Why Build Your Financial Castle?
The United States has just five
percent of the world's population and yet 70% of the world's lawyers. Legal
agree that there are literally millions of lawsuits filed in the U.S. every year that would not be pursued overseas.
Though the legal profession provides an important service in the U.S. and around the world, many lawsuits are filed
by lawyers who must litigate just to survive.
In addition to an overabundance
of lawyers, the U.S. is about the only civilized country in the world that
does not have
a "loser pays" legal system. In other countries of the world, such as Canada and England, for example, the one who
loses a lawsuit pays his or her own legal fees as well as those of the opponent. However, in the United States. this
scenario is much different. Even if a party to a lawsuit wins, he or she is still out his or her own legal expenses. what
this means is that in the U.S.~ even if a defendant in a lawsuit wins he or she still loses.
In other counties, one must think
twice before bringing suit. Is the chance of losing the lawsuit and paying
of two attorneys worth the possible outcome? Most foreign lawsuits that would be litigated in the U.S. are dropped
before they start.
Of course those who live outside
the U.S. are not safe. The rising tide of litigation remains a major concern
majority of countries around the world.
The lawsuit jungle does not vanish
after your death. Probate fees, which are paid in order to bring your estate
upon your death can take a sizable chunk of your estate. Probate is, in summary, the procedural act of proving that a
will is valid. Some people believe they can avoid probate if they have a will. This is quite the contrary.
Many states set the probate fees
that an attorney is allowed to charge. These fees are often around 8% of
the gross worth
of the estate. If a jurisdiction does not have state-mandated probate fees, each attorney can establish his or her own rate.
The attorney can charge based on a percentage of the gross worth of the estate or the attorney can bill his or her clients
on an hourly basis or both. This arrangement often ends up costing the same as or more than charges incurred in a state
that has state-mandated probate fees.
Let's take a look at what we mean
by gross worth. Let's say, for example, that you leave behind a $200,000
your death. For the purposes of this discussion, we will say that you were somehow able to acquire a $199,000 mortgage
on the property before you died. To move this particular asset through probate, it would cost your estate, ($200,000 x
8%) $16,000 in probate fees. Since in this example your heirs have only a $1000 equity in the property, they would
lose $15,000 worth of your estate to simply move this asset through the probate courts!
There is some good news. There is a way to avoid probate completely. Read on for solutions to this dilemma.
Not only do you need to be concerned
about probate after your death. Estate taxes also take their toll. Estate
paid over and above probate fees. The U.S. Internal Revenue Service currently sets its maximum in federal estate tax
rate at 55%. If sizable, the federal, and sometimes state, government can take a majority of your estate before it is
distributed to your heirs. Continue reading to find out how to virtually eliminate estate taxes.
Solving these concerns is what
this publication is about. We take you through the legal tools that can
help you protect
your assets from litigation. We show you how, through the use of the proper legal entities, to protect yourself and your
business from excess taxes. We also show you how you can avoid probate fees and lower or eliminate your estate taxes
by simply structuring your affairs properly. It is our hope that you find the information contained in this booklet useful
today and that we can help you build your financial castle.
Do It Now
The average man or woman in the
United States today experiences five lawsuits in his or her lifetime. The
that one of these is a devastating lawsuit.
You can and must safely shelter
your assets from lawsuits before a lawsuit strikes. The law deals quite
those who seek last minute transfers of assets in an attempt to defraud creditors. what this means is that you must
realize now that you can run into financial trouble. You must recognize and come to grips with your own vulnerability.
When you get this reality under your skin, only then will you have the sense of urgency necessary to take action to
protect yourself from the virtually inevitable.
Most of those who have assets
to lose occasionally consider taking action to protect their assets and
lower their taxes.
The reminder may strike around tax time or when a lawsuit or other tragedy strikes. However, the consideration to
protect ourselves often fades when the danger subsides. Then the procrastinator is usually leveled with a financial blow
that robs the individual of hard-earned resources.
You are strongly urged you to follow these words: DO IT NOW! These are the most important words in this book.
Write it down in your appointment
book right now. Tell yourself that you will talk to a knowledgeable attorney.
free to call us. This is the beginning of a safe and secure financial future for you and those you care about. If you
already have significant resources, you already know that this is action you need to take now. If you do not yet have
significant resources this is the foundation upon which to build a strong financial fixture.
Why incorporate? Three reasons.
1. Lawsuit protection
In our lawsuit-plagued world,
using a corporation as a shield to separate you personally from the all
of the potential
liability in your business is almost a legal necessity. Once you do business with the public or have even one employee,
you are wide open to legal liability. Year after year there are thousands of us who lose nearly everything we have due
to personal liability with our unincorporated businesses. In addition, once you do incorporate it is important that your
business follows certain, relatively simple, formalities so that it looks and acts like a corporation. 1
2. Income tax savings
There have always been more tax
deductions available to "C" corporations than to businesses that are not
A few examples include medical expenses, business trips and entertainment. The IRS seems to give preferential
treatment to corporations.
