Estate and Business Planning. Asset & Risk Protections.

By Richard Rydstrom, Esq., LL.M. Taxation Š1989-2005 || rydstromlaw@yahoo.com
California Attorney/Accountant/National Speaker & Author
Published or Quoted in:The Financial Times, MSNBC, CPA Journals, Banks, Yahoo Finance, Value Line, Vantage Retirement, Excite Finance, Dunn & Bradstreet's Hoovers, Design Build, Landlords Apartment Associations (various, from California to Florida), HVAC Association, Lycos Finance, etc. Courtesy of LandlordsClub.Com and EntityPros.Com, ClubLegal(TM), ContractorsClub, etc.

Foreword: After handling hundreds of high profile or celebrity clients, certain themes of success repeat in wealth building and protection; especially for clients who can afford the best. This article started as an internal cheat-sheet and over the years grew into an article published throughout the world. As a lesson sheet of such experience and knowledge, this article is an annual summary and update of the 13 most commonly used devices in estate and business planning (asset and risk protection). When discussing business and estate planning matters the following devices and alternatives should be discussed with your attorney and wealth building and protection TEAM; I call this the BIG TEAM(TM). This list is non-exhaustive and only given as a tool to afford easier discussions with your professional BIG TEAM. Your first step in the right direction is to put together a BIG TEAM, which should include an Estate & Business Attorney, Tax CPA, Insurance Expert (re Life, Disability, Buy Sell, Long Term Care, etc.), CFP (Certified Financial Planner), Money Manager, Brokerage House or Investment Advisor. Always remember, TEAM means, Together Everyone Accomplishes More! This article is not intended as legal, tax, accounting, financial, money management or insurance advice, and as such you may not rely upon same for that purpose. It is recommended that you hire an attorney experienced in this area to plan your business, estate and protection matters.

13 Most Common Business and Estate Protection Planning Tools or Devices!

1. Revocable Living Trust (or Living Trust). In tax circles this trust is called the Section 671 Trust. Sometimes called a tax-neutral device. However, you may use the trust to invoke maximum estate tax exclusions ($1,500,000 for each husband or wife). But better yet, in larger estates, it is often advisable to put certain assets (wealth) in various other devices (e.g. LLC, Children's Trusts, Life Insurance Trust, C or S Corporations, PAT, PRT, etc.) for asset and risk protection, as well as tax reduction reasons. Such "interests" may be then assigned to your Living Trust. The Living Trust is most often used to avoid Probate, its costs and delays. Contrary to myth, generally it is not intended as an asset protection safeguard, at least during life (while it is revocable); and without certain separate Property Agreements. Also assets held in your living trust are not protected from the reach of creditors. (Ca. Prob. Code, Sections 18200, 15304 (a), 15304 (b)). However, you can achieve some measure of property "characterization" protection (as separate, community, etc.) if the husband and wife maintain separate living trusts and property agreements. With proper business and estate protection planning, the living trust is commonly used to hold 'select' property and all of your (personal) property "interests". Such interests are usually derived from your ownership of property or real estate (rental units) held or owned in one or more of the entity devices mentioned hereinbelow (or other devices not mentioned herein). Also, the Living Trust can hold such interests in investment accounts or money management accounts. Such investments may be held personally, in the Living Trust; or in an LLC (with its "interests" held by the Living Trust). You should have a money manager or investment advisor retained for what we call asset appreciation, growth and "Liquidity Planning". You need to plan your retirement by considering your insurance (life, disability, long term care, etc.) and cash management needs (from investments, and cash equivalents). You must project your liquid or cash equivalent assets necessary to meet your potential taxes upon disability or death. Most persons commonly use the living trust in business and estate protection planning as a central planning device; we like to refer to it as the quarterback). It is part of most business and estate protection plans, as it can avoid probate and act as the directing authority for all or most of your property disposition plans; including certain investments. Although certain investment accounts are considered "POD" accounts (or "payable on demand" accounts); you should coordinate PODs consistently with your estate, business and retirement plans, which includes your Living Trust. For some estates, this device alone is not sufficient as a business and estate planning solution. To have maximum effectiveness, it should be used with one or more of the other devices or techniques mentioned hereinbelow.

