1. Asset Protection Planning For Various Tax Advantaged and Specialized Accounts and Assets March 6, 2013 Ed Morrow, J.D., LL.M., CFP®, RFC ® OSBA Board Certified Specialist, Estate Planning, Probate and Trust Law Wealth Specialist edwin_p_morrow@keybank.com

2. 2 Agenda I. What is Asset Protection Planning II.Limits of Malpractice, Umbrella Ins. III.State/Federal/Bankruptcy Protections IV.New Ohio Law re LLCs, DAPTs V.Downstream/Upstream Planning and Beneficiary Controlled Trusts VI.LLCs and Irrevocable Trusts VII.Avoid Simple Gifting to Spouse/Children

3. 3 I. What is Asset Protection Planning? Not Preventing Lawsuits/ Hiding Assets, but Preservation and Protection of Wealth It uses several legal strategies of risk management and ownership structure Integral to good estate and business planning

4. 4 II. Limits of Insurance in Asset Protection First line of defense - good malpractice insurance and an umbrella insurance policy Malpractice insurers can go out of business Loopholes not covered by insurance – e.g., failure of insured to timely inform, intentional torts, gross negligence, sexual harassment, mold/asbestos/sewer for rental properties, etc Claims may exceed coverage

5. 5 III. What Assets are NOT Protected? Any IRA or ERISA plan that engages in “prohibited transactions” (e.g. your IRA or plan purchases your practice building, home or business, you pledge IRA for loan…) (this may now include many brokerage firms’ IRAs – see the Schwab and Merrill Lynch class action and bankruptcy cases, but see new Ohio law protecting “substantial compliance”) Bank/Brokerage Accounts, Revocable Trusts, cars, artwork, C/S corporation stock, etc

6. 6 III. What Assets are Protected? Retirement Accounts Annuities****(probably NOT) Insurance (probably – strong precedent) Education IRAs, 529 plans Homestead increase, Misc. accounts

7. 7 IV. New Ohio Law on LLCs and DAPTs New LLC law toughens charging order protection to “sole remedy” HB 479 (passed December 2012, effective March 27, 2013) – fixes inherited IRA protection, LPOAs, increases Homestead to $100,000 Also - “Ohio Legacy Trusts” – DAPTs!

8. 8 IV. New Ohio Law on LLCs and DAPTs Importance of new 5805.06(B)(3) to ILITs, SLATs and Intervivos QTIPs Settlor can grant spouse, kids, lover, whomever the limited power to appoint to settlor without jeopardizing estate/asset protection (if no quid pro quo, etc). Settlor can be reimbursed for taxes due as a result of grantor trust status w/o jeopardizing asset protection

9. 9 IV. New Ohio Legacy Trust 5716.01 et seq – Ohio Legacy Trust Act “Qualified Trustee” could be Ohio bank or Ohio resident – could be co-trustee – can’t be ordinary LLC/Corp, or settlor, or non-resident Can be valid against future spouse (de facto prenup without the pain/expense)

10. 10 IV. New Ohio Legacy Trust Settlor can retain veto power Settlor can fire/replace trustee Settlor can retain LPOA Can be CRT, GRAT, QPRT Settlor can retain 5/5 power

11. 11 IV. New Ohio Legacy Trust Qualified Affidavit recommended as to debts/creditors and asset levels can protect against UFTA type claims. If so used, Ohio has the shortest statute of limitations for such claims of all the DAPT states (NV, DE, SD etc)

12. 12 Domestic Asset Protection Trusts (DAPT) –Summary (Delaware, Alaska, etc – this month, Ohio!) A Domestic Asset Protection Trust (DAPT) is a trust created by a person (“transferor”) for the person’s own benefit. A DAPT shields the trust’s assets from creditors of the beneficiaries (including the transferor) while permitting the transferor to retain a beneficiary. –Features and Benefits If properly structured, should protect assets from creditors Transferor retains the ability to get distributions from the trust Transferor may retain investment control by appointing himself or another as Investment Advisor (Key often acts as “directed trustee” with someone else directing investments)

13. 13 Domestic Asset Protection Trusts WHO CAN BENEFIT Business Owners Professionals/ Lawsuit awards/ Professional athletes Directors/ CEOs Individuals Planning Marriage Tax-Exempt Organizations Business Entities Estate Planning Vehicles: CRTs, GRATs, GRUTs QPRTs

14. 14 V. What is Upstream Planning? Would you rather inherit funds that are subject to creditors, lawsuits and attachment and are in your taxable estate for gift, estate and GST tax? OR, Would you rather inherit funds that are exempt from creditors, lawsuits and not in your estate for 40% federal gift, estate and GST taxes?