Moreover, there can be significant
tax savings by using the "income splitting" techniques available to "C"
See below for details. Please read this very carefully because it is very important that you understand this tax-saving
Here is the current U.S. tax rate schedule for a joint tax filer:
Joint Filer Corporation
$0 to $42,350 15%
$0 to $50,000 15%
$42,350 to $102,300 28% $50,000 to $75,000 25%
$102,300 to $155,950 31% $75,000 to 100,000 34%
$155,950 to $278,450 36% $100,000 to $335,000 39%
$278,450 + 39.5% $335,000 to $10 Mil. 34%
$10 Mil. to $15 Mil. 35%
$15 Mil to $18.3 Mil 38%
$18.3 Mil .+ 35%
Notice that in the higher and
lower brackets, taxes are lower for a corporation than they are for an
importantly, by splitting the income between an individual and a corporation can have some staggering tax- savings
effects. Also, make note that there are so many things that you can do with a corporation that can make and save you
loads of money.....Tax bracket is only one consideration.
For example, let's say Frank earns
$42,350 in his job or business. On this amount of income, Frank is taxed
in the 15%
tax bracket. Then, lets say that through real estate or stock market investing, Frank earns another $50,000 on top of
the $42,350 for a total annual income of $92,350. If Frank made all the money in his own name ($92,350), the first
$42,350 would be taxed at 15%. The $50,000 of extra income would be taxed at 28% The Frank's total tax bill would
Now, let~s say Frank sets up a
corporation. The $42,350 Frank earns on his job is taxed at 15%. Frank
the $50,000 of additional income will be made in Frank's corporation. At $50,000 income, a corporation is taxed at
15%! Whereas, if Frank would have made this same amount of money in his own name, the $50,000 of additional
income would have been taxed at 28%. The total tax bill is $6,352.50 for Frank, and $7500 for Frank's corporation,
for a total of$13,852.50. That's a total yearly savings of $6500 by Frank having a corporation rather than making all
of the money in his own name. Now, of course, Frank can spend the $50,000 by borrowing some or all of it from his
corporation. when he pays back the loan, if he owns the stock, he is essentially paying himself back.
3. Estate Planning
Once the richest individual in
America, the late Sam Walton, of Wal-Mart retail stores, placed his business
a closely held family corporation from near the beginning of his career. Taking the advice of his mother-in-law, Mr.
Walton gave each one of his four children 20% of the stock and he and his wife together owned the remaining 20%.
In~the beginning, the value of Mr. Walton's family corporation was relatively small. Through the years, the value of
the assets held inside his family's corporation grew into the billions of dollars. However, upon Mr. Walton's death there
was no. estate tax due upon the children's shares of stock! Why? Because the shares of stock had already been owned
by the children from the beginning of Mr. Walton's career. Since a surviving spouse receives assets estate tax free Mrs.
Walton was also able to avoid paying estate taxes on her portion of the assets. From reading Mr. Walton's book "Made
in America" it is quite clear that Mr. Walton had no idea at the beginning of his career that his fortune would grow
into the billions of dollars.
Now envision the same scenario
if Mr. Walton hadn't planned ahead. The 80% that Mr. Walton's children
amounted to some $17.6 billion. If Mr. Walton had given 80% of his wealth to his children after he died instead of at
the beginning of his career, his children would have had a whopping tax bill of close to $9.7 billion handed to them
from the IRS! Instead, they paid nothing in estate taxes.
Many people establish their corporations
with two classes of stock: voting and non-voting. The parents own all of
voting stock and control the entire corporation while the children own the majority of the corporation through non-
Whether you have a large or small
estate, it is important to take action now to ensure that you have a proper
"Better now than later" is the advice of anyone who has been surprised by a whopping estate tax bill after having to
endure the loss of a loved one.
How does a corporation differ from a Sole Proprietorship?
A sole proprietorships an arrangement
where a person pursues a business venture as an individual. Lets say John
forms a lawn mowing business. John .might file a DBA ("doing business as") alerting the world that John Smith is
doing business as "John's Lawn Mowing Service."
Then, let's say that John is happily
mowing a lawn, when a rock from John's mower hits a passing stranger in
blinding him for life. John is very sorry and distraught over the whole incident but, of course, it was an honest mistake.
That evening, John is sitting down for dinner when he hears a knock on the door. Lo and behold, it is the Sheriff who
promptly hands John with some papers the blind man's lawyer has thoughtfully prepared. Because John is doing
business as a sole proprietorship, John is in trouble.
