of individuals; and (4) an entity fails to follow corporate formalities.

If your company is at risk, you might consider having a qualified attorney assist in completing the corporation’s annual minutes. In some cases a complete legal audit might prove beneficial to identify vulnerabilities and additional risks from failing to maintain proper formalities.

[1] E.g., United States v. Bestfoods, 524 U.S. 51, 55-56 (1998).

Who Needs Asset Protection?

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We are often asked when asset protection is necessary or helpful. Some believe asset protection might only be helpful once you accumulate millions of dollars in assets–but this isn’t always true. We help many wealthy clients and we also assist clients with only a few hundred thousand dollars in assets who want to protect those assets against outside liabilities.

Liability can arise for anyone. The risk of liability might come from driving a car, operating a business, being sued for professional malpractice, suffering economic downturns, engaging in bad investment deals, being subject to lawsuits, entering bankruptcy, and other similar risks. The key is to assess your specific situation and determine how to protect against those risks.

Here is a quick list of individuals who might benefit from some type of asset protection:

  • Professions with high liability risk (i.e. physician, dentist, attorney, accountant, engineer, and other similar professions)
  • Business Owners
  • Property Owners
  • Individuals who are close to retirement and want to protect retirement savings while still engaging in business ventures and other activities that might put retirement savings at risk.
  • Individuals who have accumulated substantial equity in real property, savings, or investments which with individual needs or wants to protect.

There are many ways to protect your assets such as maintaining liability insurance, using business entities for your business (corporations, LLCs, etc.), creating irrevocable trusts, and various other strategies. No two situations are exactly alike and everyone has different goals and risk tolerance. Finding the right solution to reach your goal is important.

To begin protecting your assets, we generally recommend that clients obtain adequate insurance coverage that frequently exceeds the minimum requirements. We can then analyze your situation and the available options to determine a plan that is unique to your situation.

Timing is important. It is essential to consider asset protection before a claim or liability arises. You can greatly reduce your risk exposure by implementing a plan before you are facing a claim or liability.

Hopefully, you will never need to test your asset protection plan. In any case, you will want the peace of mind and comfort of knowing that your plan will work and your assets are protected and can withstand lawsuits and unforeseen circumstances. We provide a free consultation to help you determine the most effective and appropriate asset protection strategy for your situation.

TrustCo case shows importance of timing in asset protection.

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The most important factor in almost every asset protection case is the timing between the time the assets were transferred and the time of the creditor’s claim.  In TrustCo Bank v. Mathews, the court held that a plaintiff was barred from bringing a fraudulent transfer claim because the statute of limitations had run.  Susan Mathews signed a personal guaranty in 2006.  A few months later she transferred stock to a couple of Delaware asset protection trusts.   The plaintiffs brought a fraudulent transfer claim against the trusts on March 1, 2013 and the court ruled that the claim was barred because the statute of limitations on fraudulent transfers had run.  This case is interesting because the transfer actually occurred after Susan had incurred an obligation.  Because the transfer occurred after the obligation, the transfer probably would have been voidable as a fraudulent transfer if not for the statute of limitations.  In other words, the planning worked only because of the timing between the date of the transfer and the date of the fraudulent transfer action.

California Court Throws Out Case Against Our Trust – Client Very Satisfied

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On June 19, 2012, the Superior Court for the State of California for the County of Los Angeles sustained our motion to dismiss a lawsuit by Wilmington Capital LLC against The Big Whale Trust (an irrevocable trust created by McCullough).

The grantor had funded the trust with cash and real estate prior to the time the liability was incurrred. The grantor’s spouse and children were the trustees and beneficiaries of the trust. The trustees had made several distributions to the grantor’s spouse, but the grantor was not a beneficiary and the grantor had personally received no benefits from the trust.

Wilmington Capital LLC sued the trust because it had been unable to collect against the grantor and the grantor’s spouse. Wilmington Capital LLC had no evidence to claim that the trust was invalid, that the transfers to the trust were fraudulent, or that the grantor was the alter ego of the trust. Wilmington Capital LLC argued that they should have access to the trust because the grantor had retained a special power of appointment over the trust.

Because California law protects the assets of an irrevocable non self-settled discretionary trust (even when the grantor retains a special power of appointment), our client was able to have the case summarily dismissed without incurring significant legal fees.

The Big Whale Trust is a perfect illustration of the best way to create, fund and operate an asset protection trust. Copies of the court pleadings (including our Memorandum of Points and Authorities) are available upon request.

Bankruptcy Court – Our Trust Protects Client’s Home and Trust Assets

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In 2009, our client, Todd H., transferred his home and some cash to one of our carefully drafted irrevocable trusts at a time when they were solvent and had no foreseeable liability problems.  Todd’s wife was the trustee, and his wife and children were the beneficiaries.  In 2010, Todd’s business went downhill along with the rest of the US economy.  In 2011, Todd’s small business went bankrupt and he was also forced into personal bankruptcy.  The transfer of the home to the trust was fully disclosed to the bankruptcy court, but the bankruptcy court excluded the trust and its assets pursuant to the federal bankruptcy code which provides that this type of trust is excluded from the bankruptcy estate.  After losing everything else they owned in the bankruptcy,  Todd’s family continues to live in the paid-off home that is owned by the trust.