CASE STUDY: DAVID A TANZER
Over thirty years in law and business, David Tanzer concentrates in international planning for clients located around the world. Tanzer provides guidance to individuals and businesses, assisting them in mitigating personal and business risks, allowing for opportunities for wealth preservation, asset protection, financial growth and pre-migration planning. A former Judge, retired commercial litigation attorney, and an Adjunct Professor of International Law in the U.S. and Australia, Tanzer places emphasis on advance planning steps before a problem materializes.
David Tanzer is a member of the Offshore Institute, a multidisciplinary international professional organization of individuals engaged in offshore and international planning. David is on the Wealth Advisory Panel of the Oxford Club, a private, international organization of investors and entrepreneurs.
Appointed to the bench of the Circuit Court of Cook County, Illinois as Chairman Judicial Arbitration Panel, David has tried complex civil cases, developing special expertise in business and transactional law, commercial litigation, asset protection and wealth preservation. After entering private law practice he became a named partner in the law firm of Bjork, Tanzer & Associates, Ltd., in Chicago, Illinois, and then establishing the law firm David A. Tanzer & Associates, P.C., in Vail, Colorado.
Tanzer has also been a member of the Colorado Bar Association Judiciary Executive Counsel, the American Bar Association, Chicago Bar Association, Northwest Bar Association, Association of Trial Lawyers of America, and the Continental Divide Bar Association. He is also an Associate Member of the Auckland District Law Society, New Zealand - Foreign Lawyer, and an Associate Member of the Queensland Law Society, Australia - Foreign Lawyer.
The author of the books How to Legally Protect Your Assets and Offshore Living & Investing, and numerous articles on international business and asset protection planning, David Tanzer is a sought after speaker on topics of international asset protection planning and wealth preservation.
David A Tanzer, David A. Tanzer & Associates, P.C.
2121 N. Frontage Rd. W. # 209
Vail, CO 81657
Tel. 970-476-6100 • Fax. 720-293-2272
Datlegal@aol.com or Dat@DavidTanzer.com
www.DavidTanzer.com
In what way are you involved with asset protection, and does this include general estate planning and tax issues?
100 percent of my professional time is involved in asset protection. I started working with international planning techniques around 1990. At that time you could count those of us doing work in this area on one hand and have several fingers left over. Asset protection should always integrate estate planning into the overall structure.
Only two decades ago, asset protection planning was often done in isolation and without regard to the overall life and death cycle of clients. Originally, the focus was on protecting the assets of high risk individuals. However, planning has evolved and now includes both the life side and the aging and death side of protecting and preserving assets. Integrating all segments into one overall plan makes good sense. Planning for only one or the other is missing the big picture.
Next, understand that your estate plan should address the concerns of potentially huge estate taxes which may be assessed upon the transfer of your assets when you die. The good news is that you can substantially reduce your estate taxes if allowable credits and proper estate planning techniques are used effectively. However, it is essential for your estate planners and advisers to work closely together to legally reduce your taxable estate.
In the U.S., there are both federal and state guidelines that must be closely followed. And prepare your estate plan with a current financial statement of all assets and their values, relying upon qualified individuals to assist you in establishing and realizing your goals.
Remember that good estate planning consists of both proper documentation and implementation. One without the other is not enough. A good estate plan includes the retitling of assets, transferring ownership of assets, renaming beneficiaries of life insurance and retirement benefits, and many, many other details that must be taken into account.
The list of techniques for estate tax savings tools is a long one. Too often, I have seen a high asset client walk into my office without even the basic, organized estate plan to really assist with asset preservation, even though a Will and a trust might exist. Often, a long time attorney-friend helped put together their estate plan and they assumed their house was in order in the event of untimely death. Is death ever timely?
Do you specialize in any particular aspects of asset protection, such as foreign trusts or LLCs?
Yes—in business and personal asset protection planning, some people wish to protect assets domestically, while maintaining income tax and economic neutrality. One way of doing this is through the combination of a tax neutral domestic “asset protection trust” and one or more LLC.
By way of example, let’s first place your business in one LLC called the “Business LLC” and your after tax cash, stocks and mutual fund assets (the cash) into another LLC which we’ll call your “Nest Egg” LLC. You are the manager of both and make all investment and business decisions.
Importantly, different LLC jurisdictions and statutory provisions result in very different LLC protection. Some are very marginal indeed, and others offering Charging Order protection as a sole remedy are superior. The content of the LLC Operating Agreement and the ancillary documentation also greatly affect the results.
