Estate Planning and other legal discussions

What is a Family Limited Partnership?

The Family Limited Partnership (FLP) is a limited partnership created to transfer ownership of assets to family members with a minimum of tax consequences.  The FLP is designed to lower the value of your investments and assets (for estate tax purposes) while still allowing you to maintain full control of your estate inside the limited partnership.  It works particularly well to transfer a family business, real estate or an investment portfolio to the next generation.  It helps to reduce estate taxes — and to reduce the risk that assets would need to be sold to pay those taxes.

 Here’s how it works:  Senior members of a family convey a family business, investment portfolio or real estate to the Family Limited Partnership.  Typically, the senior family members will own the limited partnership initially.  In most cases, though not all, the senior family members will begin a gifting program to make gifts of partnership interests to younger family members.  The senior family members retain control of the partnership.  The FLP allows elder family members to introduce younger members to the family business and investments, while limiting their liability.

In FLPs, two types of partners are involved: The General Partners, who control the partnership — and Limited Partners, who earn a share of the profit but cannot exercise control.

The general partner is usually an entity, such as a Corporation or a Limited Liability Company, owned by you and your spouse.  Usually, though not always, you will gift partnership interests to the children.  The general partners control the day-to-day operations of the FLP and make investment decisions.  Also, they can receive a management fee based on a percentage of the FLP’s income.

Limited partners, which would usually be you, your children and maybe even grandchildren, own an interest in the FLP.  They share part of the income from the FLP, calculated on the number of shares they own.  But they have almost no control.  When the heirs dissolve the FLP, the partner-ship’s property will pass to each limited partner based on their number of ownership shares.

Discounted Value:  By conveying into the FLP income-producing assets, such as rental property, the assets’ value can be discounted 25% or more.  This is due to factors such as the lack of market-ability of — or the minority interest in — the partnership shares.  Gifting small interests in FLP assets during your life is an effective way to use a person’s applicable federal transfer tax exclusion amount.

Limited Liability:  In an FLP, the general partners can be personally liable for the acts of the partnership, but the limited partners are not subjected to such liability.  Limited Partnership statutes are written to give the limited partners limited liability for partnership activities.  More important, if a limited partner is personally sued, the creditor cannot take his share of the partnership assets.  Rather, the creditor is limited to a Charging Order.  This remedy is of very limited benefit to the creditor.  Thus, creditors usually try to avoid Charging Orders.

Unified Credit:  FLPs often allow you to give your heirs more than the maximum unified credit.  This is because a gift of FLP assets may be appraised at a much lower figure.  This means, due to discounting, you may be able to gift substantially more to your children, who still qualify to receive the gift free from both income and estate taxes. 

Because of its many benefits, the Family Limited Partnership is one of the hottest tools in estate planning and asset protection.  Parents can protect their assets from liability for a child’s car accident.  They can shield their assets from lawsuits arising from renters and rental property.  They can safeguard their assets from disputes that result from their business.

In today’s lawsuit-happy world, NO business owner should be a sole proprietor because his assets are there for the taking.  Every business owner must have a high level of asset protection, not only for his children, but also for himself and his spouse.  And in the event the husband and wife ever divorce and remarry, the children’s assets are still protected.

I urge you to look at how a Family Limited Partnership will protect your assets — and help you transfer assets to your children and grandchildren, while paying the lowest amount in taxes.

Anthony J. Medico, Esq., has practiced law for over 15 years.  To ask a question for this column, or to receive Medico’s free Estate Planning Survival Guide, visit his website at www.ajmedico.com, send an e-mail to Anthony@ajmedico.com or call (203) 661-8151.  You can read most of his previous columns on his Greenwich Time estate planning blog on the internet.  Just go to http://www.greenwichtime.com/blogs and scroll down until you find him under the business section.  Enjoy.

The Law Offices of Anthony J. Medico

7 Benedict Place v Greenwich, Connecticut 06830

Telephone (203) 661-8151 v Facsimile (203) 625-9612

Anthony@ajmedico.com v www.ajmedico.com

All I want for Christmas is my Trust Fund Money!!

I wonder how many letters Santa gets with that request.  I would guess that most of those letters would be written by older children, and as humorous as it may sound, these requests are made more often than you think.  Not to Santa though, but to a Trustee.