The case goes to court. John hires
a lawyer (whom John has paid the tidy sum of $15,000 by the time the case
court). When allis said and done, the judge decides that John should write a check for $2 million to compensate the
The good news is that John had
the foresight to take out liability insurance of $500,000. The bad news
is that John had
the foresight to ONLY take out liability insurance of only $500,000. Moreover, when John contacts his insurance
company, the insurance agent points out that the clause on page 27 of the policy that says, "this policy does not include
coverage for flying debris." After all, the insurance company is in the business of making money, not paying it out.
And, of course, the insurance company writes the policy.
The next day, John gets a call from the blind man's attorney. "Please write me a check for $2 million.
John says, "I don't have the money."
Now, the blind man's attorney, considerate as he is, says, "Okay, John, I'll help you then."
The blind man's attorney proceeds
to help John by emptying all of John's bank accounts. He also auctions
to the highest bidder, as well as all of John's personal possessions (including John's lawn mower).
Now, John is left penniless on the street, without so much as a dollar to find a new place to live.
Now we can see the peril of doing business as a sole proprietor.
In addition, there are no good
tax benefits with a sole proprietorship. One must to pay taxes on business
income in the
highest of one's personal tax bracket..
How does a corporation differ from a General Partnership?
Let's say you are doing business
as a general partnership. Then, let's say your partner, Joe, is sued for
failure to pay
a personal debt. Your partner, Joe, loses the lawsuit. If your business is a general partnership then Joe's judgment
creditor (that is, the one who won the lawsuit against Joe) can take all of the assets (money, equipment, accounts
receivable, etc.) owned by your general partnership. This is true even if you have nothing to do with your partner's debt.
It is also true if you or Joe is sued for any number of other reasons. This may include negligence, an auto accident
where insurance doesn't cover the entire debt, someone slipping on his front porch, etc.
Let's say your general partnership
itself is sued. Your partner, Leslie, makes a mistake that costs one of
$100,000, Your customer sues and wins. Now, the customer who won the lawsuit can take not only the assets of your
business and Leslie's personal assets. Again, the customer can also take YOUR personal assets away from you.
Depending on the state in which you live, that means the customer who won the lawsuit against your business can take
your house, all of the money from your bank accounts, your investments, your cars, your furniture, etc. If you get a job
elsewhere, the customer who won the lawsuit may be able to take up to 25% of the money from each paycheck away
from you. Therefore, general partnerships serve no role in asset protection.
If you think that you can simply
transfer your assets to family members before your customer gets them,
Laws in all states have "fraudulent transfer" provisions. Courts will take back transferred property and give them
to those who have won lawsuits against you. In addition, you could also be subject to severe civil or criminal penalties
for transferring assets when you know a lawsuit is on its way. You need to build your fortress before your baffle begins.
Build your corporate fortress
By doing business as a properly
structured, properly run corporation, you put a shield between yourself
business. You also put a shield between yourself and your partner. In addition, if your corporation is sued, then assets-
equipment, cash, accounts receivable, etc -used by your corporation can be protected by using the next asset protection
tool, the limited partnership. In brief, the corporation can have as few assets as necessary and lease its equipment from
your limited partnership.
Limited Partnerships Three big advantages.
1. Protects you from lawsuits
A limited partnership, unlike
a general partnership, has provisions to keep it from being destroyed or
one partner is sued. Assets held inside of a properly run, properly structured limited partnership are safe from creditors.
Properly structured, the only
remedy a creditor has is to place a "charging order" against your interest
in the limited
partnership. In theory, any income distribution from the limited partnership that would go to you goes to your creditor.
But here is the beauty of limited
partnerships: there are three big booby-traps that are allowed by the Uniform
Partnership Act for a properly structured limited partnership.
can have a clause in your partnership agreement allowing you to leave profits
inside the limited
partnership for its fixture needs. You can, therefore, make the creditor aware that your limited
partnership will make no distributions of income. The creditor will receive no payments.
2. As an assignee of the limited partnership, YOUR JUDGMENT CREDITOR NOW
HAS TO PAY THE
INCOME TAXES ON YOUR PORTION OF THE PROFITS. THIS Is THE CASE EVEN IF YOU DECIDE
TO LEAVE YOUR PROFITS IN THE PARTNERSHIP AND YOUR CREDITOR RECEIVES NO
PAYMENT!! (Rev. Rule 77-137.) Yes, you have read correctly. The IRS says that anyone who is entitled
to receive the proceeds of a limited partnership must include the income on his or her Federal income tax
return whether or not he or she receives such proceeds. (See appendix A for details of Rev. Rule 77-137.)
3. You may alternatively mortgage or sell partnership assets and distribute
the proceeds to the partners before
the creditor puts a lien on your interest in the partnership.
Why are there laws such as this?
