I am going to let you know up front that this is a slight rant on what I am seeing in the Asset Protection arena. Particularly with respect to planning for people who are facing a mortgage default situation. For most people this is a very scary situation and puts them in a vulnerable and fearful position. The issue I see is that some planners are recommending fully triggered Asset Protection Trusts which have a maintenance cost that is simply not appropriate for the problem being addressed.

Click here to See Doug’s Article “Should I Strategically default on My Mortgage?”

Do I need Asset Protection for a Mortgage Default? is a post from: Lodmell & Lodmell, the Nation's #1 Asset Protection Law Firm

These attributes basically mean that married couples own their property “together,” in every sense of the word.  And if one spouse dies, the other spouse automatically takes sole ownership of the property.

Benefits of Tenancy by the Entirety

From the standpoint of asset protection planning, a tenancy by the entirety provides a high degree of protection.  That’s because neither spouse can transfer property out of a tenancy by the entirety without the consent of the other spouse.  That feature is what provides asset protection.  For example, if one spouse is sued or otherwise incurs a liability, assets held in a tenancy by the entirety are exempt from the claim.  In other words, they aren’t accessible by the creditors of any single spouse.

How to Use Tenancy by the Entirety

Many married couples often earn separate incomes.  One way to protect those individual incomes is to deposit them into an account that owned in a tenancy by the entirety.  This method is especially effective in households where only one spouse is a physician, dentist, or lawyer in a state where profits can only be shared with other licensed professionals.  Income from the professional practice can be protected against potential malpractice suits by having it deposited into a tenancy by the entirety account.  There is one drawback: This method only works if it’s done consistently over a long period of time.  It simply won’t be effective if you wait until a lawsuit or other claim is pending before you begin.  That’s because of fraudulent conversion laws.

Weaknesses

Tenancy by the entirety does suffer from a few weaknesses.  One obvious weakness is that property held in this form of ownership is accessible by joint creditors of married couples.  Property is also becomes accessible if a divorce occurs or upon the death of a non-debtor spouse.  Also, in order to take advantage of tenancy by the entirety in the event of bankruptcy, you’d have to opt to take your state’s exemptions rather than the federal exemptions.  To overcome these weaknesses, we almost always recommend the use of a limited partnership rather than sole reliance on tenancy by the entirety.

If you have questions about tenancy by the entirety and want to know if it’s available in your state, please call Lodmell & Lodmell today.  We’d be happy to spend some time discussing this topic with you.

Holding Property As Tenants By the Entireties is a post from: Lodmell & Lodmell, the Nation's #1 Asset Protection Law Firm

Before you continue reading, take a moment to download our guide to Funding Your Asset Protection Plan (click the link to download).

Funding Basics

• Primary and Second Homes (non-rentals)

The first asset you need to consider is your primary residence.  If you live in a state with fantastic homestead protection like Florida or Texas, then you don’t need to do anything.  Your home is protected.  Otherwise, you need to provide some protection for your home.  The typical way to do that is to transfer or “deed” your primary residence into your asset protection trust.  The same is true of any second homes that you own but don’t use to generate rental income.

• Rental Properties

Rental properties are slightly riskier than non-rental properties.  As a result, there needs to be some additional insulation around them in order to protect your other assets.  That additional insulation comes in the form of a limited liability company (a “LLC”).  The funding works as follows:

1. The LLC is created, and it is owned in the exact same proportions as the rental property to be transferred.
2. The rental property is deeded into the LLC.
3. The LLC is transferred into your asset protection limited partnership.

It’s very important that you follow the exact sequence described above, because in some instances it can save you money by avoiding transfer taxes and/or a reassessment for tax purposes (check with your local taxing authority and clerk of court to make sure).

• Safe Assets

Cash, stocks, bonds, precious metals, and jewelry are all considered “safe assets.”  That’s because they can’t generate liabilities for you.  Think about it like this: Someone can get injured on your rental property.  That’s just not true of your safe assets.  Because of this unique feature, your safe assets can be owned directly by your limited partnership, without the need to insulate those assets with an LLC.

• Vehicles

Vehicles are very risky assets.  As a result, they should be left outside your plan completely.  Own vehicles in your personal name, and trust that your other assets are safely protected.

• If you have questions . . .

If you have questions about how you can fund your existing plan, or if you’re interested to develop an asset protection strategy, call Lodmell & Lodmell today.  We’ll be happy to answer your questions.

Tips for Funding Your Asset Protection Plan is a post from: Lodmell & Lodmell, the Nation's #1 Asset Protection Law Firm

1. Either the investment does not get back to even, and after a long holding period, the client chooses to exit the investment or (worse) is forced to exit the investment at the worst possible moment.
2. The investment gets back to even, and then the client chooses to continue holding it with the belief that it will appreciate in value according to the original investment objective.

