“Masada Asset Protection Plan” – Lee Phillips

Defend from the High Ground

Masada sits on a very high bluff overlooking the Dead Sea in Israel.  The Romans had a very hard time conquering the high ground chosen by the Jews.  The Jews had built a strong fortress on top of the bluff and had massive amounts of water and food storage.  They were prepared well ahead of time for the Roman siege.  After over a year of work and moving thousands and thousands of tons of dirt and rocks, the Romans finally built a ramp up to the bluff and overran the defenders, who all committed suicide as the Romans made their final assault.

The concept of defending the high ground is applicable to asset protection. But, it really doesn’t matter what your asset protection strategy is, a determined creditor can often breach your defenses.  Actually, there are a few defenses that almost can’t be breached, but most asset protection plans are based on defenses that could be breached.  Even the simple strategies could be hard to breach, and the defense discourages many would be attackers from even trying.

You’ve worked hard to build your estate.  It might be a moderate estate or even a large estate.  The few hours and the few dollars it will take to put an asset protection plan in place will be worth every dime you spend and every effort you make just in the peace of mind it will give you.  The problem is you have to put the plan in place long before the siege starts.  It is hard to think about an attack when everything is going great. 

You are probably envisioning a lawsuit when you think about an attack on your estate.  There are a lot of other things that attack your financial security—identity theft, sick family member, business failure, bad real estate deal, downturn in the real estate or stock market, bad marriage, addiction, the IRS, the EPA, and so many others.  All of these types of threats need to be “protected against.”

Let’s look at an asset protection plan that will put you on the highest ground possible and hopefully protect you from a variety of possible threats.

Inventory

The first step is to inventory your assets.  How is each asset “owned”?  What is the asset?  The question is, what assets do you have to protect?  You may not realize it, but a lot of your assets are protected by law.  Most of the asset protection laws are state specific, but there are a few federal laws. 

Under the federal laws, ERISA is probably the one you will deal with most.  The Employee Retirement Income Security Act defines retirement plans and benefit plans.  It is in the government’s interest to protect your retirement and your benefits, so the law protects them.  ERISA retirements plans which include 401(k) plans, pension plans, 412i plans, SEP plans, 403 b (TSA) plans, and many others are all 100% protected from your creditors.  Likewise, ERISA benefit plans such as your HSA, HRA, Cafeteria, and other benefit plans are protected. 

ERISA protection is really almost bullet proof.  The Goldmans have been trying to get to OJ’s football pension for years, but they can’t do it, because it is protected under ERISA.  About the only way your ERISA retirement or benefit plans can be attacked is in a divorce proceeding by your spouse. 

IRAs are not protected under ERISA, because they are not ERISA plans.  An IRA was created under Section 408 of the IRS Code.  In the 2004 Rousey case, the United States Supreme Court ruled that IRAs were protected under federal bankruptcy law.  So, your IRA is protected if you file for bankruptcy.  But, is it protected from your creditors generally?  That will depend upon your state law, but most states protect both standard and Roth IRAs.  (The biggest exception is California.)   For asset protection purposes, it may not be wise to roll your 401(k) or other ERISA money into an IRA.

Life insurance is protected by most state laws from your creditors.  Many states protect both term and cash value policies, up to the total amount of the policy and cash value.  Many states will allow you to fund money into a policy and have it protected, even if the money would otherwise be subject to a fraudulent conveyance claw back by your creditors.  Generally, you have to be the insured and the owner of the policy, if you want the policy and your premiums to be protected.

Assets that are held in an LLC may or may not be protected assets, as far as your creditors are concerned.  If they are setup properly and follow your state’s laws, LLCs can be great places to hold assets and have them be asset protected.  I will discuss that in more detail below.

Annuities are often protected by state law.  Today, the right annuity can be protected from your creditors, and it can give you great protection against a downturn in the market.  The problem is getting the right annuity.  I recently went to see an older lady, and she showed me an annuity she had purchased a couple of years ago.  The agent had added all kinds of riders to what was a poor annuity that locked her money down for ten years.  She can’t get any of it back without a penalty for the first ten years.  At 75 years old, the annuity is useless to her.  Additionally, because of all the riders and the poor quality of the annuity, she is losing money every year.  In ten years she will have lost almost half of the money she put into the annuity initially.  The agent that sold it to her made a fortune off her.  If you are going to buy an annuity, let me look at it first.  I gave up my securities license fifteen years ago, which I had held for 25 years, but I can still help with an annuity evaluation.

