Predatory litigation: A threat against your wealth

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You only need to turn on the news to hear about the latest legal battle playing out in the courts. Tens of thousands of lawsuits are filed every day all across the country. Everyone sues everyone: strangers, employers, friends, even family members. Litigation is such an accepted part of the culture that a lawsuit is often the first thing people think of when they have a dispute.

It wasn’t always like this. Believe it or not, at one point in history, lawsuits were discouraged and only considered as a last resort. Being an attorney was considered a gentleman’s profession. Attorneys were expected to counsel wisdom and restraint, rather than encouraging no-holds-barred litigation. Clearly, that is no longer the case. Several facets of our legal system have contributed to this unfortunate situation.

Attorney advertising

Until relatively recently, attorneys were not allowed to advertise their services. But in 1977, in Bates v. State Bar of Arizona, the U.S. Supreme Court held that attorneys had a constitutional right to advertise. It was considered “commercial speech” and therefore protected under the First Amendment.

It’s difficult to imagine a world without attorney advertising now. You can’t walk down the street without seeing a billboard or a bus stop bench offering to help you with your legal needs. As a consequence of this, lawyers have become both more competitive and more aggressive at chasing that big case.

Contingency fees

A contingency fee is one where the attorney is paid a percentage of a court award (rather than an upfront fee or hourly billing). The fee typically ranges anywhere from 25% to over 50%. Contingency fees have become the standard in personal injury cases. With awards in big cases reaching into the millions (and sometimes even billions!), plaintiffs’ attorneys stand to make a huge windfall with the right case.

An attorney with this much to gain if they win the case (and nothing if they lose) has a huge incentive to aggressively pursue profitable cases against vulnerable defendants.

No “loser pays” rule

Many other countries follow the English Rule for attorneys’ fees, where the losing party pays the other side’s legal fees. Under the American Rule, absent a contract or statute to the contrary, each party pays their own legal fees.

What this does, in effect, is provide a system where a plaintiff can bring a lawsuit with no risk to himself. If his attorney takes the case on contingency, and he does not have to pay the other side’s legal fees if he loses, he can sue someone without paying anything out of his own pocket. The defendant, on the other hand, risking tens or hundreds of thousands of dollars in legal fees regardless of the outcome, is very often forced to settle, even if the case has no merit.

Fighting back

Predatory attorneys have encouraged the culture of litigation and Americans have embraced it. It’s unlikely that this culture is going to change any time soon. The best way to fight back is to adapt to this environment by being proactive with your wealth.

Predatory attorneys go after easy targets, those with “deep pockets” and vulnerabilities they can exploit. The right asset protection plan puts up walls of legal protection around your assets, changing the landscape altogether. Potential litigants no longer see an open treasure chest ripe for the plucking. Instead, they see an imposing fortress whose defenses they are unlikely to penetrate.

Sollertis can help with asset protection

The Sollertis Master Asset Protection Plan™ is the framework for protecting all of the individual assets that contribute to financial success.  Based on an analysis of your needs, each plan is a customized blueprint outlining the types and mix of legal structures needed to best meet your specific goals and objectives.

Once a MAPP™ is designed, you have a plan in place to protect your assets and to guide business, personal and investment decisions. Unlike traditional asset protection plans that take a “one-size-fits-all” approach, a MAPP™ adapts to changing circumstances. Whether implemented all at once or over time, you will create greater financial freedom knowing you’ve legally protected the wealth you have earned.

Contact us today to learn more about the Sollertis MAPP™ and our unique approach to managing all of your legal needs.

History of asset protection: A timeline

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As a specific legal field, “asset protection” has only been around for a relatively short period of time. However, its origins date back to ancient times. Tracing its roots allows us to see the big picture and understand how this important practice area developed. Here are some important events in the history of asset protection.

200 B.C. – First mention of the ancient Roman institution of “fideicommissum” (meaning to commit something to one’s trust), a sophisticated system developed for leaving property to one’s heirs after death (testamentary trusts).