15. 15 V. What is Downstream Planning? Would you rather your children inherit assets that are subject to creditors & lawsuits and susceptible to division in a divorce and are in their taxable estate? OR, Would you rather your children inherit assets that are exempt from creditors & lawsuits, can’t become commingled or “transmuted” into marital property and are not in their taxable estates for potential 40% tax?

16. 16 V. Beneficiary-Controlled Trusts Sophisticated attorneys are drafting much more flexible trusts than previously Where maximum access to the beneficiary is achieved, some have taken to call such trusts “Beneficiary- Controlled Trusts” Not appropriate for spendthrifts, young or problem children, but trusts can increase access/liberality as children age

17. 17 V. Beneficiary-Controlled Trusts Flexible Provisions may include: –Right to Fire/Replace Trustee –Right to Replace Investment Advisor (if different from trustee) –Limited Power of Amendment in Trust Protector or Committee –Limited Power to Appoint at Death (“rewrite”) –Limited Lifetime Power to Appoint to Others

18. 18 V. Beneficiary-Controlled Trusts For Maximum Protection: –Beneficiary may be co-trustee –Beneficiary may be investment advisor –If Beneficiary is sole trustee, protection may be lost (siblings as cross co-trustees as well) –Independent corporate trustee is optimal –SPOUSE can be beneficiary and be given right to appoint to trust for owner at death

19. 19 VI. Use of Entities Assets held in limited liability partnerships or limited liability companies (LP, LLCs) are not subject to garnishment/seizure, but subject to charging order remedies first (unlike corps) Such protection offers much better chance at compromising with creditors However, benefits are often “oversold” May provide estate tax savings as well Avoid use for “personal” assets! Avoid single-member LLCs

20. 20 Recent, Current and Future Estate/GST/Gift Tax 20092010 2011-20122013 Now by ElectionNow Default Top Estate/GST Tax Rate 45%N/A, 0%35% 40% Top Gift Tax Rate 45%35% 40% Estate Tax Exclusion $3.5MillionN/A$5Million $5Million*+ DSUEA GST Tax Exclusion $3.5Million$5Million $5Million* Lifetime Gift Tax Exclusion $1Million $5Million*+ DSUEA *Indexed for inflation after 2011 ($5.25 million 2013) DSUEA = Deceased Spousal Unused Exclusion Amount (aka "Portability")

21. 21 VII. Use of Irrevocable Trusts You can gift to a trust for spouse and/or kids and have this be completely protected. This may use the $5.25 million gift exemption, be an incomplete gift or use the marital deduction You can receive funds back in trust if spouse dies (by what is called a power of appointment). You can write trust to remove spouse as beneficiary in event of divorce and define “spouse” as whomever you are married to You might even remain a discretionary beneficiary and be afforded protection, if a different state’s law and trustee is used (DE, UT, AK, now, Ohio)

22. 22 VIII. Avoid Simple Gifting to Spouse The most common asset protection technique is to put assets in the non- professional spouse’s name, but this: Places assets at risk to spouse’s creditors May be susceptible to constructive/de facto trust, nominee trust arguments May be considered spouse’s separate property (not marital) if later divorce Fails to use any estate planning leverage

23. 23 VIII. Avoid Simple Gifting to Children UTMA accounts may be in your estate if you remain custodian Kids get full control at age 21 of UTMA Provides no protection from son/daughter in-law in divorce Provides no creditor protection Consider gift of LLC/LP share Consider gift via Irrevocable Trust

24. 24 Conclusion Coordinate Financial/Estate and Asset Protection Planning among advisors for best effect – titling is crucial Sooner always better than later Beware “too good to be true” schemes, $5000 “planning in a box” Beware transfers after potential liability Annual Check Up as part of Financial Plan; Pay for Legal Opinions!

25. 25 Bank and trust products from KeyBank National Association, Member FDIC and Equal Housing Lender. Credit products are subject to credit approval. Insurance from KeyCorp Insurance Agency USA Inc. (KeyCorp Insurance Agency Inc., in CA, MA and NY) and other affiliated agencies. Investment and insurance products are: NOT FDIC INSURED NOT BANK GUARANTEED MAY LOSE VALUE NOT A DEPOSIT NOT INSURED BY ANY FEDERAL OR STATE GOVERNMENT AGENCY Key Private Bank does not give tax or legal advice. The comments regarding the law and tax treatment in this material simply reflect our understanding of current interpretations of such laws. Since laws are always subject to interpretation and possible changes, we recommend that you seek the counsel of an attorney, accountant or other qualified tax advisor regarding these matters as they apply to your particular situation.