2. Pour-Over Wills . This device is used in conjunction with your Living Trust. It directs property disposition directions to the Living Trust. It is intended to be a "catch-all" over property left out of your Living Trust for one reason or another. Each client will generally use one Pour-Over Will.

The 13 Secrets of the Rich or Informed (C) (TM)

3. California Advanced Health Care Directive (Durable Power of Attorney). This document is used primarily to direct your attorney-in-fact on how you wish to be cared for in the event of certain illnesses, incapacity, or disability. It is similar to the so-called Living Will. Different states have varying rules on such device(s). For example, California has a statutory durable power of attorney for health care in the form of a Directive. Adults and Spouses should have an ANTI-Schiavo CASE HEALTH CARE DIRECIVE KIT(TM) covering Medical Decisions, "Pull the Plug" issues and Final Wishes.

8/2005: NEWS: ANTI-Schiavo CASE FOR KIDS!(TM) O'Connell & Rydstrom, LLP announces a FIRST in the legal profession with its release of its CHILDREN'S GUARDIAN-CARE PROTECTION KIT(TM) included in its Living Trusts / Wills and estate plans. This is a major expansion of the typical protections offered in standard living trust/will formats. O'Connell & Rydstrom announces its CHILDREN'S GUARDIAN-CARE PROTECTION KIT for the first time publicly, at the Parenting OC Expo at the Block Mall in Orange County, California, Saturday, August 13, 2005. Mr. Rydstrom also calls it his ANTI-Schiavo CASE FOR KIDS!

4. Durable Power of Attorney for Asset Management. This document is used primarily to direct your attorney-in-fact on how to manage, run, control or dispose of your assets (or certain assets) in the event of certain illnesses, incapacity, or disability. In the event of disability, this document is critical. It will allow you to direct the person(s) of your choice in making business decisions over certain real or personal property (and businesses). It can be very effective for small and family businesses, and landlords (rental properties). For example, per your direction, it could allow for the refinance or sale of real estate.

5. Family Limited Partnership. This is a very popular business and estate planning instrument (especially before the LLC came to your State) used for many purposes, some of which include asset protection, favorable pass-thru taxation, ability to control transferred property (as managing member or per the LLC), reducing estate or income taxes, life insurance ownership, and fractional Gifting with use of beneficial "discounts" (e.g. a tax free gift of $20,000 may be worth conservatively (approximately) $30,000 thereby reducing income tax on its appreciation or growth, and eventually, estate taxes). This device is a limited partnership, which requires a general partner and at least one limited partner. But be aware that, by definition the general partner has "control", and also unlimited liability. The "limited's" have no management powers (and cannot, by definition "manage') and are afforded limited liability. The family limited partnership will protect its assets from partner creditors. It has the power of the favorable asset protection charging order law. (Ca.Corp.C 15522, 15673; Fla. Stat. 620.22; Ariz.Rev.Stat.Ann. 29-341; Nev. Rev. Stat. 88.535; NY Partnership Law 111 McKinney; Tex, Code Ann art. 6132a-1 7.03, etc.). But be aware - in California, effective January 1, 2003 the law was changed to allow "foreclosure". This is a dangerous change and a blow to the asset protection feature of the charging order. Normally a charging order is the exclusive remedy and will only allow the creditor to obtain certain distributions from the entity, if any; and not the assets! In such cases, generally the creditor would receive a taxable event (RevRule 77-137) upon the issuance of a charging order (as constructive income), even if he/she receives nothing! It appears that one should consider opening a FLP (or LLC) in a state that does not allow "foreclosure", qualify to do business in California (e.g. $70) and invoke the California Corporations Code respecting the invocation of the situs state laws concerning the integrity of such entity. Of course such entity is subject to California Laws, but California Laws also allow the invocation of situs state laws on certain key (asset protection) matters! Also, by tax definition the "limited's" are "passive investors" with passive income or loss. To obtain limited liability for all members, see the Limited Liability Company (LLC) below. To allow passive investors some voice in management without fear of losing limited liability, see the LLC. To make passive investors active without loss of limited liability status, see the LLC. To obtain family limited liability protections including the charging order, and favorable pass-thru taxation, or favorable single-member ownership taxation, see the LLC below!

