Section 6: Risk Management & Asset Protection - Quiz questions

Your client, a physician, has always been concerned about asset protection and like many of his colleagues has been sued before. 10 years ago she did extensive planning and established an ILIT with her children named as beneficiaries. At the same time she also established a foreign asset protection trust (FAPT) in Switzerland. Your client funded both trusts immediately after each was established and made no other contributions after initial funding. Your client has just now been named in a malpractice suit. Unknowingly to you, in an attempt to protect additional assets, your client establishes an additional asset protection trust (APT) in Delaware and a second FAPT in the Cayman Islands. Rank the assets below from most likely to least likely to be reached by creditors if the suit against your client is successful. I. FAPT established in Switzerland II. FAPT established in the Cayman Islands III. ILIT IV. APT established in Delaware

a) II, IV, III, I b) II, I, IV, III c) IV, I, II, III d) IV, II, I, III Assets held in the Delaware asset protection trust would likely be the easiest to reach by this creditor since the trust was set up recently. The client may be guilty of fraudulent conveyance. Assets held by the FAPT in the Cayman Islands would also likely be in jeopardy since a judge may rule assets were transferred fraudulently to avoid creditors from this suit. That being said, these assets would most likely be more difficult to reach than those in the Delaware trust (thus they are ranked second). Assets held by the FAPT established in Switzerland would be hard to reach given the trust was formed over 10 years ago, especially if new assets had not be transferred to it within the last several years or since the incident (named in the lawsuit) occurred. It is most likely that the assets held by the ILIT, also formed over 10 years ago, would be the most difficult to reach; again, assuming new assets were not transferred to the trust in order to avoid creditors of this lawsuit or incident.

Family limited partnerships (FLPs) provide the benefit of control of the assets by the general partners (GPs). Some advantages of FLPs are that GPs are able to control distributions, the assets will often receive a valuation discount, and limited partners receive some benefits of creditor protection. All of the following are potential disadvantages except: a) a creditor may receive a charging order against the limited partners and force dissolution b) once the FLP is set up, general partner assets are still exposed to creditors c) ongoing administrative expenses of operating the FLP can be significant d) the IRS is has successfully challenged numerous FLPs particularly regarding aggressive valuation discounts

a) a creditor may receive a charging order against the limited partners and force dissolution See "Asset Protection Strategies: Limited Partnerships" (Solomon and Lewis). Question

A son of a client with net worth of ten million dollars ($10MM) takes his father's Rolls Royce for a drive and drives right into a neighbor's garage and kitchen. Physical damages from the accident amount to $350,000, and your client is also sued for an additional $1.5MM for negligence. The court awards both of these amounts. The insurance company tells your client that it will only pay $250,000 per the policy in force. Which of the following actions prior to the event could have prevented this outcome?:

a) client could have raised the liability coverage on the automobile policy to the maximum allowed by the insurer b) client could have taken out a $2 million dollar personal umbrella policy and raised the maximum coverage on his PAP automobile insurance c) client could have purchased personal umbrella liability coverage for $5 million d) client could have purchased a separate PIP policy with maximum coverage of $3 million See chapter 24 of Private Wealth (Hallman) - page 496-497. Personal umbrella coverage would most likely solve this problem, but keep in mind that it will not fully pay a claim unless maximum liability coverage is maintained on auto coverage for this particular event.

A client lost her diamond wedding ring, which cost $85,000 twenty-five years ago, and is currently valued at $125,000. The insurance company processed her claim and sent a check for $122,500. What type of coverage did this client have?

a) coverage D under homeowner's policy b) scheduled replacement value c) actual cash value coverage d) HO-4 personal property coverage See chapter 24 of Private Wealth (Hallman).

What are the tax implications of a foreign trust?

a) distributions to beneficiaries are not subject to U.S. tax b) assets in a foreign trust are not subject to U.S. gift and estate tax c) the grantor trust rules apply if the donor retains one of certain enumerated powers d) the earnings of the trust are not subject to U.S. tax law U.S. citizens are taxed on income worldwide. Assets placed in a foreign trust are subject to U.S. tax law. Consequently, clients choosing to establish a foreign trust should do so for reasons other than tax avoidance.

Which of the following trusts would be most appropriate for your client who would like to transfer assets to multiple generations, claim the GSTT exemption on gifts made to this trust, protect assets from the claims of their heir's future creditors, keep the assets in the U.S., and allow for special powers of appointment to be held by beneficiaries allowing additional flexibility? a) dynasty trust b) revocable living trust c) foreign asset protection trust d) grantor trust

a) dynasty trust See page 387 of 2015 Field Guide to Estate Planning, Business Planning & Employee Benefits - Dynasty Trust

In most states what is the necessary burden of proof for a potential creditor to "pierce the corporate veil" and gain claim to a defendant's personal assets?

a) fraud or gross negligence b) intent to harm c) significant and meaningful harm d) premeditated malfeasance Case law in most states does not allow creditor judgments to reach through a properly established and managed corporate (business) entity in order to reach personal assets unless fraud or gross negligence is proven.

Which of the following assets is available to but generally least attractive to a creditor claim?

a) principle residence b) Individual Retirement Account c) family limited partnership interest d) assets held as tenants in common Most states offer creditor protection though a homestead exemption to some level so a) is not correct. Some IRA assets are protected up to $1million (plus) while others offer unlimited protection from the claims of creditors so b) is not correct. This leaves c) and d) as the only viable options. TIC assets are exposed and attractive while FLP assets are exposed but much less attractive given limited control and the potential for adverse events such as phantom income. Therefore, FLP assets are the correct choice.