The answer can be found in this
example. Imagine a skyscraper in downtown Los Angeles. It might be difficult
person to build such a structure using one's own financial resources. So, laws were developed so that many people could
contribute to the building of a structure that requires substantial capital. So, let's say that 100 people contribute. If when
one of the 100 people are sued and the property title is held in the names of the individual investors, the prevailing party
would be able to seize the asset (in this case a skyscraper), sell it, and utilize the proceeds to satisfy the judgment of the
one individual. The other 99 people could lose all or part of their investment and its projected growth.
With a limited partnership, when
one of the partners is sued, the judgment creditor (the one who won the
only be granted a charging order on that one individual's interest in the limited partnership. The remaining partners could
continue to enjoy the benefits of their venture unscathed by their partner's misfortunes. Thus, a limited partnership allows
for the protection of the remaining investors when one investor runs into legal difficulties.
The exciting part is that all
of us can take advantage of the same laws as the big syndicates. A family
of four (or two or
seven or any other number), a couple of friends, or a trio of strangers can take advantage of the same tax-saving and asset
protection benefits afforded a limited partnership as can Donald Trump and Co.
It is almost always best to own
more than one limited partnership. Safe assets, such as cash, stocks, mutual
are owned by one of your limited partnerships. Rental properties, for example, are owned by your other limited
partnerships. Incidentally, if you have more than one rental property, especially if one or more has a large equity, it might
be most prudent to have each one owned in a separate limited partnership. It is important to separate "safe" assets from
"unsafe" assets. You wouldn't want to own your car in the same limited partnership that owns your cash. If the partnership
that owns your car is sued because of a brake failure that causes an automobile accident, for example, you would certainly
want to have your cash in a separate limited partnership. It is most sensible to increase the number of limited partnerships.
One family set up 34 limited partnerships: 1 for each of the 33 rental buildings and 1 for theft cash and other "safe"
There are two kinds of partners
in a limited partnership. There are general partners and there are limited
partners have total management authority as well as total liability. General partners control the limited partnership.
Limited partners have no management authority and assume no liability - the most they can lose is the money they've
invested in the limited partnership.
Keep in mind, a general partner
is different from a general partnership. A general partner customarily
refers to the person
or entity that manages a limited partnership. A general partnership, on the other hand, is a form of doing business where
two or more people establish an association to operate as co-owners of an enterprise.
If you are a general partner,
there is a way to protect yourself from personal liability. You accomplish
this by structuring
your limited partnership so that your corporation or, heifer yet, your limited liability company stands in as the general
The key to a properly structured
limited partnership is a properly drafted limited partnership agreement.
partnership agreement is a private document signed by the partners involved and is customarily not publicly recorded.
Merely structuring a limited partnership is of little value unless the partnership agreement has been properly worded and
all formalities are adhered to.
2. Income tax savings
Limited partnerships, themselves,
pay no income tax. Income tax is paid by the people or entities who have
an interest in
the limited partnership. Many families spread income to children or grandchildren age 14 and older who are usually in
lower tax brackets. Partnership profits are distributed, usually, in proportion to the ownership interests of the partners. If
the parents are the general partners, they can most often decide how much of a proportional distribution, if any, to make
to the partners and how much to pay themselves as a salary for managing the partnership. If the parents like, the
partnership agreement may be structured so that the parents have the choice of paying themselves all of the partnership
profits as a salary and/or a bonus. Such a structure will allow the parents to maximize their income during theft lifetimes
and eliminate taxes the children incur from the partnership. It will also allow parents to take advantage of the next
advantage offered by a limited partnership, estate planning.
3. Estate planning
Many families use a Family Limited
Partnership for a lifetime of wealth protection. Often, the spouse most
lawsuits has, for example, a 1% interest and is a general partner. (An interest in a partnership can essentially be thought
of as ownership in the partnership.) The other spouse has, for example, a 1% general partnership interest and a 10%
limited partnership interest. The children share an interest in the remaining 88%. The parents CONTROL 100% of the
partnership though they OWN relatively little. The parents decide how much of a salary they get, what happens to the
money and property inside the limited partnership, how much of a distribution, if any, is given to the children, etc. The
parents can spend ALL the money on themselves if they wish or they can leave all or part of the money inside. The
children have little or no say in the day-to-day activities of the limited partnership during Mom and Dad's lifetime.
However, when Mom and Dad pass away, the children don't have a big estate tax bill. The reason for this is that the
children already owned the majority of the limited partnership before Mom and Dad's death preferably before the assets
contained therein were sizable. That is why it is important to establish your family limited partnership as early in your
career as possible. The parents' interests in the family limited partnership are best held in their living trusts. So, when both
Mom and Dad pass away, the control vested in the general partner is then given directly to the children.