Especially in hard economic times, people tend to seek income from every crack and crevice. So now may be the perfect time to discuss “Spendthrifts”.  What is a Spendthrift?  Well, the basic definition of a Spendthrift is one who spends money recklessly or wastefully.  Now, we have all experienced times in our lives when we may have made an ill advised purchase or feel as though we wasted money on something that seemed like a good idea at the time.  We are not, by definition, Spendthrifts.

A true Spendthrift is someone who has a history of such recklessness or wastefulness to a greater extent and perhaps on a much higher level.  Someone who most people would agree, has minimal control over their spending habits.

The classic Spendthrift is usually experiencing significant debt (credit cards, student loans, auto loans, home mortgages) and for the most part is behind in making payments on those obligations.

So how does this relate to the subject of Trusts and estate planning?  Well, the issue of Spendthrift is a serious consideration when creating Trusts where one of the beneficiaries is a Spendthrift.  The natural concern of the Grantor of the Trust is the preservation of the Trust principal and its protection from the spending habits and debts of the Spendthrift.  Hence, the creation of the Spendthrift Trust.

Spendthrift Trusts are usually established with the object of providing a financial benefit for the maintenance of the Spendthrift, while also protecting the assets of the Trust against the Spendthrift’s imprudence, extravagance, and inability to manage financial affairs.

A Spendthrift Trust is designed to shield the assets of the Trust from the obligations and creditors of the Spendthrift, while the assets are maintained in the Trust.  However, the assets cannot be protected once the funds have been distributed to the Spendthrift.  With this type of Trust, a creditor cannot compel the Trustee to make a payment to satisfy a debt of the Spendthrift.  A creditor, however, can seek payment from funds already received.  A creditor’s claims to future payments under the trust, however, are restrained.

One of the protections afforded with a Spendthrift Trust is the avoidance of “anticipation” ( a term used often in estate planning).  The Trust is designed to prohibit the Spendthrift from anticipating a distribution of assets from the Trust because it is designed with to give the Trustee full discretion regarding the distribution of the Trust assets, within the confines of the directives of the trust document.  Hence, the Spendthrift can’t attempt to satisfy a debt by offering or margining the anticipated distribution to ward off creditors.

Viewing this situation from a different angle, if the Spendthrift, were permitted to transfer his right to receive income from the trust, his poor habits may never be thwarted.  On the other hand, by restricting the Spendthrift so that he can do nothing with the income until it is actually distributed, he is more likely to remain protected and forced to deal with his obligations in a different manner.

I should conclude with the note that Spendthrift Trusts are most often created out of the love and concern of the Grantor for the Spendthrift, and with a desire to assist rather than punish for bad habits.  Spendthrift Trusts are used significantly for the preservation of assets and are solid estate planning tools.   

Anthony J. Medico, Esq., has practiced law for over 15 years.  To ask a question for this column, or to receive Medico’s free Estate Planning Survival Guide, visit his website at www.ajmedico.com, send an e-mail to Anthony@ajmedico.com or call (203) 661-8151.  You can read most of his previous columns on his Greenwich Time estate planning blog on the internet.  Just go to http://www.greenwichtime.com/blogs and scroll down until you find him under the business section.  Enjoy.

The Law Offices of Anthony J. Medico

7 Benedict Place v Greenwich, Connecticut 06830

Telephone (203) 661-8151 v Facsimile (203) 625-9612

Anthony@ajmedico.com v www.ajmedico.com

The Durable Power of Attorney and its effect on your financial matters.

A power of Attorney (POA) is a document that, when executed properly, creates a relationship similar to that of an agency, in which one person appoints another person to transact business or perform other financial matters on behalf of the other.  The person granting the power is known as the Principal and the person being given the power is called the Attorney-in-Fact.

As I have stated in many of my previous estate planning columns and seminars, a POA should be a part of every person’s estate plan.  The POA can prevent many problems associated with one’s disability or incapacity and can prevent the need for costly conservatorships or guardianships.  At one time, the POA would become ineffective the moment the Principal became disabled or incapacitated.  However, Connecticut, along with several other states, by statute, has created the “Durable” POA which permits the POA to survive the disability with full force and effect.

