Do you understand asset protection and how it works? Have you been fielding questions from your clients regarding asset protection?
As CPAs, we are the key advisors to our clients. It is imperative you understand these issues in order to best serve and advise your clients. You may have some clients who have risky assets and who are worried about the current legal climate. You need to understand asset protection in order to give your clients safety and security. You need to help your clients identify when they need to speak with an asset protection attorney. You must recognize that working with clients is a team effort and you need to be confident and comfortable and understand when referring to an asset protection attorney is appropriate and necessary. You don’t know everything and you’re not practicing law, so refer to an expert when appropriate.
To dive further into the topic of asset protection, Tom interviewed Doug Lodmell, an asset protection attorney who he works closely with and who he highly recommends.
What is asset protection?
Oftentimes, you have clients who have a chance of being sued. To provide safety and security, insurance is the first line of defense. Clients need to make sure that they are not underinsured and that they have an umbrella policy to provide excess coverage to make sure all assets are covered. It’s important your client understands what they are insured for. Asset protection is important as it takes all the assets themselves and places them in a safer place. Asset protection is your 2nd line of defense. Doug recommends placing your risky assets into an LLC to protect from an outside attacker. You can place your real estate, businesses, airplanes, and yachts into LLCs and consolidate them.
What is a Holding Company?
One single holding company can house multiple LLCs. You can have one holding company for businesses and one for real estate. You will have one holding company for the asset side and one holding company for the business side. You can place your safe assets (cash, security, stocks) directly in a holding company. There is insulated risk in your own LLC. Oftentimes, one thing accountants miss in tax planning is the benefit of holding companies and how transferring assets is easier with the holding company.
Trusts
Trusts are another powerful form of asset protection. A standard revocable living trust is important in estate planning. This trust functions wonderfully as you can change it and add or subtract assets, and it makes it so that you are able to avoid probate. The best thing about this living trust is that everything is taken care of, which makes it easy for one’s heirs to deal with. One thing to remember is this trust must be funded; therefore, you must transfer ownership of the LLC into the trust. Tom had a client who passed away and the wife discovered her husband’s living trust was all done and all assets were titled into the trust. These types of trusts are inexpensive to set up and make life easier from an estate planning perspective.
Asset protection trusts
Doug discusses a new type of trust called a bridge trust, which is a hybrid trust. This trust is registered offshore as a foreign trust and the client must be made the trustee of the trust to have control of the assets. In addition, a U.S. jurisdiction must be named to have primary supervision. In the event there is a problem, the attorney can declare an event of distress; this causes the offshore trustee to become the full trustee and removes the client as the trustee. This then fails the control test and is no longer considered a domestic trust and becomes a foreign trust. When doing tax planning at TFW Advisors®, we want flexibility. The hybrid trust is a great option as it becomes a living trust (a domestic normal grantor trust) and in rare situations, becomes a foreign asset protection trust if needed.
As a CPA, you should be proactive and help your client find solutions. You may have clients who have risky assets and who are worried about the legal climate. Don’t hesitate to consult an asset protection attorney or to refer your clients to an asset protection attorney.
Our clients become better clients and rely on us more as we are more involved in the day to day and give quality advice. And when you provide quality advice, you will have better clients, a better practice, and a better life.
If you are the owner of a CPA firm who would like to learn more about joining TFW Advisors®, book a call with us today!