Limited Liability Companies
For many years, business people
and tax planners have desired a business entity that offers now-through
limited liability for the business owners. The Limited Liability Company is an entity that offers these advantages. The
Limited Liability Company (LC) can be thought of as a mixture between a limited partnership and a corporation. (If you
haven't done so already, please read the sections on limited partnerships and corporations.) In the past some business
people turned to "S~' corporations, however found that they are quite restrictive and inflexible in terms of ownership and
offer little if any asset protection from personal lawsuits.
The protective features mentioned
above for the limited partnership are similar to a properly structured
LC. A creditor
can attach your interest in an LC (called a charging order) but cannot get any money out unless you decide to take it out.
And you, as a manager of an LC, can decide to stop disbursements from being paid if you are sued. Thus, your creditor
gets nothing of value out of your LC. However, even if he receives no payment, the creditor who was granted a charging
order is required by the IRS to pay the income taxes on what would have been your portion of the profits of the LC.
For example, let's imagine you
hold a 30% interest in an LC that makes a $100,000 profit. Let's say your
a charging order against your 30% interest. If you decide to leave your $30,000 portion inside the LC, your creditor must
pay the federal taxes on this $30,000 even though he is unable to touch the money! However, your finds are not forever
trapped inside your LC. There are ways for you to withdraw these finds for your personal use. Under these circumstances,
you may be able to take money out by taking out a loan from and borrowing money from the LC. Alternatively, you may
pay a spouse or family member or work as an independent contractor of the LC and be free from creditor attachment.
Check with your attorney or accountant.
LC's have an added benefit. With
a Limited Partnership, you always have at least one general partner with
With LC's however, there is ordinarily no partner (or member as they are called in an LC) who has personal
liability for the acts of a properly structured, properly run LC.
Those who have an interest in
an LC are called "members." There are two kinds of members in an LC. There
members and member-managers. LC's can be structured so that only some of the members are managers or so that all
of the members are managers. In addition, members can elect to have a manager who is not a member of the LC.
The first LC statutes in the United
States were instituted in Wyoming in 1977 Florida adopted LC statutes in
Then, in 1988, the IRS allowed the properly structured LC to be taxed as a partnership instead of a corporation (Rev.
Rule 88-76). After this favorable IRS ruling, as of mid-1996, all 50 states have enacted LC legislation.
Unlike a corporation, LC's generally
do not have a perpetual life. The life of an LC is typically no more than
years; at which time another LC can be formed to take over the business.
LC's have become a very popular
form of operating for small businesses. They are also popular asset protection
devices in which to own "unsafe” assets such as an automobile or liability-prone equipment to provide a shield to
protect yourself from legal exposure.
It is usually wise to make sure
that your business that has liability exposure owns little in the way of
assets. For this
reason, it is often advisable to have more than one LC. You use LC #1, for example, to do business with the public
and hire employees. LC #1, therefore, is exposed to liability. Then you use another LC; in this example, LC #2.
LC #2 owns your business equipment used by LC #1. Then, LC #1 leases his equipment from LC #2. When the
business you operate in LC #1 gets into a lawsuit, there will be very little for the suing party to seize. top
There arc three main benefits to a funded living trust:
1. Probate can be avoided
Probate is the legal act of proving
that a will was signed and executed according to legal statutes and that
it is valid.
Most always, there are attorney fees as well as court costs associated with taking a will through probate. In addition,
those who are to receive the proceeds of a will are unable to receive those proceeds until a probate court has allowed
them to be distributed. This process can tie up the proceeds from a few months to several years.
If your hefts bring your will
to your bank and attempt to withdraw money after your death the bank will
not allow the
finds to be touched until the probate court grants the bank permission. With a properly drafted living trust, on the
other hand, those who you name in the trust can generally go to the bank, bring a copy of your trust along with their
identification and your death certificate and withdraw finds immediately in accordance with the trust agreement.
2. Lawsuit protection:
Lawsuit protection can be given to married people when assets are held
trusts. Assets in a properly drafted trust for the wife can be insulated from the acts of the husband, for
3. Sheltering your estate
You can to shelter all or a large portion of your estate when you have with sections 2056 and 2041 of the IRS tax code.
Having property or money in your
revocable living trust does not require you to change your federal tax
filing. It is
analogous to you wearing a different colored hat. You simply file your taxes the same way you did before you had your
There are two ways to put property into a trust.
1. You change the title to the
property. For example you go to your bank, bring your trust document and
banker to transfer your accounts into your trust. You can also fill out a simple "quit claim deed" and transfer your
real estate from your name into your trust.
2. You list the property on a
"schedule 'A."' A schedule "A" is a piece of paper that is usually attached
to the back of
your trust. It simply describes the property that you would like to have included in your trust. For example, "The
brown china cabinet" or " The red antique clock from Germany" or "My Hewlett Packard printer model #
J354436." Each time you change your schedule "A" it is best to also have it notarized. Many people update their
schedule "A's" once a year or when they buy expensive items.