Next, instead of you owning the LLC membership interests, let’s place them into an asset protection trust. Best of all, an International Trust there is an important distinction between domestic and offshore trusts, and offshore trusts offer superior asset protection. But for now, you place the LLC interests into a trust. Instead of you owning the membership interests, the trust owns them.
Depending on the type of trust, revocable or irrevocable, where it is registered, and many other factors, the level of protection afforded to the LLC membership interests may become substantially enhanced. What’s more, the trust may maintain Charging Order protection with the proper establishment of the LLC. There are many types of LLCs and trusts, and many will offer no or limited protection. By creating a trust that avails itself to asset protective provisions and integrating it with a properly established LLC, you can enhance asset protection significantly.
Before you run out and set up your own LLC, remember that all LLCs are not created equally. Different jurisdictions offer very different protection. The Operating Agreement and other formalities must be set up in a manner to provide the best opportunity to achieve protection. And too, you must use great caution before transferring personal assets into an LLC to avoid negative tax consequences.
For now, this is the basic concept.
There are numerous ways to hold and own LLC membership interests. One excellent option would be to place 99 percent LLC interests in an International Trust. The result is you only personally own 1 percent interest, equal to only 1% of the total value of the assets in the LLC. Accordingly, your personal risk exposure is now limited to 1% of the value of these assets.
Segregating asset risk classes and limiting values within different entities are basic goals. For example, placing lower risk assets like cash, stocks and bonds into a “Nest Egg” LLC would be separate from a Business LLC which generates higher risk.
If you transfer your principal residence into an LLC, it should be a single member LLC. This means it is 100 percent trust owned. The LLC then elects to be treated as a disregarded entity for tax purposes. This presents opportunities to maintain the $500,000 husband-wife capital gains exemption upon the sale of the home, which has been a matter of dispute in the legal and tax communities for some time. However, the IRS provided guidance on the classification of qualified entities of a home owned by a husband and wife in Rev. Proc. 2002-69. With the trust also being treated as a disregarded entity for U.S. domestic tax purposes, it logically follows that this is the preferred method to hold title to your principal residence.
Thus far we have discussed three new entities, two LLCs, one owned 99 percent by the trust and 1 percent by you, the other 100 percent owned by the trust, and the International Trust. You have also retitled, or conveyed, your assets into the LLCs. The assets are the same assets as before, located at the same local bank. You have not relocated or transferred your assets to distant parts of the world. You control the assets in the LLC as the manager. And as the Protector of the trust, you exercise control over the trust and trustees.
And there is much more we can do in expanding the above basic concept.
Do you find that a single entity or strategy is sufficient for most people, or do you commonly recommend a multi-layered structure?
Asset protection is always customized to the needs of individuals. Structuring, per se, is not a hallmark of quality asset protection, only an example of planning for some individuals. . . . nothing more. Sometimes a single entity may be sufficient, but for more active businesses and professional clients, a multilayered strategy is generally superior.
Have you found that you have needed to change your methods in recent years, because of FTC v. Affordable Media, or to include Nevis LLCs?
The Anderson case (as it is known) is a good example of bad planning. We have never created plans of the type and style of Anderson, so we have never needed to change our planning as a result of Anderson.
In a highly controversial case originating in Nevada during the late 1990s, a couple dealt with the very issue of maintaining too much control over an offshore trust after a judgment was taken against them. The case was highly publicized and became known as the “Anderson” case (F.T.C. v. Affordable Media, LLC, et al, 179 F.3d 1228 (9th Cir. 1999), 1999 U.S. App. Lexis 13130). This case, even though arguably rife with bad facts throughout, sets forth an important lesson in how not to set up a trust and respond to court orders.
The Andersons were involved in a very successful and profitable Ponzi Scheme, where the payment of profits to early investors was only available based upon money paid into the scam by later investors. Their actions were held to be illegal by the judge, based upon fraud. Millions of dollars poured in, which the U.S. government claimed was hidden with the assistance of a trust registered in the Cook Islands. The Federal Trade Commission (FTC) acted to shut them down and have monies returned to the U.S. Then a suit was filed in Nevada, and the local judge ordered the Andersons to return all monies to Nevada.
The Andersons acted as both the domestic trustee and the Protector of the trust so they could continue to retain full power and control over it. This is certainly not a practice I would ever recommend, for reasons you will soon see. And only after the judge ordered them to repatriate the money back into the U.S., did the Andersons resign as the domestic trustees of the trust.
Furthermore, they also continued, at least initially, to act as Protectors. The Andersons sent instructions to the foreign trustee in the Cook Islands to return the money, pursuant to the judge’s order. The foreign trustee, acting according to the anti-duress terms of the trust, properly refused to repatriate monies.
