For Clients, Community, Professional Advisors.

Recently, business and estate planning attorneys have increasingly focused on assisting their clients in protecting their assets from loss due to unexpected circumstances.

The typical business owner will respond, “But, my business is structured as a corporation/limited liability company (LLC).  It’s already protected”.  This is only partly true.

The business has inside protection.   That is, the assets inside the corporation have asset protection.  In other words, if there is an accident in the business, the owner’s personal assets cannot be taken away.  That’s the key advantage of using a corporation or a limited liability company.  However, there is a separation between the business assets and the owner’s personal assets.  It’s a form of asset protection.

In a world of creditors, predators, unforseeable circumstances and divorces, it’s important to take active steps to protect our assets.  In the above situation, the assets inside the business may have some protection, but the ownership interest (the shares or membership interests themselves),-  the  “outside interest” – is not protected in any way.

If the owner of the business is in a major car accident and has a large judgment against him or her, he or she could lose his or her interest in the business in a moment’s time.  Having a corporation does not protect the outside ownership interest in the business from potential judgment creditors and other predators.  Many very smart and sometimes very wealthy business owners fail to understand this fact.

A recent study in New York demonstrated that there were a surprising number of judgments in the prior five year over $5 million dollars.  The study found that there was no correlation between the amount of insurance carried and the amount of the judgment.    Under many court rules, once there is a judgment against you, the court can issue supplementary process to find out all of your assets– no matter where they might be.  This is called a Citation to Discover Assets.  Hence, advance planning is important.

Many states have passed new laws designed to protect the outside interest of shareholders and particularly members of limited liability companies.  As we review our clients’ estate plans and prepare for our business clients’ annual meetings, it is our obligation to bring these new techniques to our clients’ attention.  We have already seen situations in our practice where using simple asset protection techniques has saved our clients and their families significant dollars.

Look for further articles in my blog and for additional information on our website concerning asset protection tools and techniques.

For Clients, Professional Advisors

Since my March 3, 2011 posting on inherited IRAs, there has been an interesting precedent. A Federal Court in Texas has issued an important appellate decision. The case is Chilton v. Moser.

What happened? Shirley died in 2007 naming Janice as beneficiary of her $170,000 IRA. Janice opened an IRA titled, “Janice, beneficiary of Shirley IRA” and transferred the funds to this account. Janice filed a bankruptcy petition in December, 2008. Janice sought to protect the IRA from the bankruptcy estate, claiming that the assets were exempt from her creditors under Federal law. The United States Trustee objected. The bankruptcy court judge held that the assets were part of the bankruptcy estate and that they could be distributed to the creditors. Janice appealed to the Federal District Court.

In a well-reasoned appellate decision, Judge Ron Clark reversed the bankruptcy court decision. He held that in order for inherited IRA funds to be exempt from creditors in a bankruptcy (a) they must be tax exempt under §401 or §408 or §403 (or other) section of the Internal Revenue Code (covering individual retirement accounts, pension and profit sharing plans and certain non-profit organization annuity plans) and (b) they must be retirement funds.

The court went on to conclude that Shirley’s funds were both tax-exempt and were retirement funds. Therefore, the exemptions under the bankruptcy code applied and the money was in fact Janice’s. Her creditors in the bankruptcy case would be unable to reach them!

Can Illinois residents rely on these cases? The trend of the decisions is clear. All Federal District Court Decisions to date and one Appellate Court decision has been consistent with the holding in Chilton v. Moser.

However, one cannot say for certain that this is the law of the land. There is some likelihood that the Federal appellate courts will differ in how they apply the bankruptcy code to IRAs. Nationally respected IRA and tax expert Bob Keebler recommends that professionals continue to offer clients an individualized IRA trust for asset protection. It provides certain asset protection.

Until the matter is resolved by the Seventh Circuit Court of Appeals (Illinois, Wisconsin and Indiana), or if the circuits disagree, by the United States Supreme Court, we continue to offer our clients with large IRA accounts an individual retirement plan trust that provides the asset protection they need.

Why take a chance if a deal goes bad?

For Professional Advisors, Clients, Business Owners

Asset protection is an increasing focus in our practice.  In its March 4, 2011 Tax Letter, Kiplinger gave the impression that inherited IRAs are exempt from creditors and in bankruptcy, citing an Arizona case.  For now, that’s not the case in Illinois.  Allow me to explain:

In the case cited by Kiplinger, Kay Theim and her husband filed for bankruptcy.  While the bankruptcy was pending, Kay’s mother died, leaving her $10,032.57 as beneficiary of an IRA.  Mrs. Theim wanted to keep the IRA.  Who wouldn’t?  So, she amended her bankruptcy petition, seeking to have the inherited IRA exempted from her bankruptcy estate.  The bankruptcy trustee objected and the litigation progressed.  In a 21 page opinion, the United States Bankruptcy Court in Arizona held that the IRA was exempt and that Mrs. Theim could keep the IRA money.

What would happen if Mrs. Theim lived in Illinois?  Illinois has a statute that states that all IRAs and qualified retirement plans (401(k) plans, profit sharing plans, defined benefit plans) are exempt from attachment by creditors and are outside an individual’s bankruptcy estate. Meaning… One would hope that the beneficiary of an IRA would be awarded the same protections that an IRA accountholder would have. 

Unfortunately, in Illinois, Mrs. Theim might be out of luck.  A 2006 bankruptcy case, In re Taylor is the only case applying Illinois law.  The court summarily decided that a contributory IRA or rollover IRA and an inherited IRA were different because one cannot roll over an inherited IRA.  Thus, an inherited IRA is not the same as a contributory IRA and is not protected.  This ruling is controversial.  I’m certain it will be challenged in cases soon to come.

In the meantime, it will be important to consider asset protection planning for non-spouse inherited IRAs in Illinois.   This requires coordinated planning among the client’s professional advisors including his or her attorney, investment and/or insurance advisor and accountant. 

It’s 10:30pm as I write this.  Do you know if your inherited IRA is protected from creditor attack? 

Do you think that inherited IRAs should be exempt from creditors?

(Case and statute citations are available by contacting me).