It is often best to do both of
the above when possible. For example, ask your banker to change the title
to your bank
account into the name of your trust and also list "Bank of America account # 00533-01242" on your schedule "A."
You can modify your revocable
living trust at any time. You can be the trustee. (The trustee is the one
the trust and holds legal title to the property in the trust for the benefit of another person - or himself/herself- and who
is required to follow the directions outlined in the trust document.) That is, you can control your trust. You can change
the beneficiaries as many times as you like. (Beneficiaries are those who receive the proceeds of your trust- usually
upon your death.) If you like, you can have another person or company be the trustee to act under your direction. You
can also change who the trustee is at any time. You can put money or property into your trust or take it out of your
Many people who have real estate
holdings title each property in the name a different trust. Then they have
who provides trustee services stand in as the trustee. The trust has a name that is not associated with the one who had
the trust set up (for example, Presidential Services Inc. Trust # 24775) so if anyone does a title search in the public
records, the one's name who holds the beneficial interest in the property does not appear
Owning property in a revocable
living trust does not provide you any more actual lawsuit protection than
same property in your own name. That is why many use the living trust in combination with an asset protection
device. Many people hold title to their limited partnerships in their trust. For example, the parents hold their 15%
general partnership interest in their trust. Then their children share the remaining 85% limited partnership interest.
Though the trust does not provide
asset protection from personal lawsuits, a properly structured limited
does (see above). Then, when you pass away, your general partnership interest can go to those whom you name, suc4
as your children, without having to go through expensive and time-consuming probate procedures.
We highly recommend that you review
all trusts in detail with a knowledgeable estate-planning attorney before
implementing them into your estate and/or financial plan. Laws vary and change from time to time and your specific
needs may vary.
There are many kinds of children's
trusts but the one known in tax arenas as the 2503 "C" trust is one of
useful. There are three major advantages:
1. Lawsuit protection
Customarily, the assets within
this type of trust are not susceptible to lawsuits, judgments and bankruptcies
parents or other creators of the trust. It is important to establish this kind of trust in a sufficient time period before a
legal threat occurs. A word of warning, however; a parent, a blood relative or a controlled employee should normally
not be the trustee of this type of trust. The reason is as follows: a creditor who has obtained a money judgment against
you is generally entitled to stepping into your shoes and obtaining the same fluids that you are able to obtain. If you
were personally able to withdraw funds from the trust and spend them as you chose, your creditor would have the right
to do the same. The courts, similarly, will determine whether or not the relationship between you and the trustee is so
close that the trustee might as well be you. If the trustee is your spouse or your mother, the courts would generally
allow your creditors to seize the assets inside the trust. Courts therefore closely examine the relationship to determine
if the trustee is at arm's length from you or merely your alter-ego. However if the ability to withdraw finds is at the
discretion of a properly selected trustee and not yours, your creditors would generally not be able to step into your
shoes and do the same.
Income tax advantages
A major tax advantage exists in
that the children's trust may own such assets as a computer which, in turn,
this equipment to the father's company to be used in his business. As an illustration, a children's trust can purchase
computers, typewriters, desks, etc. In short-the business of the parents now makes payments to the trust to lease this
equipment. These lease payments can now be written off as an income-tax deduction to the parent's company under
Section 162 of the tax code. What this means is that, if put to use, thousands of dollars of taxable income are now
shifted to the children, age 14 or over, who are likely in a lower tax bracket. Keep in mind that even if the children are
under age 14, they can still make over $1,000 without being taxed at the custodial parent's higher tax bracket.
Additionally, this type of trust can be set up to pay for a child's education. This allows the parents to take a tax write-
off for indirectly paying for a child's schooling. (Check with a knowledgeable accountant.)
Estate planning advantages
The assets owned by the children's
trust are customarily outside of the parent's estate and thus not susceptible
estate taxes of the parents. One family, we learned, used a Children's trust to a tremendous advantage. The father and
mother were in the construction business. When the construction industry came under extreme financial pressure, the
couple lost their business and both flied for personal bankruptcy. The bright side is that the children's trust assets
exceeded one million dollars! Moreover, the children's trust had been established and capitalized in a sufficient time
period before the bankruptcy. Therefore, even though the creditors were aware of the trust, the assets inside the
children's trust were beyond the reach of the parent's creditors. After the bankruptcy, the parents then borrowed money
from the children's trust and started all over again!
The foreign trust combines the
powerful asset protection advantages of an irrevocable trust with the favorable
an overseas country. The Trustor (the one who creates the trust) conveys assets into the trust and designates the trustee
(the one who manages the trust) and beneficiaries (the ones who benefit from the trust). There are three jurisdictions
whose laws strongly favor this kind of trust: the Isle of Man, the Cook Islands, and the island of Nevis. These
jurisdictions are politically strong and have laws favorable to foreign investors.