Examining the Choice

There are fundamental problems with both of those typical choices.  In the first scenario, you’ve sacrificed time and the value of your money over time, not to mention the capital loss when the investment is finally exited.  In short, the opportunity cost is very significant.

In the second typical scenario, the fallacy is that once you’re back to even, the investment could continue on an upward trajectory.  That may or may not be true, but you have to realize (i) that the investment has already made an upward move (can it continue?), and (ii) why is your psychological stance changing from “just get me back to even” to one that smacks of greed?

The answer is to that question is that losing feels psychologically worse than winning feels good.  That means that almost all of us with consciously seek to alleviate pain (“just get me back to even”) . . . until that emotion is gone.  At the point the pain disappears, however, we seek a new emotion–the joy of winning.  The problem is that it will take a lot more winning to induce an emotional response, so much so that it will be almost impossible achieve and you risk losing again before getting to your upside objective.

Make The Choice That Seems Unnatural

As odd as it sounds, often the best thing to do is admit when an investment has gone bad and cut losses as quickly as possible.  Some of the best traders on Wall Street have echoed this advice: “If a trade doesn’t feel right from the start, get out . . . even if you’re down.”  The point is that your time is too valuable to waste worrying about an investment.

If it doesn’t feel right or if it’s a losing trade that doesn’t look to make a very quick turnaround, don’t torture yourself.  Make a change, and get into an investment that you feel right about!

How to Make Change Even When It Feels Wrong is a post from: Lodmell & Lodmell, the Nation's #1 Asset Protection Law Firm

An example of a generation-skipping gift is a gift from grandparents to their grandchildren (or an unrelated person who is 37 1/2 years or more younger than the gift giver), even if that gift is give via a trust that distributes the gift long after the grandparents have died.

How Generation Skipping Taxes Work

This is how generation-skipping taxes are assessed: A grandparent creates a trust, names her children as income beneficiaries, and directs that the assets should be distributed to the grandchildren after the child dies. That way, the trust corpus isn’t part of the child’s estate. This worked to avoid taxes until the generation-skipping tax (“GST”) was introduced. The GST basically said, “The IRS is going to tax all distributions from the trust, to the extent that there is no unified credit remaining for the trust creator.”

Lawyers can be pretty clever. When some states did away with the dreaded Rule Against Perpetuities and cleared the way for Dynasty Trusts (trusts that last forever in some circumstances and provide a lot of asset protection), attorneys saw an easy solution to circumventing the generation-skipping transfer tax.  They simply created trusts that don’t terminate for many, many years.  In Florida, for example, trusts can last up to 360 years. If such a trust is created and the original trust creator’s unified credit is applied to it, money can grow in trust and pass from generation to generation to generation without the burden of estate taxes eating into wealth.

Dynasty Trusts Help Avoid Onerous Taxes

Realizing that families have figured out how to avoid a very onerous tax burden, the Obama Administration has cleverly decided to tax Dynasty Trusts (the kinds of trusts that can last forever in some cases) every 90 years. In effect, this reverses the benefits of creating a Dynasty Trust in the first place. Fortunately, there is still time to create your Dynasty Trust in 2012 and possibly forever avoid these changes in the tax code, since the changes will only affect trusts created in 2013 and beyond.

You can learn more about estate taxes and generation-skipping taxes in IRS publication No. 950.

Obama’s New Tax Plan and How it Affects Your Wealth is a post from: Lodmell & Lodmell, the Nation's #1 Asset Protection Law Firm

Lately we’ve had more conversations regarding investment strategy and the way it fits into asset protection planning than ever before, and questions about Madoff are still fresh in the minds of many of our clients.  With that said, we want to take the time to address the elements that make a Ponzi Scheme possible.

What is a Ponzi Scheme?

First, a quick definition.  What is a Ponzi Scheme?  Broadly speaking, the operator of a Ponzi Scheme (or Ponzi Game) is a person who promises outsized investment returns, “sells” investors on the idea, takes investor money, and then uses money placed into the scheme by future investors to pay earlier investors.  Ponzi operators don’t actually make investments or, if they do, the investments are often losers.

Ponzi Schemes can last for as long as new capital is available and invested into the scheme.  When sources of “new money” dry up–when there are no new investors, as happened to Madoff when the markets crashed and a large number of people requested a return of their money–there is no cash available to honor redemption requests (i.e. to pay investors when they ask for their money back).

The Million Dollar Question (literally): How to Identify a Ponzi?

Madoff was brilliant in the execution of his Ponzi in that he gained such a wide following and enjoyed such a high level of trust from his investors that he generally enjoyed a reputation for trustworthiness.  On top of that, he made it seem as though opportunities to invest with him were scarce, so that people jumped at any chance to “get in” and often (or possibly always) failed to ask critical questions.

