Volume XX, Number 2 – FEBRUARY 2011
© Donlevy-Rosen & Rosen, P.A.
BACKGROUND. Many individuals attempt to implement asset protection on their own (See, APN, Vol. III, No. 3). Among the “do-it-yourself” methods commonly utilized is titling and re-titling assets among a spouse, children and others (friends & family members). Instead of accomplishing the desired protection, these “strategies” often expose the transferred asset to additional creditors, cause family conflicts, and raise gift and estate tax issues. Therefore, individuals should proceed with caution and utilize experienced counsel when titling new assets or transferring title to existing assets. This issue of the APN is the second of two parts addressing the most frequent failings of individuals attempting to implement do-it-yourself asset protection by titling/retitling assets (Part 1: Vol. XVI, No. 2).
PITFALL #6: ASSUMING THAT TRANSFERRING TITLE TO FAMILY MEMBERS / FRIENDS WILL PROTECT ASSETS. Individuals (the “transferor”) transfer their assets to children or other family members (“transferee(s)”) assuming the assets will be protected from litigation claims (sometimes with the expectation that the asset will be returned at some future date). This assumes that the transferee does not work, drive a car, or have any interaction with other human beings. More importantly, this also assumes that the transferee will never be liable to anyone for any reason-such as alimony or child support, credit card debts, medical bills, slander/libel, accidents, etc., that the transferee will still own and make the asset available to the transferor at a later date or when asked, that the transferee’s estate will return the asset to or distribute it according to the transferor’s wishes (what if the transferee dies first? His/her spouse may have different thoughts about returning the asset. Remember the old adage: “You never really know someone until you share an inheritance with them.”). When an individual titles an asset in someone else’s name, there may be gift tax ramifications causing the transferor to owe gift taxes for that year, and/or estate tax ramifications which will result in higher overall estate taxes for the family than would be paid with proper planning (although less likely now with the $5,000,000 exemption – See, APN Vol. XX, No. 1). Finally, a transferor’s creditor may be able to undo the transfer if a court finds it to be a fraudulent transfer/conveyance (generally, a four year window). See APN, Vol. IV, No. 4.
PITFALL #7: ASSUMING THAT FAMILY MEMBERS / FRIENDS WILL BE WILLING AND ABLE TO TRANSFER ASSETS BACK AND FORGETTING THAT THEY CAN HAVE THEIR OWN LIABILITIES. Individuals faced with litigation threats sometimes transfer title of assets to family members / friends expecting that when the threat is over (or when the transferor so desires), the assets will be given back. Assuming that the transfer is a true gift (no strings attached), the transferor is counting on the good will of the transferee to give it back, as well as the transferee being alive and not having subjected the asset to his/her own creditors. For instance, Doctor Quatro gives his stamp collection to his elderly retired Aunt Cindy, who doesn’t appear likely to incur liabilities. Unbeknownst to the Doctor Quatro, Aunt Cindy has co-signed a loan for one of her ner-do-well nephews (who defaults on the loan), and the lender turns to Aunt Cindy to pay up. When her liquid assets are insufficient to pay the nephew’s creditor, the lender looks to the valuable stamp collection – and takes it away.
PITFALL #8: ASSUMING THAT FAMILY MEMBERS / FRIENDS WILL BE ALIVE TO GIVE ASSETS BACK. Individuals transfer assets to family members / friends expecting that when the threat is over (or when the transferor so desires), the assets will be given back. The first assumption is that the transferee will be alive at the time the transferor wants the asset back. If not, the fiduciary of the transferee’s estate would not legally be able to return the property – that is, unless the transferee provided for its return in his/her will or trust. If the will or trust does return it to the transferor, the return may come at a time when the very creditor the transferor sought to avoid can still attach the property (judgments can remain valid for decades). A properly implemented asset protection trust would assure the transferor that the property will always be available for the transferor’s benefit and enjoyment while the transferor is alive, and available for the transferor’s chosen beneficiaries upon the transferor’s demise.
PITFALL #9: NEGLECTING THE GIFT TAX RAMIFICATIONS OF TRANSFERRING ASSETS TO FAMILY MEMBERS / FRIENDS. Individuals make gifts to children or other family members without regard to the gift tax ramifications. While a transfer may protect the asset from the transferor’s creditors, it may also use up the transferor’s annual gift tax exclusion (currently $13,000.00 per donee per annum) and use up the lifetime unified credit ($5 million for gifts made for years after 2010).
PITFALL #10: NEGLECTING THE ESTATE TAX RAMIFICATIONS OF TRANSFERRING ASSETS TO ANYONE ELSE – INCLUDING THE SPOUSE.Individuals transferring title by gift (including “sales” for less than fair market value) often do so without regard to the estate tax ramifications. Improper titling of assets may cause unnecessary estate taxes to be incurred. For example, if an individual transfers title to all the family’s assets to his/her (“low risk”) spouse (or into tenancy by the entirety or joint tenancy with right of survivorship with the spouse), it is likely that all or a portion of the transferor’s estate tax exclusion will be wasted, ultimately resulting in an estate tax increase for the family of up to $1.75million. With proper planning, the estate taxes can be minimized, if not avoided entirely. In addition, “temporary” gifts to select family members may result in the transferor’s estate being distributed in an unanticipated manner – and cause unnecessary strife among family members (for instance, where one or more family members inadvertently receive more than their “fair share”).
CONCLUSION. Use experienced, qualified counsel to advise you regarding titling and re-titling of assets. Worth repeating: A properly implemented asset protection trust would assure the transferor that the property will always be available for the transferor’s benefit and enjoyment while the transferor is alive.