The 13 Secrets of the Rich or Informed (C) (TM)

6. Irrevocable Life Insurance Trust. This non-amendable document is often used to hold and receive Life Insurance. This is one of the most effective methods to avoid taxation of life insurance proceeds, reduce the value of your estate, and reduce estate taxes! Otherwise, contrary to common myth, Life Insurance is generally taxable at your death. However, the use of insurance is key to the financial health of the upper middle class and rich. Life insurance is often used for 'tax cost wealth replacement', and as a 'wealth creator' for surviving spouses, heirs and future generations. Also, disability insurance is often used as a means to income stability. You should seek the advice of a professional insurance firm, as all life insurance is not created equally!

7. Children's Trust . Although a creature of many forms, usually it is couched in IRC 2503 (b) or (c). Generally it is an Irrevocable Trust used to hold property for the benefit of your children. Parents may gift or sell assets to the children's trust and lease or loan certain assets back. This device does carry a high measure of estate and asset protection from creditors. It can also reduce estate and income taxes.

8. CRT. Charitable Remainder Trust . This irrevocable trust is usually used to receive and hold property for the purpose of making charitable gifts, supplying income from such assets for life, achieving current charitable donations, or reducing Capital Gains Tax. It requires the making of a "complete" charitable gift. It may also be used in conjunction with your estate plan including a family Foundation (no longer recommended), or "your" own charity. In the most basic sense, your property is transferred to the trust, and the trust sells the property, deferring certain taxes. The trust then invests the sale proceeds, and you receive an income and/or principal payout therefrom (depending upon the device, and factors including the term of the trust and your life expectancy). The trust monies (or res) are protected from most outside liability attacks. Life insurance must also be seriously considered for wealth replacement and also as a wealth creator! Life insurance is effectively used in a CRT to replace any so-called "gift", and often times results in an increase in wealth for your heirs. See you Attorney, and Life Insurance specialists before acting upon such a plan. Also consider a CLT (Charitable Lead Trust).

9. LLC. Limited Liability Company . An LLC is a creature of state statute; it varies from state to state. It most often takes the form of a limited partnership for purposes of liability, accounting and taxation. It is rare, but certain LLCs can be corporations for taxation purposes. Most clients will desire it to take the form of a "limited partnership" (not a "corporation"), especially if residential or commercial rental properties or other capital assets are to be held or owned by the LLC. (See Landlord's Asset & Insurance Protections Kit (TM)Š, Courtesy of LandLordsClub.Com). Generally all of the favorable attributes of the (family) limited partnership discussed above apply to the LLC, including but not limited to: asset protection, favorable pass-thru taxation (Subchapter K

The 13 Secrets of the Rich or Informed (C) (TM)

partnership taxation), ability to control transferred property (as managing member or per the LLC), reducing estate or income taxes, life insurance ownership, fractional Gifting with use of beneficial "discounts", allows the passive investor some voice in management without fear of losing limited liability, can make passive investors active without loss of limited liability status, favorable asset protection charging order laws (Ca.Corp.C 15522, 15673; Fla. Stat. 620.22; Ariz.Rev.Stat.Ann. 29-341; Nev. Rev. Stat. 88.535; NY Partnership Law 111 McKinney; Tex, Code Ann art. 6132a-1 7.03, etc.), and the LLC allows favorable single-member ownership taxation (TR 301.7701 et seq) which does not require a separate entity tax return or Federal ID number. But be aware - in California, effective January 1, 2003 the law was changed to allow "foreclosure". This is a dangerous change and a blow to the asset protection feature of the charging order. Normally a charging order is the exclusive remedy and will only allow the creditor to obtain certain distributions from the entity, if any; and not the assets! In such cases, generally the creditor would receive a taxable event (RevRule 77-137) upon the issuance of a charging order (as constructive income), even if he/she receives nothing! It appears that one should consider opening an LLC in a state that does not allow "foreclosure", qualify to do business in California (e.g. $70) and invoke the California Corporations Code respecting the invocation of the situs state laws concerning the integrity of such entity. Of course such entity is subject to California Laws, but California Laws also allow the invocation of situs state laws on certain key (asset protection) matters! For more tax and liability distinctions, See LLCs, Entity Options & ComparisonsŠ, LandLordsClub.Com.