There are two types of POA’s; General and Limited.  The General POA allows the Attorney–In-Fact to perform virtually all functions including business and personal affairs.  The Limited POA can restrict either the specific transactions the Attorney-in-Fact can perform or the time period that the transactions can be performed, or both.

A good example of the limited POA would be the situation commonly found in real estate transactions.  In a typical real estate transaction a “closing” is scheduled where all of the banking and property transfer documents are signed and recorded.  If a husband and wife are both purchasing the house, they both need to sign the documents.  Often times, either the husband or wife are not available to attend the closing, usually for work related or travel related reasons.

In that situation, the real estate attorney, (with the pre-approval from the bank) will prepare a Limited POA allowing the attending spouse to sign the documents as the Attorney-in-Fact for the unavailable spouse.  Once the closing is completed, the POA becomes null and void as it was limited to the real estate transaction on that given day.

Of importance when considering a POA is when it will become effective.  There are generally two methods; effective upon execution or upon disability.  As you would think, effective upon execution means just that; once it’s signed, it’s valid and available for use.  This method should only be used when the principal is completely comfortable and confident with the proposed Attorney-in-fact.

The “Effective Upon Disability” or “Springing” Power becomes effective upon the disability of the Principal.  This method is not often used today because the standards require proof of the disability along with physician’s affidavits, etc., which can cause significant delays in the process. 

One of the most important questions to ask when preparing the POA is who should be your Attorney-In-Fact.  Obviously, it should be someone you trust with great confidence; perhaps a loved one or your attorney.  The POA should have more than one designated Attorney-In-Fact, acting either alternatively or in concurrently.

One final thought on POA’s; they are not the key to the kingdom for all financial matters.  Most third party financial institutions will most likely have their own internal requirements for access, for which a POA will often be challenged.  I highly suggest that if you are going to execute a POA, you check with each of your financial institutions as to their requirements for access to your finances.

Anthony J. Medico, Esq., has practiced law for over 15 years.  To ask a question for this column, or to receive Medico’s free Estate Planning Survival Guide, visit his website at www.ajmedico.com, send an e-mail to Anthony@ajmedico.com or call (203) 661-8151.  You can read most of his previous columns on his Greenwich Time estate planning blog on the internet.  Just go to http://www.greenwichtime.com/blogs and scroll down until you find him under the business section.  Enjoy.

The Law Offices of Anthony J. Medico

7 Benedict Place v Greenwich, Connecticut 06830

Telephone (203) 661-8151 v Facsimile (203) 625-9612

Anthony@ajmedico.com v www.ajmedico.com

Q: “Asset Protection”- Are they dirty words?

A:  Rarely in the world of Trusts & Estates do you hear the words “Asset Protection” from long standing & established estate planners and attorneys. Why is that?  For many years asset protection had been touted as a means to avoid responsibility; to dodge lien holders, creditors and tax liabilities. 

Asset Protection was often associated with off shore bank accounts where people (perhaps unscrupulous) were able to hide their money.  Asset Protection also included the creation of shell companies and partnerships so diluted it would frustrate creditors. 

The problem with the term Asset Protection is that its reputation has too often thwarted what would otherwise be considered good estate planning.  Even today, if you search the internet for “Asset Protection”, you will be flooded with a litany of websites offering asset protection methods that are not only borderline illegal, but completely ineffective. 

The good news is that there are many “asset protection” devices and methods which are effective and used in most estate plans.  These methods have been around for generations.  We just don’t call it “Asset Protection”.  However, they are very legal, very responsible ways to plan your estate through time tested methods accepted by State and Federal laws and taxing authorities. These methods can focus on protecting business assets or personal wealth for generations.

From an operational standpoint, incorporating your business or forming a Limited Liability Company are two of the best methods to protect your personal assets from being exposed to the liabilities of your business.  Anyone who owns their own business will tell you that you shouldn’t have your house exposed to liability from an unfortunate business downturn or a negligent act of an employee.  Both methods are very effective.  The formation of an LLC is cost efficient and very effective and should be a standard among small business owners or sole proprietors.  