The “low hanging fruit” for your lawsuit creditors (your creditors in general) is real estate.  You can’t unload it easily.  It is valuable and easily converted by a creditor to money.  It is very traceable, so you can’t hide it.  Stock accounts are also very easy targets for creditors.  Any of these types of assets are easy to get to, particularly if they are in your name or you and your spouse’s names as joint tenants. 

You don’t need to worry about assets that are already asset protected, but the low hanging fruit needs to be moved to higher ground, so it can be protected.   

A Unique Plan

Your plan has to be unique to you.  Attorneys that you may go to will be fixated on their “plan.”  They all have their favorite tool.  They might use family limited partnerships, asset protection trusts, LLCs, a series of LLCs and corporations all nested together, or even offshore trusts.  Your plan has to be unique to you because it has to protect your assets. 

Simple is often better, because people can’t deal with complication in their life.  Although the plan may be designed perfectly and even implemented perfectly, over the years, complex plans always begin to get cluttered.  The plans have to be maintained.  You need to carefully consider ownership and placement within the plan of assets that are acquired after the plan is put in place.  If a person really doesn’t understand their plan, they can’t keep it going.  After ten or twenty years, most plans are in such disarray they are worthless.  The more expensive and complicated a plan is, the lower the chances are the plan will stay in place over the years. 

Homestead Laws

Many states have some sort of homestead protection.  The state law simply says that certain assets are protected from creditors.  For example, Texas and Florida have 100% homestead protection for a personal residence.  When OJ bought a house in Florida, dumped a lot of money into it, and declared that it was his personal residence, he knew exactly what he was doing.  You can dump as much money as you want into a Florida or Texas house, call it your personal residence, and the house is protected from creditors.  The nice thing about it is you can do it when your creditors are coming after you, and it is not considered a fraudulent conveyance. 

See what your state has in the way of homestead laws.  Most states have some homestead protection.

Fraudulent Conveyance

All states and federal bankruptcy have fraudulent conveyance laws that have to be considered.  The basic concept is you can’t move assets out of your ownership so that your creditors can’t get to it.  If you try and move assets away from your creditor’s reach, the creditors can “claw” them back.  Any movement of an asset within a time period (usually 5 years) will expose the asset to the claw-back provisions. 

If the asset is sold for fair market value, then you got money for it and your creditor can get the money.  So transfers that involve a fair market value purchase of one of your assets are not subject to the claw-back laws.  However, if you give an asset away or sell it on a deal for less than fair market value, then the creditor can get the asset back, even though someone else has it. 

Note that the transfer of money from your bank and purchase of a residence in Florida isn’t a fraudulent conveyance.  It is simply a conversion of one of your assets (money) into an asset that is protected by Florida law.  The sale of your 30 unit apartment building and transfer of all that money into your residence in Texas isn’t a fraudulent transfer.  And, the residence in Texas is protected from your creditors.  Of course, you have to show the intent to move to Texas and make “the residence” your personal principal residence. 

In Nevada stripping $60,000 in equity out of your rental unit by taking out a second mortgage and then putting that money into life insurance policies (one for you and one for your spouse) would not be a fraudulent conveyance.  The $60,000 in equity converted into a life insurance policy would be outside of the reach of your creditors.  Most states have similar laws. The rental unit would also probably be protected from the creditors, because there wasn’t any equity in it.  As a general rule, I am not a fan of “equity stripping” as an asset protection technique.  But, if you are in trouble it will work, PROVIDED you put the stripped equity into an asset that is otherwise protected by your state’s laws.

The take home concept is that conversion of an asset from one form to another isn’t a fraudulent conveyance.  It is just a change in asset form.  If I give IBM a hundred dollars and they give me a hundred dollar stock certificate back, I have simply changed one asset (money) for another asset of equal value (stock).  If the asset I happen to convert my wealth to is one that is protected by law, so be it.  My creditors can’t yell foul. 