In any of these three islands
you can establish an irrevocable trust and can name yourself as the only
trustee must live in the jurisdiction. You can also replace an unsuitable trustee. Moreover, you can legally require the
trustee to take your direction regarding trust investments. Therefore, you essentially remain in control of the trust and
keep its asset protection provisions.
Here is the major advantage of
a foreign trust: It keeps assets out of reach of a creditor. These islands
protective of trusts. Since a judge in the U.S. does not have jurisdiction over foreign citizens, the judge cannot compel
the foreign trustee to release funds to your judgment creditor. Moreover, none of the above jurisdictions recognize
judgments originating in the U.S. So, new litigation must be initiated there to reach the assets. Furthermore, laws in
certain foreign jurisdictions place numerous obstacles in the way of those who attempt to bring suit when an asset
protection trust is involved. In Nevis, for example, a judgment creditor must put up a $25,000 deposit in order to bring
suit against you in Nevis. Then it must prove beyond the shadow of a reasonable doubt (an extremely high legal
hurdle) that assets were transferred into the trust in order to defraud the creditor.
In the Cook Islands, the statute
of limitations for fraudulent transfer is one year or two years after the
of action. So, by the time a lawsuit is brought to completion in the US,, the statute of limitations in the foreign
jurisdiction bars the suit! Some have even used foreign trusts to protect assets from bankruptcy. (Be sure to check with
a knowledgeable attorney before taking such action,)
It is most prudent to keep the
assets held by your foreign trust in an offshore location beyond the reach
of U.S. courts.
You would not want to hold title to domestic real estate inside a foreign trust, for example, because U.S. courts
have jurisdiction over U.S. real estate. U.S. courts, therefore, have the ability to demand seizure of such assets. The
foreign trust is better suited for overseas bank and brokerage accounts. (Incidentally, many offshore tax havens, such
as Switzerland, have stronger, more stable banking systems than the U.S.)
One wise asset protection strategy
includes a combination of the foreign trust and the limited partnership.
example, assets are held in a U.S. limited partnership. The foreign trust is given a 990/c limited partnership interest.
The U.S. resident is given a 104 general partnership interest. Remember, the general partner has legal control over
the entire limited partnership and assets inside a properly structured, properly operated limited partnership are
protected from seizure by judgment creditors. Therefore, the U.S. resident controls 1000/c of the assets, yet "owns"
1% of them. (See the limited partnership section.)
For ultimate privacy a foreign
corporation offers some outstanding benefits. With a foreign corporation
in one of the
tax havens, the officers and stock holder are not a matter of public record. You can even have nominees stand in the
place of the stockholders. The nominees can even serve as the officers or directors and the actual owner can maintain
control by way of proxy votes. This is a very effective manner of operating if you want your association with an
offshore bank kept private. In nearly all offshore havens this makes it nearly impossible for a government or private
litigant to find out who the actual owner is.
Another manner in which to secure
secrecy is through the use of bearer stock certificates. Bearer shares
are similar to
cash in that they are not issued to a specific individual. The true owner of the certificates is the one who has possession
of them. Though the IRS cannot discover who is the actual owner of the shares, U.S. stockholders are still required, by
law, to pay taxes on the profits of the company.
My company supports the use of
such corporations to be used only for legal purposes. That is why we chose
with respectable reputations and high regard of U.S. and international law. We wanted to steer clear of money
laundering, tax evasion and drug trafficking that is all to common in many offshore domiciles. Therefore, we have
conducted extensive research to find truly law-abiding, peaceful countries in which to give our clients privacy and
protection. Though the countries that we have chosen are beyond the scope of this book, you are welcome to contact us
for details if you have decided that going offshore is. for you.
For the above reasons and more, foreign corporations can be thought to offer the utmost in privacy.
Putting It All Together
Using a combination of the above
entities can provide you with superior financial protection. Though we
legal advice only your attorney can do that-the following is a useful guide to take to your attorney and to tailor to your
The basis of your asset protection
and estate plan is your living trust. Your properly drafted living trust
estate-consuming probate and attorneys fees. Your living trust also holds title to the controlling interest in your asset
protection devices so that upon your death they can be passed directly to your spouse, children or loved ones.
Your corporation has several tax
deductions available to it such as medical expenses, life insurance, home
utilities deductions, retirement plans, etc. (See your tax advisor for details.) The life of a corporation can be perpetual.
Moreover, there are provisions in a properly run, properly structured corporation to protect you from liabilities of your
corporation. We feel it is the ideal entity in which to operate your business.