Another issue which is of great concern for most of my clients is the preservation and protection of current assets for future family generations.  Most of my older clients are concerned about their ability to assist their children and grandchildren financially.  This usually involves two issues; 1) growing the assets for future wealth, and 2) protecting/preserving the assets for future generations. 

A further, but no less concerning, issue for those who desire wealth preservation is the spend thrift personalities of their younger family members.  Older generations are often concerned with members of the younger generation handling family assets in a “less than conservative” manner and exposing family wealth to creditors.

Quality estate planning provides for a litany of methods to address the personal wealth concerns of most clients.  Gifting laws and gift tax exemptions are, of course, methods which provide for the annual and lifetime distribution of assets to family members, thereby preserving wealth.  Irrevocable Trusts which provide for the transfer of assets to other family members will relieve the Grantor of ownership and control of assets thereby removing them from the reach of future unknown liabilities.  Family Limited Partnerships can create new ownership rights of family owned property thereby limiting exposure to certain assets. 

Revocable Spendthrift Trusts are a surefire way of preserving assets distributed to a minor, or “less Conservative” family member by keeping the assets unexposed to that person’s creditors.

The world of “Asset Protection” can be slippery slope.  Despite the availability of time tested methods of preventing exposure of your assets to the unexpected, there are people out there continuing to create new untested and often unorthodox methods to avoid creditors.  Beware of any new method that has not been tested and survived the IRS and State & Federal laws.  Always consult your estate planning attorney before starting any method intended to protect your estate.  As history has proven, if it seems too good to be true, run, don’t walk, from it.

Anthony J. Medico, Esq., has practiced law for over 15 years.  To ask a question for this column, or to receive Medico’s free Estate Planning Survival Guide, visit his website at www.ajmedico.com, send an e-mail to Anthony@ajmedico.com or call (203) 661-8151.  You can read most of his previous columns on his Greenwich Time estate planning blog on the internet.  Just go to http://www.greenwichtime.com/blogs and scroll down until you find him under the business section.  Enjoy.

The Law Offices of Anthony J. Medico

7 Benedict Place v Greenwich, Connecticut 06830

Telephone (203) 661-8151 v Facsimile (203) 625-9612

Anthony@ajmedico.com v www.ajmedico.com

Should you advise your family and financial institutions about your estate assets?

One of the biggest issues that estate planning lawyers are faced with is the fact that most people don’t want to think about estate planning, and they don’t want to inform anyone about their financial situation.  For many reasons, that’s understandable.

Estate planning is most often the last thing on your mind.  Let’s face it; no one wants to spend time thinking about death or incapacity.  Unfortunately, it’s a fact of life and not thinking about it, at least once a year, is worse.

Of most importance in any estate plan is an accurate analysis of your assets and liabilities and who you want to know about it. Despite what you might think, there are very good reasons for keeping others informed.

At a minimum, there with be two people (or institutions) who (that) will be in charge of your assets and liabilities at some point; an Executor (when you die) or a Conservator (when you become incapacitated).  In addition, if you appoint someone as your Attorney In Fact through a Power of Attorney, he or she will need this information as well.

Can you imagine how difficult that person’s job will become if they are not well informed of your estate matters?  The average person has, at a minimum, bank accounts, stocks, real estate & insurance policies.  Above that, they may have safety deposit boxes, equity accounts at several financial institutions, trusts, real property in other states, divorce Court orders, military concerns, etc.

Without these people knowing this information, they will spend months trying to uncover the contents of your estate, and these delays can be detrimental for loved ones who require continued financial support.  Now, obviously I’m not suggesting that you have to keep telling your family and friends about your financial situation but here are a few suggestions that are invaluable.

 1) Keep an accurate inventory of your holdings.  You can go to my website www.ajmedico.com and download a free estate planning questionnaire.  Use that document to identify all of you assets with the names, addresses, account numbers etc.  2)  Make a copy of it, and put one in a safe place like a safety deposit box and let just one or two friends or family members know where it is.  This way, when the information is needed, it can be readily available.  Keep the other at home for easier access.

Another issue, which most of my clients never think about is the internal security requirements of financial institutions.  Each financial institution has their own internal requirements for a non customer to gain access to a customer’s accounts and account information.  This is true despite any document you present which you might think gives you permission, such as a Power of Attorney.  Hence, a good estate plan includes contacting all of the financial institutions where you are a customer and filling out all of the necessary paperwork required by them to allow someone else access to your account in the event of death or PROVEN incapacity.