10. Will. (Warning! PROBATE!) The old-faithful estate planning tool, the Will, is often times not the appropriate estate planning choice in modern times. With modern business or estate planning, the Revocable Living Trust (with a Pour-Over-Will) is often the best choice. The historical Will is possibly the simplest document to implement, however, it does not avoid Court Probate! The Will may cost your family great Probate expense (2-10%), delay and court battles (with Will challenges and lawsuits). However, the marital deduction provisions often used in Revocable Living Trust may also be used in the Will, but probate, its delay and costs will not be avoided by doing so!

11A. The Corporation ("C"):

"C" Corporation. The "C" corporation is often the best entity for front line business operations that affords maximum tax write-offs (however, the Sub Chapter S is getting closer, year after year). Corporations are often used to operate a business with limited liability, and to divide up your business activities for creditor and lawsuit protection reasons. It is often beneficial to segment your "risky" business activity (or assets) from your "safer" activity (or assets), or to have certain corporation(s) act as partner(s) to other devices. The "C" or "S" corporation may be used to as your front line business entity, which in this day and age, is expected to be sued. The "C" corporation is often used to "conduct" business with minimum of asset ownership. However, certain capitalization rules must be satisfied with legal contributions, insurance and credit. The "C" corporation is often used to maximize corporate and "fringe benefit" deductions. However, if "C" deductions and fringe benefits are not used, the "C" corporation will be vulnerable to "double taxation" (taxation once at the corporate tax return level and again at the personal "wage" level). The corporation may have superior payroll tax opportunities. (See Sole Proprietorship vs. Corporations - Lower Corporate Tax Rates vs. Double Taxation - A Payroll Tax Comparison).

11B. "S" Corporation . Like the "C", the "S" is often used to achieve the same level of limited liability protection, but with less ?fringe" benefit tax deductions. However, the "S" comes with pass-through taxation, which is often advantageous to many clients who

The 13 Secrets of the Rich or Informed (C) (TM)

expect (some) losses in the first years of operation, or use the "S" with other devices named herein, etcetera. The tax attributes of income, deduction, credit and loss are passed-through to the shareholders personal tax return. The "S" corporation does have several limitations that you must be aware of, including but not limited to (a) limited loss deductions when debt is in excess of basis, (b) the lack of increase in basis due to entity level debt (whereas the LLC and FLP (LP) does not have such limitations), etc. For example, for basis reasons, an S owner should consider getting a loan personally (not the S itself ) as opposed to the LLC (or FLP) which can have the entity itself get the loan and benefit from that increase in basis adjustment. The S Corporation in 2005 is much more acceptable, especially, if the immediate is not a concern. See LLCs, Entity Options & Comparisons Š, Courtesy of LandLordsClub.Com.

12. The Business or Land Trust. The business trust is often used as an alternative to the other business devices to operate a business and add a level of privacy and potential creditor protection; or used to hold rental real estate. The trustee may be a person not owning the beneficial interests therein. Often family members may be effective holders of the generally "private" beneficial interests of the business trust. Warning - the beneficial interests may be attachable by creditors.

13. Other Devices include but are not limited to Grantor Retained Annuity Trust (GRAT), GRUT, GRIT, Private Annuity Trust, Qualified Personal Residence Trust (QPRT), Self Canceling Installment Note (SCIN), Private Retirement Trust (PRT), SOs, Pools, 1031-TIC , etc.

Writers, Publishers and Professionals May Distribute Article or Quotes with Notice to Author, By Line and Author Contact Info.

This is Attorney Advertising. This web site is designed for general information only. The information presented at this site should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

REPRESENTATION BY WRITTEN LEGAL RETAINER ONLY.