Which state is the best in which
to incorporate? In the past, Delaware had the most protective statutes.
experts feel that Nevada and more recently, Wyoming, have surpassed all other states as the ideal state in which to
incorporate. Nevada and Wyoming offer superior protection to the officers of the corporation from lawsuits against
the company. There is also no state corporate income tax in Nevada or Wyoming. The owners of shares of stock in
Nevada and Wyoming corporations are not a matter of public record. Note that a U.S. corporation formed in one state
can do business in all other states. Though the laws are very similar, we feel that Wyoming has a slight edge because
of their superior speed in getting the corporation filed (24 hours) whereas Nevada charges additional moneys for a
rapid filing. Plus, Wyoming has a low annual cost (usually $25/year plus registered agent fees).
Your limited partnership can own
your "safe assets," such as stocks including the stock in your own
corporation - cash
and personal accounts. You are protected from liabilities incurred by your business by running your business as a
corporation. You are protected from personal liabilities by having your
investments in a properly structured,
properly run limited partnership (LP). Remember, those trying to sue you
only get a "charging order* against your LP on the money which would go to you. In addition, you, as the general
partner, can decide not to make distributions out of the LP, rendering the charging order worthless. You can also have
an LP for each piece of investment property you're involved with so that creditors cannot take them away from you.
Moreover, if one of the properties incurs liability, it doesn't draw the others into the battle.
A FAMILY LIMITED PARTNERSHIP where
the mom and dad are the general partners and control the partnership
and the children are the limited partners Is becoming increasingly popular by those who know their asset protection
and estate planning.
Which state do we prefer the most?
Our favorite state is Arizona, with Wyoming and Nevada being our second
The key to a properly structured
limited partnership is a properly drafted partnership agreement. Merely
limited partnership is of little value unless the partnership agreement has been properly worded. Additionally, there
are a few, relatively simple, formalities that must be observed. One such formality is the holding of an annual meeting.
The meeting may take only a few moments. Then the minutes of the meeting are written down and signed by the
partners in attendance. The minutes of the meeting may perhaps be merely a sentence or two.
Limited Liability Company
A limited liability company (LC)
is the ideal vehicle for small business. It provides the liability protection
corporation and the asset protection of a limited partnership. Your limited liability company that does business with
the public and hires employees should have as few assets as necessary and should lease its equipment from another one
of your limited liability companies.
A limited liability company also
makes an ideal general partner for your limited partnerships. Since the
partner incurs the liability in a limited partnership, having your limited liability company stand in your place can
shield you, personally, from such exposure.
Since Wyoming has had limited
liability companies available longer than any other state and has strong
protecting members and managers of an LC, we feel it is the state of choice.
One of the last few tax shelters,
a children's trust can be used to pay for your children's education, while
giving you the
tax deduction. For example, a children's trust can purchase items used by the parent's business and lease the equipment
back to the parents. These lease payments can be tax deductible to the parent's business. The children's trust can then
pay the children's tuition. (Check with your accountant.) The children's trust can also be used to shelter income to
children in a lower tax bracket. In addition, assets inside a timely established and funded children's trust are generally
beyond the reach of lawsuits, judgments and bankruptcies of the parents. A parent, blood-relative or controlled
employee should not be the trustee of this type of trust.
A foreign trust transfers certain
assets to a foreign trustee who is beyond the reach of domestic courts.
countries, you can retain some degree of control over your trust while at the same time keeping its asset protection
features. Safety constraints may also be placed in a properly drafted foreign trust so that a foreign trustee is not able to
make major decisions with trust fluids without your approval.
A foreign corporation is an advanced
asset protection device to keep your foreign bank accounts and other holdings
private. The countries which we utilize are prevented, by law, from revealing the owner of the corporation. Again,
though they may not know that you have an interest in the company, the IRS does require you to pay taxes on the
profits of a foreign company controlled by US tax payers. (See your knowledgeable tax advisor.)
Feel free to call us or e-mail
Presidential Services, Inc. for details as to the countries which we believe
to be most
Our telephone number is (206) 650-0250 or you can reach us via e-mail at firstname.lastname@example.org.
It is our hope that this information
is useful to you and that you will use it today to help build your financial
The average person in the Unites States has five lawsuits during his lifetime, one of which will demolish him or her
financially unless the proper steps have been taken in advance. Additionally, because of advances in the IRS computer
system, IRS seizures are at an all time high. Though we live in a litigious and tax4idden society, I hope one message is
clear. When you arrange your financial affairs, using the proper tools, you and your loved ones can have a stronghold
to protect yourself against the perils that lurk all around us. Now that you are armed with the knowledge, it is
up to you to take action to see to it that your financial castle is built properly. Having the knowledge is not enough. We
never know if a lawsuit or loss of a loved one 15 just around the corner. You must take action now and put the proper
legal tools to work for you today!
Wishing you and your loved ones
a strong and secure financial future.
Dennis M. Gac
Dennis M. Gac , President
National Brotherhood Of Fathers Rights
17171 Bothell Way NE #297
Lake Forest Park, Washington USA 98155
(206) 650-0250 Fax (425) 771-5911