These two measures are so very important to quality estate planning. They take little effort and time, but will make it so much easier for your loved ones and appointed representatives at a time when your financial information will be very necessary, and readily available.

Anthony J. Medico, Esq., has practiced law for over 15 years.  To ask a question for this column, or to receive Medico’s free Estate Planning Survival Guide, visit his website at www.ajmedico.com, send an e-mail to Anthony@ajmedico.com or call (203) 661-8151.  You can read most of his previous columns on his Greenwich Time estate planning blog on the internet.  Just go to http://www.greenwichtime.com/blogs and scroll down until you find him under the business section.  Enjoy.

The Law Offices of Anthony J. Medico

7 Benedict Place v Greenwich, Connecticut 06830

Telephone (203) 661-8151 v Facsimile (203) 625-9612

Anthony@ajmedico.com v www.ajmedico.com

Trusts for minors, why do you need them and how do they work?

Other than gifts to minors due to health care concerns, most gifts are typically made due to a parent or grandparent’s desire to fund education or other specific purposes.   Many times such gifts are designed to protect against unwise spending or to protect assets from creditors.  Minimizing estate taxes and shifting wealth to future generations also play a big part in gifting to minors.

The overwhelming concern for most of my clients is the fact that the law recognizes the age of majority at 18.  For the typical parent in today’s day in age, that is considered far too young to receive substantial wealth.  Let’s face it, no parent wants to see their children receive substantial income, only to have it spent unwisely and exposed to creditors and lien holders.

Fortunately, there are a variety of techniques you can use to make sure this doesn’t happen.  First, is either an Inter Vivos (living) or testamentary (in a Will) Trust that is set up to receive funds and other assets.  The minor is designated as the beneficiary of the Trust and the Trust documents set forth the terms in which the minor will receive the assets. 

This type of Trust can limit disbursements to a minor in several ways including higher age specifications (I’ve done them as high as 40 years old!) and intermittent distributions for clearly outline purposes.  Another benefit of this type of Trust is that it can direct how the principal of the Trust must be invested and maintained which will allow for greater longevity of the assets as well as creating an income stream on the principal which is almost guaranteed to be non-existent with a direct distribution to a child at the age of 18.

Another comforting factor in creating this type of Trust is that the principal and income can be distributed at any time, at the discretion of the Trustee for health, education and wellbeing of the minor.

Another technique is the Connecticut Uniform Transfers to Minors Act (“UTMA”).  Basically, the UTMA allows for the annual gifting to a minor without losing control over the assets.  The custodian maintains legal title to the assets until the child reaches the age of 21.  Usually this type of transfer is utilized for smaller amounts and is maintained with far less stringent terms than a Trust, simply due to the fact that the child will receive the assets outright upon the age of 21.  Despite this, however, the UTMA is usually seen as a great tool and is appealing to many potential donors because both real property and other investments can be held in a UTMA account.

Gifting to minors is a consideration that shouldn’t be taken lightly.  As part of an overall estate plan, the ages of your children should always be considered as well as your intentions for the use of the assets you intend to give them. 

The techniques discussed in today’s column as well as the multitude of other options in this area of estate planning can provide you with the confidence that your children will be financially stable well into their adult lives.

As with all of the estate planning techniques and tools that I discuss in my columns I caution you to seek both legal and tax counseling before creating these plans.  The legal and taxation concerns are considerable and are often times only a part of your overall planning.

Anthony J. Medico, Esq., has practiced law for over 15 years.  To ask a question for this column, or to receive Medico’s free Estate Planning Survival Guide, visit his website at www.ajmedico.com, send an e-mail to Anthony@ajmedico.com or call (203) 661-8151.  You can read most of his previous columns on his Greenwich Time estate planning blog on the internet.  Just go to http://www.greenwichtime.com/blogs and scroll down until you find him under the business section.  Enjoy.

The Law Offices of Anthony J. Medico

7 Benedict Place v Greenwich, Connecticut 06830

Telephone (203) 661-8151 v Facsimile (203) 625-9612

Anthony@ajmedico.com v www.ajmedico.com