MORE ABOUT “FIREWALLING” ASSETS AND ESTATES: USE OF EXEMPTIONS (The “Recession” Isn’t Over!)


Post Date: 5/30/2012

Eckley & Associates Video Article MORE ABOUT “FIREWALLING” ASSETS AND ESTATES: USE OF EXEMPTIONS (The “Recession” Isn’t Over!)

BY: J. ROBERT ECKLEY
Real Estate and Construction Attorney
Eckley & Associates

March 1, 2012
©2012 ECKLEY & ASSOCIATES, P.C.

REPRINTED FROM "COUNSELOR'S CORNER", Ed. 58
Current Circulation: 75,004 per Month

THE WORLD TODAY: A MIRACULOUS “NOVEMBER RECOVERY”

Well, it’s an election year and so, naturally, after a half decade of fairly universal, unrelenting financial and economic collapse and calamity, things in the U.S. “suddenly appears to be getting better”……strangely, just as the Presidential election approaches in November. I do emphasize “suddenly” respecting this “turnaround” with tongue firmly planted in cheek. The Powers that Be are capable of turning on certain spigots throughout the system to artificially float most all boats until midnight of the election. At ten minutes after midnight, however, I would not want to bet that all of the mess is behind us. The Smart Money always hedges as a matter of course, no matter how rosy the scenario is manipulated to appear or even actually may become. The hedge for short-return money right now is “maintain at least 20% liquidity” and “go short on buys-to-sells” (and especially consider avoiding entirely the new dot-com bubbles blowing up to Herculean valuations recently-- so reminiscent of those that exploded in everyone’s face a bit more than decade back). The “limited hang-out” positions one to be both fortified against debt in case of further fall-backs and limber enough in cash to scoop up any short-fused bargains that the market (up or down) might make too apparent to resist. But what to do when venturing into territory known for smoke and mirrors, ventriloquism, “spin control” and in general, acres of thin ice is only part of the Survival Process. The savvy folks are also, in the background, taking steady legal steps to “firewall” their businesses, assets and estates from

the ongoing debt, seizure, liability and tax risks of their investments, entrepreneurial exercises and professions.

“FIREWALLING”: NOW S.O.P FOR THE WISE.

“Firewalling”—the generation of legal barriers between a personal portfolio and the “storms outside”—is the ultimate hedge. It assumes three postulates about life and business. First, it assumes that if “anything can go wrong even with the best-laid plans, it will”; second, it assumes that “an once of prevention is worth way more than a pound of cure”; third, it assumes as a mantra that in all endeavors it is ALWAYS “better to be safe than to be sorry”. This makes even more sense when the environment has been on lean times. That is when the predators who did not plan wisely and are thus very hungry for cash come out to hunt…and their first prey is “them that got.” Like you or your clients.

What that means in practice is that every investor, business, asset-holder, high-income/high-rIsk professional or high-asset estate needs A PROTECTION PLAN as its first economic step. The “Firewalls.”

A FEW FIREWALLS:

As said, “Firewalling” is assuring that good, viable assets (if there are any) are put into places and behind lawful legal walls where their own liabilities can be contained and also where what is inside the entities can be protected against attacks from outside, all at the same time being tax-conscious. It is always important that these strategies and entities are tuned up and legal and “t”s are crossed to do that before the trouble is immediately at the door and before a fight starts. There are many misunderstandings about what protections actually work. One example: Living trusts (doesn’t everyone have one [?]) for the most part have no protection at all under recent law. They need to be converted to other entities. Another example: Many people consider entities such as corporations, complex trusts and LLCs as methods to contain internal risk, when, in fact, their best and most legally-artful recent uses have been to protect internal low-risk or no-risk assets from external risks such as an outside creditors wishing to seize one of the partner’s interests.

In other articles past and future various Firewalls have been discussed. The use (and abuse) of corporations, trusts and the new power of new artful LLCs was discussed in the March, 2011 Newsletter, (find it at www.eckleylaw.com) and it is further suggested reading. There are other topics such as legally removing assets or control of assets to more favorable jurisdictions, equity-shifting by sales, close debt, “poison pills” and leasing and a host of others. A creative, well-planned bankruptcy in radical situations is also a highly-artful Firewalling technique. The “How-To’s” are separate articles each in themselves. See an “artful counsel” for more.