All Ponzis will typically have two attributes in common:

1. Internal (or wholly owned) accounting
2. Internal (or wholly owned) auditing

If an investment fund delegates either of those two functions to an outside, reputable accounting or auditing firm, it is almost impossible for that fund to perpetrate a Ponzi.  The simple fact is that with accurate and transparent accounting, auditing, and invoicing, it becomes quickly apparent when investment returns are falsified.

Madoff, as you might expect, operated an in-house accounting firm, and his auditors were employed by a firm that was wholly owned by Madoff.  In other words, there were no check and balances in place, nothing to keep to keep Madoff accountable to his investors . . . all of whom were duped by a marketing genius who was able to instill trust by delivering fantastic (but fake) results and engender a word-of-mouth following.

Ideal Situations

Ideally, if you invest in any type of fund–especially funds that are not registered with the Securities and Exchange Commission (“SEC”)–you should demand three things:

1. Cash controls by a third-party administrator: Let the fund manager worry about managing investments, not cash controls.  Make sure that cash controls are strict (where money can go, to whom, and when) and that they are transparent.
2. Accounting: Should be handled by a reputable firm that has many more clients than just the fund you’re considering.
3. Auditing: Make sure it’s handled by a firm that is in no way affiliated with the investment fund.

Follow that advice, and you’re largely taking Ponzi Risk off the table.  Call Lodmell & Lodmell if you have any questions about this topic or the financial markets in general.  Also, take some time to check out the videos at Mind of Money.

Ponzi 101: How to Spot a Madoff Scheme is a post from: Lodmell & Lodmell, the Nation's #1 Asset Protection Law Firm

Investing With An Asset Protection Mindset

The most commonplace risk that Lodmell & Lodmell has traditionally helped clients avoid is the risk of lawsuits.  It’s worth the time, effort, and money to hedge against lawsuit risk for one simple reason: Without asset protection planning in place, a lawsuit could be absolutely catastrophic.  It could wipe out your entire net worth and leave you with nothing to show for your years of hard work.  Investing with the wrong strategy could be equally devastating.

Return of Your Money Is The New Return on Your Money

One important aspect to investing with an asset protection philosophy is realizing that traditional methods of investing involve more risk than may at first be obvious.  Traditional wisdom is to buy and hold.  Well, if you had bought most asset classes in 1998 and held through 2008, you would have lost a lot of money.  The fact is that today there are unknown risks built into the market.  There is not only market risk (which most of us are used to) but there is also institutional risk.

Institutional risk goes beyond the risk of a bank or brokerage house failing and taking your money with it (think MF Global).  It also involves the risk that when a bank (or European country) fails, it could take the market down with it.  Add that to the fact that many banks and brokers trade for their own account–and many times in exactly the opposite direction that they advise their clients to trade–and you have a recipe for a potentially catastrophic outcome in the market.

Viewed in that light and combined with some of the lowest interest rates in history, a return of your money from banks is the new return on your money.

So How Do You Generate A Return?

The answer is simple.  Put most of your money in an absolutely safe place like a Swiss private bank or Treasury Direct where you will actually pay a fee to remove institutional risk.  Then, with the portion that you are willing to put at risk for a reasonable rate of return, invest it in a vehicle that is designed to take only market risk.

What does that mean?  It means you need to avoid ETFs, mutual funds, and other synthetic products that actually charge you a fee to give you less performance than the market itself will actually give you.  If you have questions regarding what kinds of products are pure market risk plays, call an asset protection attorney today!

What Is Your Investment Strategy? is a post from: Lodmell & Lodmell, the Nation's #1 Asset Protection Law Firm

A client holds her home in an asset protection trust and decides to refinance it.  The bank, however, has other plans.  The bank offers to refinance the home but only if the trust is amended to erode all of its asset protection features, rendering the trust totally useless.  But our clients are savvy, so they propose to remove the home from the asset protection trust and then refinance it.  Only one problem with that plan, as the bank usually proceeds to scare the bejesus out of the client by stating that if the home is ever deeded back to the trust, the due-on-sale clause will be triggered.  Effectively, that means that the bank can call the entire principal due on the loan.

It’s usually at this point that we get a call from the client asking for help, which is unfortunate since the bank is simply acting nonsensically.  Financing a home held in an asset protection trust does not impair the bank’s rights and security interest in the home at all!  It simply keeps your other creditors away from the home.  In short, the bank is massively wasting everyone’s time.

Federal Law Supports Asset Protection Trusts

For once, the solution to the due-on-sale clause threat can be found in federal law.  Specifically, the Garn St. Germain Act, which states that a due-on-sale clause cannot be triggered upon a transfer of property “into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.”  In other words, it would be unlawful for a lender to carry out the threat of triggering a due-on-sale clause if you deed your property into an asset protection trust created for you by Lodmell & Lodmell.