1200-1300 – Trust law starts to develop in England. When landowners left for the Crusades, they would transfer ownership to another party for upkeep in their absence. Upon their return, it often fell to the Court of Chancery to force the “trustee” to return ownership of the land to the “beneficiary.” This helped lead to the concept of the “inter vivos” or “living” trust, a major contribution of English common law.

1664 – Luke Barber, a doctor in colonial Maryland, tries to protect his assets from creditors by transferring them into trusts. He was unsuccessful, as the transfers were considered fraudulent conveyances.

1700’s – Thomas Jefferson engages in asset protection for the benefit of his daughter. He leaves property to her in the form of a testamentary trust designed to protect her inheritance from the creditors of his insolvent son-in-law.

1800’s – The concept of the spendthrift clause begins to develop in American trust law. At this time, they were nearly always considered invalid if the trust was self-settled (still the majority view in the U.S.).

1977 – Wyoming becomes the first state to allow for the creation of a new kind of business entity: the limited liability company (LLC).

1980’s – Although the limited partnership structure has been used for centuries, it becomes popular during this time among real estate investment groups. Eventually, attorneys start to notice and utilize its asset protection benefits as well.

1984 – The Cook Islands passes its International Trusts Act. Amended in 1989 with many favorable provisions, it makes the Cook Islands the first country to authorize the creation of international asset protection trusts. Several other countries would soon follow suit with similar legislation.

1997 – Alaska passes legislation authorizing the creation of the first domestic asset protection trust (self-settled spendthrift trust). Eventually, many other states join Alaska in allowing for the creation of SSST’s.

2011-2015 – A series of important court cases are decided showing the vulnerability of domestic asset protection trusts when used alone.

As you can see, “asset protection” as a field of law has only been around for the last few decades. (It’s no coincidence that this development has happened in the same timeframe as the litigation boom in the U.S. As our affinity for lawsuits has grown, so too has the need for asset protection.) Looking back at the historical context is a good way to understand how we got where we are, and where we might be headed.

Sollertis can help with asset protection

The Sollertis Master Asset Protection Plan™ is the framework for protecting all of the individual assets that contribute to financial success.  Based on an analysis of your needs, each plan is a customized blueprint outlining the types and mix of legal structures needed to best meet your specific goals and objectives.

Once a MAPP™ is designed, you have a plan in place to protect your assets and to guide business, personal and investment decisions. Unlike traditional asset protection plans that take a “one-size-fits-all” approach, a MAPP™ adapts to changing circumstances. Whether implemented all at once or over time, you will create greater financial freedom knowing you’ve legally protected the wealth you have earned.

Contact us today to learn more about the Sollertis MAPP™ and our unique approach to managing all of your legal needs.

Pieces of the puzzle: (Family) Limited Partnership

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The limited partnership (LP) is a popular type of business entity for managing wealth among both family members and investment groups. The LP has a host of advantages, including tax reduction and the efficient transfer of wealth from one generation to the next. More recently, it has become an integral part of asset protection planning. In fact, it very often forms the core of a solid asset protection plan.

(Within the asset protection context, a LP is often referred to as a family limited partnership (FLP). The word “family” merely indicates its use among family members.)

What is a partnership?

In the simplest terms, a partnership is an arrangement where 2 or more parties agree to work together to do business. Members of the partnership can be individuals, organizations, or a mix. The partnership is treated as a separate entity from the partners themselves.

The basic type of partnership is also known as a general partnership (GP). Some of the default characteristics of a general partnership include the following:

  • Each partner has equal responsibility for partnership management.
  • Each partner is equally liable for partnership debts and judgments.
  • Each partner is able to bind the partnership (and thus the other partners) for debts and liabilities.
  • Profits and losses are shared equally.

Absent an agreement to the contrary (which is common), the above rules apply. The biggest disadvantage of the GP is liability. Each partner’s personal assets may be at risk for partnership liabilities (including those incurred by another partner).

Limited Partnership

A limited partnership (LP) is a bit different. What distinguishes a limited partnership from a general partnership is the two types of partner: general partner and limited partner. There must be at least one of each.

General partner: The general partner is responsible for managing all aspects of the partnership, including the timing of partnership distributions. Likewise, the general partner also bears the burden of partnership liability.

