Insurance Insights: The Cleary Insurance Blog
The Cleary Insurance blog covers insurance, risk management, and financial planning for New England businesses and individuals. Our team of licensed advisors and specialists publishes regular articles on commercial and personal coverage, employee benefits, life and financial planning, and insurance compliance. Browse recent articles below, or use the category filters to find topics relevant to your business or personal situation.
Asset Protection
A Vital Part of a Wealth Management Plan
Thanks to a soft economy, the up and down stock market, and the loss of equity in many homes, more people than ever are considering ways to protect their assets. Threats such as a forced bankruptcy filing, a frivolous lawsuit or an IRS audit are all reasons to implement strategies to shield your property from potential creditors, litigation and other legal hazards. Let’s explore two asset protection techniques that may be right for your situation.
1. Transferring assets to a trust
Placing assets into a trust is one way to protect them from potential creditors. But not all types of trusts will provide asset protection. A common estate planning tool, the irrevocable life insurance trust (ILIT), is a trust that does. You set up and fund a trust that uses those funds to buy an insurance policy on your life — or you can transfer an existing policy to the trust. Either way, the policy’s value is protected because you’re no longer considered the legal owner. (This also means the policy isn’t included in your taxable estate.) At the same time, the trust also protects it — until funds are distributed — from your beneficiaries’ creditors.
Other trusts also are available to protect your assets. In recent years, several states have followed Alaska’s lead and passed laws to provide protection to “self-settled” trusts. These trusts are available to residents of any state, but the costs of setting them up and maintaining them are typically higher than with normal living trusts and should be weighed against their asset protection benefits.
Offshore trusts are an option, but they come with their own set of costs and risks. These trusts can offer significant protection. But they not only must comply with the laws in the country in which they’re established, but also must be structured in accordance with U.S. tax laws and regulations.
2. Establishing a family limited partnership
A family limited partnership (FLP) is another estate planning tool that shields assets from creditors. You establish an FLP by setting up a partnership and transferring assets to it in exchange for limited partnership interests for you and your family. You also can use a properly structured FLP to reduce gift and estate taxes.
In general, a limited partner’s creditors cannot reach the FLP’s assets — they can only obtain rights to receive any distributions made from the FLP to the limited partner. By retaining a small general partnership interest (1%, for example), you can retain control over the property while providing some level of protection from potential creditors.
In recent years the IRS has challenged valuation discounts on FLP interests and also attempted to have FLP assets included in the taxable estate of the person who funds the partnership. But a properly structured and operated FLP likely will survive most challenges.
Who owns that asset?
Your ability to protect a certain asset greatly depends on how you own it. One type of ownership, tenancy by the entirety, is common and easy to accomplish.
Tenancy by the entirety is a form of joint tenancy with right of survivorship that can apply to personal residences. Available in most states, it’s perhaps the simplest and least intrusive form of asset protection and allows you to protect your home for as long as you and your spouse continue to use it. Unfortunately, persistent creditors can eventually succeed to ownership of the property when you sell or on your or your spouse’s death, regardless of who dies first.
If one spouse is more likely to be the object of a lawsuit than the other, an alternative approach is to shift assets to the “safer” partner to protect them. Understand, though, that shifting too much property to one spouse could interfere with the estate planning goal of balancing assets to take advantage of each person’s estate tax exemption. Then again, holding a home in tenancy by the entirety may not help achieve your estate planning goals either.
Consider your options
No matter what the economic climate is, asset protection should always be part of your overall wealth management plan. Setting up trusts and FLPs are just two techniques to help ensure your assets stay with you or go where you want them to. Discuss with your financial advisor these and other asset protection measures that fit your specific situation.
At Cleary, we are committed to a holistic approach of protecting and preserving our clients’ financial assets. Give us a call today at 617-723-0700 or contact us by e-mail and let us know how we can help you.
SCA Health and Welfare Fringe Benefit Changes
The prevailing health and welfare fringe benefit issued under SCA increased on June 17, 2011. The U.S. Department of Labor sent a memo dated June 10, 2011 to all contracting agencies of the Federal Government and the District of Columbia titled DOL ALL AGENCY MEMORANDUM NUMBER 210.
Effective June 17, 2011 the SCA health and welfare benefit increased from $3.50 to $3.59 per hour. You can find the updated postings on the Wage Determination www.wdol.gov and Wage and Hour Division (WHD) www.dol.gov/whd websites.
The agency memo includes a history of wage determinations, what contracts are affected and the wage determination for the state of Hawaii. If you have any questions about this memo, please feel free to contact Maral, LLC.
Many contractors have called us recently stating that their contracts have both fringe benefit rates in their respective wage determinations, and wondering if it is a mistake? We advised them that the “high” rate is only used for grandfathered contracts. Unless a new contract is issued which should have the “low” rate, there can only be one fringe rate on your contract for all sites under that procurement.
Please remember to have the contracting officer modify the new Health and Welfare rate in your contract before you begin paying it!
Effective Estate Planning
Make Good Decisions Now
A well-designed estate plan can help provide your family financial security – and give you peace of mind right now. The goal of estate planning is to help you accumulate, manage and conserve capital and income – taking into account your resources, goals and tax considerations – and preserve those assets for your heirs. It can also help you manage property in an efficient, profitable way during your lifetime. Every case is unique, but some of the key estate-planning challenges include the following.
Estate Taxes
Estate taxes can be a major concern for those with significant net worth. Without an effective plan in place, estate taxes can force heirs to sell real estate and other assets to raise cash to pay the taxes. However, planning can help reduce estate taxes by making lifetime transfers to heirs and providing a source of money to pay taxes, such as an irrevocable life insurance trust (see How an ILIT is used for estate planning).
Expect the Unexpected
To understand the value of working with a professional, you only have to take a look at recent changes to the estate tax code. The federal estate tax was officially repealed as of January 1, 2010, but is slated to return in 2011 with an even lower exemption amount and a higher tax rate. During 2010, beneficiaries could still be exposed to capital-gains liability because of a limitation to something known as the “‘step-up in basis’ for estate assets.” And additional changes to the estate tax structure are also possible before the tax returns in 2011. If you’re confused, you’re not alone.
Business Succession
For many business owners, their single biggest asset is the business itself, and they often plan to pass that business on to children or others who are actively involved in it. For that, they tend to hire a lawyer (similar to a Denver estate planning lawyer) for equal distribution of wealth and assets. In the event that estate planning is not handled properly, it could result in the heirs or children splitting a smaller part of the estate, which could be further reduced by estate taxes as well. If providing equal inheritances to your heirs is a goal, one possible solution is life insurance, used either to pay the estate taxes or to equalize the values going to children who are not involved in the business.
Gifts
Gifts made during your lifetime can allow you to transfer assets that will significantly appreciate, and would drive up estate taxes if still in your name when you die. In order to reduce the size of the taxable estate, you can transfer assets each year up to the level of the annual gift-tax exclusion. Another option could be a charitable remainder trust, which can allow you to direct income from certain appreciated properties to a designated charity, with possible tax advantages.
Other Options
There are a number of more complex solutions that may be appropriate depending on your specific situation and goals. These include Grantor Retained Annuity Trusts, Qualified Personal Residence Trusts, private annuities, and installment sales.
Estate tax issues are not impossible to solve. But to ensure you end up with the solution that addresses your situation most effectively, it makes sense to consult a trusted financial professional and your legal advisor.