What You Should Do

All this boils down to a simple set of steps you can take if you want to refinance your home that’s held in trust.

1. Deed the home from your trust to your personal name.
2. Refinance the home.
3. Deed the home back to your trust, regardless of whether the bank tried to scare you with a due-on-sale clause scenario.
4. If the bank does try to accelerate your loan, pass your bank a copy of the Garn St. Germain Act.

Deeding Your Home To An Asset Protection Trust: Due-On-Sale Clause Lies is a post from: Lodmell & Lodmell, the Nation's #1 Asset Protection Law Firm

California Franchise Tax

If you are a California resident, you must pay a franchise tax for each business entity that you own.  That’s true regardless of whether the business entity itself is formed in California.  For instance, if you live in California and you form a California limited liability company, you’ll be required to submit the appropriate tax forms and remit the franchise tax payment.  The same thing is true if you own a Nevada limited liability company or limited partnership.  The tax still applies.  It’s important to keep all this in mind when forming your asset protection plan.

Avoiding Tax Base Reassessments

Another quirk about California is that upon any transfer of ownership of real estate the state can (and will) reassess the value of the real estate for tax purposes.  Effectively that means that if you don’t fund your plan carefully, you could end up paying much more in property taxes.  Since many plans involve holding real estate in limited liability companies which are themselves owned by a limited partnership, it can be tricky to transfer property into your plan without incurring additional taxes.  So here’s what you need to do:

• If you plan to transfer property into a limited liability company, make sure that company is owned by the same people and in exactly the same proportions as the property is owned right now.  Also, check with the recording clerk in the deed office to see what disclosures are necessary to make sure that no tax reassessment occurs.
• Transfer the property into the limited liability company with a quitclaim deed.
• Follow-up with the deed recording department to make sure that you have adequately disclosed to them that the property is still effectively owned by the same people  and in the same proportions as it was prior to the transfer and that no reassessment will occur.
• Transfer the limited liability company into your family limited partnership.

The same rules apply regardless of whether you are transferring property into a limited liability company, a family limited partnership, or an asset protection trust.

By following the steps outlined above very meticulously, you can avoid having your property reassessed for tax purposes, which can potentially save you thousands of dollars in property taxes every year.  The bottom line is that it’s just not fair to have an increased tax burden simply because of your desire to lawfully protect your hard earned assets.

Transferring Assets Into Your California Asset Protection Plan is a post from: Lodmell & Lodmell, the Nation's #1 Asset Protection Law Firm

But Not All Risk Is Bad

Yes, you read that correctly.  Risk is what leads to new developments and improvements.  Without risk, we would live in a stagnant world.  The question is not whether you should take risk (because we are all taking risks every day).  Rather, the question are:

• Are you fully aware of the risks you take?, and
• Are you being appropriately compensated for those risks?

These are important questions that many of us fail to ask, but recent events make this an important topic.

Municipal Bonds: Are They Risky?

You might be thinking “no way, munis are incredibly safe.”  The correct answer, however, is “yes, municipal bonds are risky.”  That’s not to say they are unreasonably risky.  All asset classes carry with them some risk.  Even the cash in your wallet is at risk.  You could lose your wallet, you could get mugged, or the value of the dollars you’re carrying could decrease relative to other currencies.  Those things happen every day, so to think your immune is unreasonable.

There are also risks associated with real estate, stocks, cash, and yes . . . municipal bonds.  The questions you need to ask with respect to any portfolio are the two questions above: (i) are you aware of the risk, and (ii) are you being appropriately compensated for it?

It’s not the intent of this article to pick on municipal bonds, but because munis are traditionally viewed as utlra-safe investments, they provide an opportunity for reflection.  You see, Jefferson County, Alabama just filed for bankruptcy protection.  It is the largest municipal bankruptcy in U.S. history, and it will cost creditors (bond investors) upwards of $3 billion!

Back to Asset Protection

Again, you should constantly be looking at the level of income you’re receiving relative to the risk you’re being asked to take.  Don’t accept less than reasonable compensation.  This is just a wake up call to those who believe that they are making “totally safe” investments.  In very simple terms, there is no such thing.  If you’re curious to read more about the Jefferson County Bankruptcy, the Wall Street Journal has a good article on the topic: Largest Municipal Bankruptcy Filed

If you have questions about asset protection or asset protection strategies, contact Lodmell & Lodmell today to schedule a consultation.  We’ll help you assess and understand the risks you’re taking, and we’ll help you protect your assets against potentially devastating events.

Are You Getting Paid Appropriately? is a post from: Lodmell & Lodmell, the Nation's #1 Asset Protection Law Firm