This month, I had a couple of interesting cases that came up and I thought I would share them with you.
The first case involves a surgeon who owes the IRS a small fortune. We’ve been working with him on his IRS issues and he shared with us a couple of concerns. The first concern was that his mother, who is in her 90’s was in pretty bad condition and she was going to leave him some assets. The second concern, my client had an idea for a startup, but was worried that the IRS would squelch it before it had a chance to get off the ground.
Both were valid, but at the same time could be solved in a very simple manner. First, we needed to have mom create a trust, while she was both competent and alive. She would need to move his inheritance into the trust right now. With the assets she moved into the trust, the trust could fund and then start the new business. Since the trust was structured correctly, the assets and the new business wouldn’t be considered owned by the doctor. As a result, he could have his cake and eat it too.
Compare this with what would happen if he did nothing. When his mother passed away and he inherited the assets, mom would effectively be naming the IRS as her heir and they would take everything away. Additionally as he built up the new business, the build up in value would be considered “his” with the IRS having the right to take away the business if in fact the business turned out profitable.
We were pretty proud of ourselves and thought we had a valid plan, except for one fly in the ointment, the doctor’s real estate attorney. It seems the real estate attorney told the doctor that our plan was a felony, as we were hiding assets from the IRS.
The second case was pretty much the same story. It involved a real estate developer . . . well, I probably don’t need to say anything more. Bottom line, he had a 15-million dollar development go south and he had signed on the note.
Being an entrepreneur, the developer was already hatching plans for a bigger, better development, but he wanted to make sure that the profits from the new project weren’t going to be taken away by the bank.
The developer went to the same real estate attorney as the doctor and received some fantastic advice: do the next project inside an LLC.
Now let’s pause for a moment here. In the case of the surgeon, we asked him if he typically went to a podiatrist when his heart acted up. (We really wanted to suggest he go to a proctologist if he needed brain surgery.) While we appreciated the input from the real estate attorney, what he didn’t realize was that we were not doing any planning with the doctor’s assets at all.
Instead, it was his mother who was hiring us to draft a trust for her assets, with the doctor being a beneficiary of the trust. Any movement of assets was going to be the movement of her assets, not his. Additionally, the new business opportunity was nothing more than a dream of the doctor’s. The last time I checked, the IRS can’t take your dreams away from you. Let me rephrase that, the IRS can’t slap a lien on your dreams.
As for the developer, if he did the next deal in an LLC owned by him personally, he was just building up his wealth so that the prior bank could take it away. Contrary to what the Internet experts say, LLCs in California offer about as much protection as a 1930’s football helmet. Since this deal, was only a dream, a much better strategy would be to imitate the doctor. That is to say, if the developer’s parents were going to leave him anything, he should approach the parents about establishing a trust, putting some seed capital into it, and if he is the beneficiary of the trust, it is even better. This way there is no movement of the developer’s assets so no fraudulent conveyance. The developer can still work on the project, and if the new project pays off, it pays off inside the trust, which is protected.
Now if he wants to buy a shiny red Ferrari, all he does is ask the trustee for a loan. In the end, he gets the cash to buy the car with the trust retaining a lien on the car to protect its interest.
Summing things up, we have all heard the dire warnings from so-called "experts" that you cannot engage in any asset protection if you are currently facing challenges. To a certain extent that is true, the assets you have built up in the past are toxic waste. However that doesn’t mean that you can’t take proactive steps today, to protect the future you want to build for tomorrow.
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At last! Somenoe who understands! Thanks for posting!