Grantor trusts, both foreign and domestic, may provide asset protection for the trust's grantor. All of the following are potential benefits of a grantor trust except: a) tax favored treatment of trust income b) control and flexibility c) option to include spendthrift provisions in the trust document d) protection of pre-martial assets

a) tax favored treatment of trust income There is no income tax benefit for a grantor trust. See page 414 of 2015 Field Guide to Estate Planning, Business Planning & Employee Benefits - Grantor Trust Rules.

What are the primary objectives of insurance and asset protection?

a) to ensure appropriate coverage of potential losses and minimize potential losses to creditors b) to recommend or sell coverage that eliminates gaps and duplications c) to protect all client assets through insurance and appropriate structures d) to identify and quantify all potential risks of loss These are fundamental descriptions of insurance and asset protection - nothing complicated here.

Which of these is NOT one of the three exceptions to member-limited liability? a) when the statute of limitations has passed b) when the LLC is not properly formed c) when the veil of limited liability is pierced d) limited liability members will be liable for unpaid contributions

a) when the statute of limitations has passed See page 3 of "Asset Protection Strategies: Limited Liability Companies" (Solomon and Lewis).

Homestead exemptions offer creditor protection. Which of the following is NOT true about this protection? a) homestead exemptions are based on state statutes b) the bankruptcy act of 2005 limits homestead protection under certain circumstances to $250,000 c) individuals may rely on homestead exemptions and law to protect their right to live in their home even if a judgment is forced on a spouse living in the same home d) changes in state statutes and case law may change the attractiveness of the personal residence of debtors

b) the bankruptcy act of 2005 limits homestead protection under certain circumstances to $250,000 See pages 1-4 of "Asset Protection Strategies: Homestead Exemption" (Solomon and Lewis). See pages 1-4 of "Asset Protection Strategies: Homestead Exemption" (Solomon and Lewis).

The following rights may be obtained with a charging order: a) the right to foreclose on the partnership thus dissolving the entity b) the right to receive the limited partner's income to satisfy the judgment c) the right to redeem partnership property up to the amount of the order d) the right to take title to the limited partner's interest in the business

b) the right to receive the limited partner's income to satisfy the judgment See "Asset Protection Strategies: Limited Partnerships" (Solomon and Lewis).

Under which circumstance below should life insurance proceeds be protected from the owner's creditors? a) a policy that is part of a cross purchase plan where the beneficiary is a business partner b) a policy where the owner, who is also the insured, assigns the policy as collateral c) a policy where the owner and the insured are the same person and the beneficiary of the policy is the spouse or child of the insured d) a policy where the beneficiary was changed after the owner entered bankruptcy protection

c) a policy where the owner and the insured are the same person and the beneficiary of the policy is the spouse or child of the insured A creditor may be able to reach a policy that: 1) is assigned as collateral, 2) where the beneficiary of the policy is not a spouse or direct descendent of the insured, and 3) where there are instances of fraudulent transfers.

The transfer of assets made with actual intent to hinder, delay, or defraud either present or future creditors and carries a statute of limitations of 4 years in most states is called: a) illegal transfer b) asset protection c) fraudulent conveyance d) creditor protection

c) fraudulent conveyance Definition of fraudulent conveyance. See "Asset Protection Strategies: Actual Intent Fraudulent Conveyance"

Which of the following statements is true of retirement account assets? a) individual retirement accounts are fully protected from creditors b) all qualified retirement plans and individual retirement accounts are protected from creditors c) qualified retirement plan accounts are protected from creditors under ERISA d) qualified plan accounts may be subject to creditor claims in bankruptcy cases

c) qualified retirement plan accounts are protected from creditors under ERISA See pages 1-5 of "Asset Protection Strategies: ERISA Qualified Retirement Plans" (Solomon and Lewis).

Which of the following statements about limited partnerships is NOT accurate? a) limited partners are offered protection of their personal assets held outside the partnership b) limited partners may not demand dissolution of the partnership based on investment underperformance c) partners may receive a share of the profit or other compensation as outlined in the partnership agreement d) a charging order is the exclusive remedy for a creditor judgment to satisfy a debt out of a judgment debtor's partnership interest

d) a charging order is the exclusive remedy for a creditor judgment to satisfy a debt out of a judgment debtor's partnership interest See page 2 of "Fact or Fiction" (Elizabeth Morgan Schurig).

Which of the following is NOT considered a badge of fraud as considered by the courts? a) secrecy of the transaction b) family, friends, or close relationship among parties c) financial difficulties d) adequate consideration

d) adequate consideration See page 1 of "Asset Protection Strategies: Actual Intent Fraudulent Conveyance

All of the following regarding "self-settled trusts" are accurate except: a) self-settled trusts require an independent trustee b) most states hold that settlors cannot retain beneficiary rights in a trust while at the same time protecting the trust assets from creditors c) a self-settled trust that includes provisions that prevent creditors from reaching trust assets, is called a "domestic asset protection trust" d) all states have now adopted domestic asset protection trust legislation

d) all states have now adopted domestic asset protection trust legislation See page 552 of 2015 Field Guide to Estate Planning, Business Planning & Employee Benefits - Self-Settled Trusts

Under which form of business entity structure is an investor or participant most likely to be personally liable for debts of the entity? a) c-corporation b) s-corporation c) limited liability company (LLC) d) general partnership

d) general partnership Participants classified as "general partners" may be subject to personal liability. See readings from eCampus for LO 6.05 - Compare various entities used in asset and creditor protection strategies.

Each of the following are appropriate reasons for establishing a foreign trust except for: a) legacy planning b) estate planning c) creditor protection d) tax minimization or avoidance

d) tax minimization or avoidance See page 2 of "Asset Protection Strategies: Foreign Trusts" - re: foreign asset protection trusts (FAPTs).