Charting a Course for Family Security

Protective Planning

Asset Protection (Multiple Entity Planning)

Generally the strategies for protecting one's assets from the claims of
creditors applies only to those unforeseen claims which arise after the protective
strategy is in place and may not be effective if the primary purpose for the strategy
was to defeat creditors' claims. When planning, we use many different methods so
that if one or more do not work, at least all is not lost.
 


If you take a hit in any one of the compartments,
the whole ship doesn’t go down. 
 

  1. Liability Insurance (Umbrella Policy).  A certain amount of your assets should be used to pay the premiums on liability insurance and an umbrella policy to protect you in the event of a liability claim.
  2. A-B Trusts (Q-Tip). After the first spouse dies, that one's assets which continue to be held in a Q-Tip Marital and Exemption Trust (with Spendthrift clause) are generally protected from the claims of the surviving spouse's creditors.
  3. Tenancy by the Entirety. Property held by a husband and wife as tenants by the entirety is not subject to the claims of the creditors of either the husband or the wife. This property is only subject to the claims of creditors of both the husband and the wife. If either of the husband or wife is sued because something they have done which does not involve the other spouse, the creditor would not be able to obtain a judgment or attach property held by them as tenants by the entirety.
  4. Qualified Retirement Plan. Assets held in a Qualified Retirement Plan  are not subject to the claims of the plan participant's creditors.  Assets transferred into a regular IRA within 3 years together with all assets held in a Roth IRA, on the other hand, are subject to attachment by creditors.  To the extent possible, some of your assets should continue to be held in a Qualified retirement Plan or regular IRA.
  5. Family Limited Partnerships. Owning a limited partnership interest in a family limited partnership may provide a certain degree of protection from creditors.  A creditor may not be able to obtain ownership of the limited partnership interest but rather only a charging order.  This charging order allows a creditor to receive any income that is distributed by the general partner  but would not authorize the creditor to control the assets in the partnership or its investments.  The creditor would not become a partner of the partnership but simply have the right to any income distributed.  Whether or not income was distributed, the creditor might still be required to pay income tax on undistributed and reinvested income.
  6. Corporation: When a business is held in the form of a corporation instead of a sole proprietorship, provided it is organized and maintained according to the rules, creditors are limited to the assets of the corporation and cannot attach your personal assets held outside of the corporation.  This would apply to both a regular corporation and a limited liability company.
  7. Irrevocable Trusts for Kids. You may wish to make current transfers of assets into irrevocable trusts for the benefit of your children to provide for their education or for other purposes. Once these trusts have been established, the assets in these trusts would no longer be subject to the claims of your creditors because they would have been removed from your estate. They may also be protected from the claims of your kids' creditors.
  8. Irrevocable Life Insurance Trust.  Converting assets which are in your individual name and subject to attachment into premiums on the payment of life insurance held in an Irrevocable Life Insurance Trust would convert those assets into a form that is not subject to attachment by your creditors. The life insurance in the Irrevocable Life Insurance Trust would be protected from your creditor's claims because you would not own that life insurance. You would have transferred ownership of that life insurance into the Irrevocable Trust.
  9. Private Annuity. Assets could be transferred to a son or daughter in exchange for an annuity for your lifetime.  This annuity would be private rather than commercial.  Though the annuity might be attachable by creditors, the underlying asset would be protected.
  10. Prenuptial/Elective Share Agreement. A properly drawn prenuptial agreement and elective share agreement can go a long way to protecting a persons assets from a divorcing spouse's claims and deceased spouse's assets from the elective share claim of a surviving spouse.
  11. Charitable Remainder Trust. If you have a desire to give to charity, you could place your gift into a Charitable Remainder Trust, get an income tax deduction and receive an annuity for life.  The assets in the Charitable Remainder Trust could not be attached by your creditors.
  12. Long Term Care Insurance. Insurance to pay for nursing home or care expenses if you become incapacitated could protect your other assets from having to be used for this purpose.
  13. Qualified Personal Residence Trust (QPRT). Your home could he in a QPRT for a term of years during which you would continue to have use of the home. After the term expires the home would belong to your children. Your Creditors would not be able to obtain a lien on your home.
  14. Generation Skipping Trusts. By bringing your parents into your planning, you could request that your parents instead of leaving your inheritance to you outright, leave it to you in the form of a generation skipping trust. This would he a trust under which you would serve as a Trustee and therefore could participate in the management and investment of the inheritance, would he entitled to discretionary income and principal, for purposes of your health, education, support and maintenance (basically to maintain your accustomed standard of living) and be given a limited power of appointment to decide who gets the trust assets upon your death among a class which could consist of anyone other than your estate or creditors.  After your parent's death, your inheritance would then be held in a form that you would participate in the management control over and receive economic benefit from but which would not be subject to the claims of your creditors provided that the trust agreement contained a "spendthrift clause."
  15. Offshore Trusts. It is possible to transfer certain "movable" assets into trusts formed in various foreign countries.  There are approximately thirty (30) countries which have provisions for trust arrangements.  There may be ten (10) or fifteen (15) that are commonly used for this purpose.  Each of these country's laws are different but generally these countries have laws which make it more difficult for creditors to reach trust assets and if set up and administered properly can provide some measure of insulation or protection from the claims of creditors.
  16. Alaska/Delaware Trusts. It is possible  to transfer assets into an Alaska or Delaware Trust with the same benefits as an Offshore Trust. 
     

Hawaii Law

[H.R.S. ' 651C-4]. Transfers fraudulent as to present and future creditors.

(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:

(1) With actual intent to hinder, delay, or defraud any creditor of the debtor; or
(2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor; 

(A) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or

(B) Intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor's ability to pay as they became due.
 

(b) In determining actual intent under subsection (a)(1), consideration may be given, among either factors, to whether.

(1) The transfer or obligation was to an insider,
(2) The debtor had retained possession or control of the property transferred after the transfer,
 
(3) The transfer or obligation was disclosed or concealed;
 
(4) Before the transfer was made or obligation was incurred, the debtor was sued or threatened with suit;
 
(5) The transfer was of substantially all the debtor's assets;
 
(6) The debtor had absconded;
 
(7) The debtor had removed or concealed assets;
 
(8) The value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
 
(9) The debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
 
(10) The transfer had occurred shortly before or shortly after a substantial debt was incurred; and
 
(11) The debtor had transferred the essential assets of the business to a lienor who had transferred the assets to an insider of the debtor. [L 1985, c 216, pt of ' 1]
 
 
 


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Honolulu, HI 96813

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