An LLC

Note that an LLC is an asset that is protected by law.  You may not think of an LLC as an asset.  I have written in other newsletters about the asset protection shield (corporate shield) and the charging order protection that goes with a properly established and maintained LLC.  Charging order protection prevents your creditors from actually getting the assets held by the LLC.

The creditor can get an “economic lien” against your interest in the LLC, but the LLC is still in control of the assets.  The most the creditor can hope for is a declaration of profit from your LLC.  You are still in charge of the LLC, and can decide when, if ever, to declare a distributable profit.  The creditor with a charging order really doesn’t have much control over your decisions.  Thus, your creditor is motivated to settle their claim with you at a substantial discount.

When you move an asset (such as a rental unit) into an LLC, you must receive an interest in the LLC back in exchange.  If the LLC is new, you will put the property into the LLC and get membership interests back in exchange.  If the LLC is older, your contribution of the property may simply result in an increase in your capital account.  But, there has to be an exchange of value, just like transferring money to IBM in exchange for their stock.  Transfer of a property into your LLC is just a change of value for value, but your membership interest in the LLC is protected by law from your creditors, and the assets in the LLC are protected from your creditors.

The IRS

Taxes are a major asset protection threat.  You hear taxes and you think income taxes.  The estate tax is real, and it traditionally has been something you had to plan for, because the tax takes nearly half of what it bites.  Trump moved the federal tax to just under an $11.2 million exemption per person.  If you are under that, there is no need to worry about federal estate taxes.  After 2025, the federal estate tax exemption drops back to its pre-Trump $5.6 million.  With inflation in the next years, that may put some of you in a position where you need to worry about estate taxes.

If you live in one of the 16 or so states that have state estate taxes, you may well need to worry about that threat.  You can use a living revocable trust that splits into a shelter trust and a marital trust upon the death of the first spouse to die.  If the estate tax in your state is still a threat, even after splitting your estate using a living revocable trust, then you’ll have to take other actions.

Yes, income taxes are a major threat to your estate accumulation.  The last few newsletters have talked about the new Trump tax laws that really give the middle class some good planning opportunities.  You have to plan your income taxes all year.  If you need to create a plan, call our office and they can put you in touch with Ben Rucker the former special auditor for the IRS.  He is good at planning. 

Insurance

You need to carry good insurance.  Insurance comes in lots of forms.  In your home owners insurance, you can have an “umbrella policy” and a lot of other coverages.  I have riders that cover earthquakes, floods, and identity theft.  I have special policies that cover me in rental cars, medically evacuate me to a US hospital, bring family members to me, ship my body to my burial place (one time $125 premium), and many other features.  I have insurance on each of my rental units that cover the building and lawsuits from renters.  I have business insurance that covers my buildings, all of the computers and contents of the offices, plus loss of data (a big deal), loss of income, and many more features.  I am doubly insured for health coverage.  My insurances have proven to be cheap for what they have paid out.

Insurance is a tool you can use to fight various types of attacks.  Insurance company lawyers will usually defend you if there are legal issues involved.  Of course, health insurance is a big deal these days.  Our out-of-pocket loss is limited to $8,000 and we meet that by February each year, but that is our total loss plus the cost of the insurance, which is $2,000 plus each month.  Health insurance may be your biggest asset protection tool. 

Do It

In pretty much all cases, you have to do your asset protection planning well in advance.  Use the Accumulation and Preservation of Wealth, come to our boot camp, pay your favorite attorney, do something and get your plan in place. 

You’ll have to integrate the whole plan.  No advisor can do it for you.  Your LLC needs to be owned by your living revocable trust.  You have to make sure that you are buying insurance that covers the rental property held by your LLC.  Ownership makes a difference for all aspects of your asset protection plan. 

Do not rely on anonymity.  There is no such thing as anonymity in today’s society, so don’t even think that you are going to hide yourself or hide your assets from your creditors.  If you can keep from having a “high profile” that is good, but anonymity is not part of asset protection planning. 

Using common legal tools and owning assets in ways that have inherent legal protection, you should be able to create a good plan that will thwart many types of attacks.  As one of my newsletter students, if you need help thinking through your plan, give us a call.