The Andersons then argued to the judge that they followed the court order but the foreign trustee failed to return any assets. Their defense was based upon the Doctrine of Impossibility, since the trustee refused to repatriate the funds (due to an anti-duress clause) and it was therefore impossible to comply with the order of the court. The court noted that the Andersons were originally the domestic trustees when the order was issued, and they retained the power as Protectors to determine what events were duress. The judge then ordered the Andersons to jail until they complied with the order of court. In other words, the return of the money was not impossible but for the events the Andersons themselves created. The Andersons only resigned as Protectors after they sat in jail for refusing to comply with the judge’s order.
In the meantime, the FTC filed suit in the Cook Islands for the return of the money, based upon the U.S. judgment against the Andersons. The foreign trustee of the trust in the Cook Islands defended the suit pursuant to the terms of the trust. The court in the Cook Islands not only denied the claim of the FTC pursuant to the terms of the trust and the Cook Island laws, but the judge charged the FTC with paying the Anderson’s court costs and expenses, including attorney’s fees, in defending the suit that it considered improper. A favorable result in the Cook Islands for the Andersons, indeed.
The Andersons, in the meantime, were released from jail because they could not possibly comply with the order of the court, as they were no longer the domestic trustees or the Protectors. All said and done, the money remained intact in the trust established by the Andersons, and the Andersons are freely out and about.
The assets remained intact in the Anderson’s trust in the Cook Islands. No funds have ever been repatriated by order of court. However, it is understood that the Andersons did eventually settle the case with the FTC for a fraction of the claim.
Briefly describe a “success” story, that is, an asset protection plan that was threatened in some way and withstood the attack, and why. Please change names as you think fit.
Mr. Martin owned a successful lounge and restaurant business at the bottom of the ski slopes in Aspen, CO, known for outstanding après ski called The Spot. Après ski is defined as a gathering time following a great day on the ski mountain where you can indulge in food and drink and meet some of those interesting bodies you saw skiing past you during the day.
The Martins, a young couple with two small children, were worth several million dollars. His wife, Dr. Martin, was a physician in the community, working part-time at two medical offices as an independent subcontractor. They had good prospects of increasing their wealth in the future due to appreciation of assets and conservative management objectives. Mr. Martin started The Spot about a decade ago, and it literally turned into a cash cow. Dr. Martin made a comfortable salary. Instead of living lavishly and consuming wildly, they invested their income wisely, owning eight different commercial and residential investment properties, and a comfortable nest egg.
Mr. Martin’s greatest concern was the ongoing liability from the bar and commercial rental properties. Dr. Martin’s professional liability risks were her concern. The business was set up in a corporation, which was not up to date with compliance and formalities. They had no asset protection strategy and they were justifiably concerned that one mishap could wipe out their assets.
The Spot was estimated to be worth approximately $1 million and in an S-Corp without any business debt. The couple jointly owned their home, valued at $900,000 with a $400,000 mortgage and $500,000 in equity. The real estate investments had equity ranging in value between $30,000 and $500,000; two were residential, and the others were commercial properties. They held $30,000 in cash, $150,000 in stocks, $100,000 in bonds, and $200,000 in deferred income (IRAs and pension plans). They owned personal property worth approximately $125,000.
After discussing tax issues related to The Spot and the investment properties, and a review of personal goals for Mr. & Dr. Martin and the family, an International Trust structure was created. There were numerous viable options for protecting the Martin’s assets.
First, a Nest Egg LLC was established. The cash, C-Corp stock, and bonds, and personal property were placed into this LLC. The deferred income accounts were left in their own names, since transferring these assets into the structure would create negative tax consequences. The transfer would trigger taxes on the IRAs and pension plan monies, and early withdrawal penalties would occur. The Martins were aware that once they reached retirement age and withdrew from the deferred income accounts, these monies could then be placed into the Nest Egg LLC. The total to the Nest Egg LLC was $280,000.
All of the cash personally owned in the money market funds and in the stock and bond accounts were transferred into the name of the Nest Egg LLC. New account numbers were assigned, but they continued to hold the cash, stocks and bonds at the same place they were held prior to the transfer. The Nest Egg LLC was the new owner of these assets, and the accounts were held in the name of the LLC.
The Martins were the managers of the Nest Egg LLC, retaining control over all assets transferred into it. They owned 1 percent interest in the LLC, and 99% interest was to be transferred into and owned by a trust. When the Martins needed to deposit or withdraw funds from these accounts in the future, they would do so exactly as they had in the past, except acting as the manager of the LLC. Distribution agreements were also created so the Martins had the option of withdrawing up to $150,000 per year from the LLC without further formalities.