Limited partner: Limited partners are not responsible for, nor are they allowed to, participate in partnership management. This is true even if they have a 99% interest in the partnership. Unlike the general partner, they are not personally liable for partnership obligations.

As with GP’s, LP’s function as pass-through entities for tax purposes. Partners are taxed on their distributions as personal income.

Limited Partnerships and asset protection

LP’s are popular and effective because of their ownership flexibility and liability protections. A basic set up would be something like this: A husband and wife set up a (family) limited partnership, owning both general and limited partnership shares. Limited shares are then transferred to other family members (such as children) over time. The parents are able to retain as little as 1% as general partners while maintaining control of the LP. (Family members may decide to hold ownership interests through other business entities or title them in trusts.)

As with limited liability companies, LP’s often carry “charging order protection.” In many states, a “charging order” is the only remedy available to a judgment creditor. A charging order entitles the creditor to the partner’s distributive share, but grants no management or voting rights. The creditor must sit and wait for a distribution at the discretion of the general partner.

Because of the advantages outlined above, LP’s are used extensively in asset protection planning. When combined with the Bridge Trust™ and other entities, the limited partnership helps establish a solid wall of protection around your assets.

Sollertis can help with asset protection

The Sollertis Master Asset Protection Plan™ is the framework for protecting all of the individual assets that contribute to financial success.  Based on an analysis of your needs, each plan is a customized blueprint outlining the types and mix of legal structures needed to best meet your specific goals and objectives.

Once a MAPP™ is designed, you have a plan in place to protect your assets and to guide business, personal and investment decisions. Unlike traditional asset protection plans that take a “one-size-fits-all” approach, a MAPP™ adapts to changing circumstances. Whether implemented all at once or over time, you will create greater financial freedom knowing you’ve legally protected the wealth you have earned.

Contact us today to learn more about the Sollertis MAPP™ and our unique approach to managing all of your legal needs.

The home sale income tax exclusion and asset protection

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Asset protection is not about hiding your wealth from the IRS to avoid paying taxes. However, a comprehensive asset protection plan takes into account all legal avenues of protecting your wealth. Sometimes, you can use asset protection in conjunction with tax reduction strategies to maximize your benefits. One example of this is the income tax exclusion for the sale of your home.

Excluding gain from the sale of your primary residence

Ordinarily, when you sell real estate, you have to pay taxes on the gain (profit) from the sale (at the capital gains tax rate). However, there is an exception. Internal Revenue Code Section 121 (IRC 121) allows you to exclude up to $250,000 of gain from the sale of your principal residence. In other words, when you sell your home, you can make a profit of up to $250,000 and not pay taxes on it. If you’re married and filing jointly, this amount jumps to $500,000.

To qualify for the exclusion, you must satisfy the following requirements for at least two of the five years prior to the sale of the home (not necessarily at the same time):

  • Use of the home as your principal residence (if married and filing jointly, this applies to both spouses)
  • Ownership of the home (if married and filing jointly, only one spouse must satisfy this requirement)

This is a powerful tax reduction tool that can be utilized multiple times in your lifetime (every 2 years), saving you thousands or even tens of thousands of dollars in taxes.

What if my home is owned by a business entity, like a LLC?

Here’s where the intersection of asset protection and tax reduction comes into play. Your home is owned by a business entity (or you’re thinking of forming one), but you want to take advantage of the income tax exclusion when you sell.

The Code of Federal Regulations sheds more light on this. 26 CFR 1.121-1(c)(3) allows you to do this if the otherwise eligible business entity:

  • Has a single owner, and
  • Is disregarded for federal tax purposes as a separate entity.

If the entity meets both of these requirements, you’re treated as owning the home for purposes of IRC 121. The sale of the home by the entity is treated as if made by you.

How does marriage affect ownership by a business entity?

An entity that is solely owned by husband and wife as community property may be treated as a disregarded entity for tax purposes. However, trouble may arise with the single owner requirement in this situation.