THIS ARTICLE: A SHORT TAKE ON ONE OF THE SIMPLEST, BUT MOST EFFECTIVE FIREWALLS OF ALL: STATUTORY EXEMPTIONS

One of the simplest Firewalls of all—one capable of shielding a great number of smaller assets for those without cadres of lawyers to set up a more comprehensive Firewall Plan, but also capable of shielding some relatively very large assets for those who are fortunate enough to have them, are the STATUTORY EXEMPTIONS against seizure, levy, forfeiture, sale and liquidation provided by both federal law and the laws of virtually every state in the U.S. (including territories and possessions). Statutory exemptions are those assets, types of assets and amounts of value in them that American society has decided are to be left to natural persons no matter what kind of debt or liability they fall into. Americans decided some time back that, unlike most of the world where creditors can legally strip a debtor to the economic bones, there would be no “debtor’s prisons” in the U.S. and that the right of creditors to get paid would extend only to a certain limit that would still leave the debtor enough to go forth and live without having to resort to public assistance. The exemption, then, are those assets which cannot be taken away to satisfy a third-party debt, a judgment or hey even protect the asset through a bankruptcy by the debtor.

There is a lot of range in these exemptions. Some jurisdictions are more generous than others. Some are downright miserly. One grand exemption is the content of bona fide retirement programs, like 401ks, which can hold over a million dollars and still be exempt. Partnerships interests in partnerships having extremely valuable assets—well beyond millions of dollars--can be exempt. In some states, the debtor has the right to pick the state exemption or the federal exemption, whichever it more generous to the debtor.

Some of these assets need to have been alive for some time to remain exempt. Creations of them, transfers to them or funding of them on the eve of a foreseen issue results in challenges as “preferences” or “voidable transfers” in some states (but not all), though the general U.S. legal trend is to be liberal in allowing the debtor to intentionally avail themselves of exemptions, even on the eve of financial or legal troubles, as a matter of constitutional right. Those artful attorneys mentioned above should be there designing firewalls and catch nets through these exemption (and the other techniques) long in advance of any crises calling for these. But it is never too late to call for their help when the alternative is a wipe out.

THE STATE AND NATIONAL EXEMPTIONS: LOG ON!

The exemptions are always in flux as states change them periodically. The general trend, though, has been to add to or enlarge them. For a list of the federal exemptions and the exemptions for each state, log now to State and National Exemptions and find the state of interest to you. Do remember that the exemptions are for natural persons in their state of domicile, but the assets exempted can be in other states and in organizations, some of which can be at least partially controlled by the individual. Some states also have laws prohibiting the seizure of assets owned by an organization in which the debtor is only a co-holder. No state will permit a judgment of another state to be levied on in-state assets without a complex and time-consuming refilling or “domestication” of the judgment from the other state to the state where the asset is which is sought to be executed upon, by which time the assets is then often long gone and the judgment accordingly worthless there.

The point is: There are “endless possibilities” for the gifted lawyer skilled in these areas to Firewall, i.e. “hedge” a client’s large, medium or small portfolio, as is apparent just from these few examples.

WITHOUT THE TICKET, THERE IS NO LAUNDRY

Exemptions are but one Firewall among many. For the “Exemption Firewall,” the questions occurring about now for most who read this far should logically be: “ Just how many of them AM I IN and if there seems to be a lot of ‘no-fits’ between my holdings and the exemptions granted me by the government, WHEN and HOW should I move into the REST and, if I don’t fit, when am I seeing that Artful Lawyer to custom-design my ALTERNATIVE FIREWALL PLAN?”

Yep. In the way of politics and money, “The November Miracle” is not likely to remain one no matter who is elected. The fact is that is that, in capitalism, any time and with or without political germandering, if you don’t “take the ultimate hedge” by getting the Firewall “laundry tickets”, above, you’re, er, hmmmm….(sorry, just no way to varnish it!)….you’re just ”buck a _ s-ed naked!”

And your Mama taught you better!

‘Nuff said!