The home was transferred into the Home LLC, which was owned 100 percent by the trust—a single member LLC. They had built up considerable value in the home during the past decade and desired to maintain the husband and wife $500,000 capital gains tax exception.
Placing the home into its own LLC isolated it from all other assets, should a dispute arise from an event not related to the home. Both of the Martins were managers of the Home LLC.
After a review of the investment real estate assets, we isolated them by risk and equity values. The two residential apartments, one with $30,000 in equity and another with $75,000 in equity, were both transferred into Res LLC. The Martins were willing to accept the risk that might arise from the lower equity property exposing the larger equity property, but they sought to minimize LLC structures and cost.
The commercial investment real estate was next. Commercial property with $100,000 in equity was transferred into Com No. 1 LLC, the commercial property with $150,000 into Com No. 2 LLC. The Martins considered transferring both properties into one LLC for purposes of minimizing the number of LLCs and costs, but decided against it because they understood commercial property was a higher-risk asset than residential property. Each of the remaining four commercial properties with equity values between $200,000 and $500,000 were transferred into Com No. 3 LLC, Com No. 4 LLC, Com #5 LLC and Com No. 6 LLC.
For tax purposes, income and expenses for each investment real estate LLC would be calculated and passed through on IRS Tax Form 1120s to the trust. Then, it was again passed through the trust on an informational tax return on Tax Form 1041 and on to the Martins on their personal tax returns. They would continue to maintain all tax benefits of owning the investment property.
The Spot nightclub was handled differently. It was already in an S-Corp. owned by Mr. Martin, certain tax benefits had occurred in the past and a number of tax issues had to be considered. After corporate formality issues were addressed, it was decided with good tax advisors to keep The Spot in an S-Corp. and all liability arising from the restaurant and lounge would remain within the S-Corp, as long as the formalities were properly satisfied.
Ownership of the stocks would be transferred into the trust, which is permissible since it is a U.S. Domestic Grantor Trust for tax purposes allowing for ownership of S-Corp stock.
The Prof LLC was created for Dr. Martin’s professional medical practice. To date she carried high professional liability coverage with expensive premiums. Even though she was only working part-time, she understood very well that she was at huge risk if an uncovered claim arose or liability occurred in excess of coverage—or worse yet, the insurance carrier went bankrupt. This separate LLC allowed better management of income and expenses for tax purposes. The result was ultimately lower taxes.
Arizona was selected as the choice for LLCs for U.S. based assets due to the Charging Order protection, and a Nevis or Cook Island’s LLC for a future vacation home and investments.
Finally, an International Trust was created and registered in the Cook Islands. The Martins were both the Settlors and Protectors of the trust. If they died before the children reached 25 years of age, a successor Protector was named. Thereafter, when each child reached 25, they became Protectors of the trust. The trust would have the benefit of Charging Order protection by owning the LLCs as an added obstacle to persistent creditors.
What is the extent of the Martin’s risk now? It is limited to less than 1 percent of the overall value of the assets. An impressive reduction in personal asset risk if they are personally sued.
The net value of the overall assets is approximately $4 million, plus $1 million term insurance for Mr. Martin and $500,000 term insurance for Dr. Martin. The Martin’s 1 percent personal exposure to assets in the trust is less than $35,000 (remember, the home is 100 percent owned by the trust).
The estate tax savings for the Martins were substantial. Depending on asset valuations and gift giving to a Child’s Trust, the present day estate tax savings was estimated somewhere between $1,000,000 and $2,000,000.
This was a substantial source of family wealth preservation for this estate, when viewed from the perspective that the Martins desired to pass their wealth to their children when they passed away, instead of putting it into government coffers. The cost for creating this tax savings is almost insignificant, comparatively speaking.
Liability insurance was still maintained on the nightclub, commercial real estate and the residential properties. And Dr. Martin still maintained professional liability coverage. However, with multiple levels of asset protection in place they were comfortable in reducing the limits of insurance coverage resulting in a substantial savings in annual insurance premiums. This alone was a significant cash flow benefit.
More details on the above and many other asset protection planning techniques are discussed in David Tanzer’s book How to Legally Protect Your Assets, found at www.DavidTanzer.com
Briefly describe an unsuccessful story where assets were seized—this may well be the story of someone who came to you for advice after the lawsuit. Please change names as you think fit.
None of the clients that we have created International Trusts designed with integrated asset protection, whom have maintained the planning structure consistent with the provisions as established, have ever had any of their assets seized, or lost any of their assets.