Depending on your circumstances, and the laws of the state where you reside, you may have a couple of options:

  • One spouse as owner: Only one spouse needs to satisfy the ownership requirement. So one way to structure it might be to form an entity in which one spouse is the sole owner (and disregard it for tax purposes). Assuming both spouses meet the use requirement, they would file jointly and exclude up to $500,000 in gain from the sale.
  • Both spouses as owners: If both spouses wish to share ownership of the home, each spouse might decide to hold their half ownership in their own single member entity. Then, if they each individually satisfy the ownership and use requirements, they would file individually and each exclude up to $250,000 in gain on their individual returns.

The exclusion of gain from the sale of your primary residence is one of the most generous tax breaks the IRS has to offer. What makes it even better is that it can work within your asset protection plan to help get the maximum financial benefit.

Sollertis can help with asset protection

Sollertis has the experience and legal knowledge necessary to help you protect your assets. We want to help you achieve financial freedom and focus on what’s important, instead of worrying about your liability.

If you think we may be the right law firm to help you with asset protection, please contact us to discuss your situation.

What distinguishes a great asset protection plan?

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If you’re looking for true financial freedom and peace of mind, the importance of asset protection can’t be overstated. But what makes for a great asset protection plan? How do you wade through the abundance of options out there, all claiming to be the best?

Other than the most obvious qualification (that it works!), there are a number of factors which you should consider essential. Here are the hallmarks of a great asset protection plan.

A great asset protection plan…

…is put into place before a claim arises.

The time for asset protection is long before an event of duress rears its ugly head. Trying to implement asset protection after the event of duress is not only generally ineffective (you may have options, but they are limited), but it can open you up to criminal liability for trying to hide assets from your creditors.

…is up front, legitimate, and most of all, legal.

Beware the shady financial guru who says he can hide all your assets in an underground Swiss bank account. An asset protection plan works with existing laws (both domestic and international) to protect your assets. In the event of a court judgment, your asset protection plan should be able to stand up to the scrutiny of creditors.

…is crafted by an experienced asset protection attorney.

As discussed above, a good asset protection plan should work within the law. This is why you need an attorney to navigate the legal process and ensure your plan does just that.

…provides minimal ownership but maximum control.

Your assets should be titled properly so that they are protected from liability, but you should retain enough control to be able to enjoy them.

…is personally tailored to your needs.

Each person has different financial goals and needs that are unique to each situation. What works for one person may not work for another. Your asset protection plan should take this into account and be personally tailored accordingly.

…puts each asset in the right place.

Each asset has its place. For instance, a business asset would most likely be titled under a business entity (rather than placed in your revocable living trust). In turn, that business entity might be owned by another entity, such as a limited partnership. There is a place for each asset, and everything fits together in the overall structure.

…is flexible and allows for growth.

Circumstances change, your goals evolve, and you acquire more assets over time. Your plan should be flexible enough to allow for this. New assets should have no problem fitting into the overall plan. Likewise, if you sell or transfer an asset, the process should be smooth, without collapsing or damaging the structure.

…is followed through on and maintained.

An asset protection plan is useless if it’s not followed through on and maintained. Once the plan is in place, each asset needs to be transferred to the right “bucket,” your attorney should keep track of ongoing filing requirements, and periodic reviews and updates might be necessary. An asset protection plan is a lifelong project, one that protects and manages your wealth while you’re alive, and allows everything to be safely transferred to your loved ones after you’re gone.

Sollertis can help with asset protection

The Sollertis Master Asset Protection Plan™ is the framework for protecting all of the individual assets that contribute to financial success.  Based on an analysis of your needs, each plan is a customized blueprint outlining the types and mix of legal structures needed to best meet your specific goals and objectives.

Once a MAPP™ is designed, you have a plan in place to protect your assets and to guide business, personal and investment decisions. Unlike traditional asset protection plans that take a “one-size-fits-all” approach, a MAPP™ adapts to changing circumstances. Whether implemented all at once or over time, you will create greater financial freedom knowing you’ve legally protected the wealth you have earned.

Contact us today to learn more about the Sollertis MAPP™ and our unique approach to managing all of your legal needs.