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January 18, 2008 Webinar January 18, 2008 Webinar "A Case Study in Asset Protection" What do I really need to Know? Jim Park, LL. M, Attorney at Law "A Case Study in Self-Directing my Retirement Plan" What are the Possibilities? Mat Sorensen, Attorney at Law www. kkolawyers. com Cedar City ~ Las Vegas ~ Beverly Hills ~ Salt Lake City Telephone 435. 586. 9366 / Facsimile 435. 586. 9491 © Kyler Kohler & Ostermiller, LLP 2008

Instructor Notes Disclaimer- Although the information contained in this Presentation may be extremely useful Instructor Notes Disclaimer- Although the information contained in this Presentation may be extremely useful and helpful, please understand that the presentation of this information does not constitute an attorney-client relationship. Moreover, the information contained in this Presentation is for general guidance only. It is strongly recommended that each individual or entity obtain their own legal advice, particularly applied to their own set of circumstances, facts and specific situation. Kyler Kohler & Ostermiller, LLP is not responsible or liable for any advice that is taken and applied in a situation without direct consultation and representation specific to that individual’s or company’s needs. © Kyler Kohler & Ostermiller, LLP 2008

"A Case Study in Asset Protection" What do I really need to Know? S. James Park, LL. M. Attorney at Law

ASSET PROTECTION The Goal of Asset Protection: To implement a comprehensive design of procedures ASSET PROTECTION The Goal of Asset Protection: To implement a comprehensive design of procedures and structures to minimize the occurrence of a law suite and to minimize the losses if a cause of action ultimately arises.

ASSET PROTECTION Key Points: There is No “Silver Bullet”! 1. 2. 3. 4. One ASSET PROTECTION Key Points: There is No “Silver Bullet”! 1. 2. 3. 4. One Size DOESN’T Fit All. Protection Varies from State to State. Creditors Can Come from Various Areas. Comprehensive Planning May Require Multiple Strategies.

Case Example • The happily married couple of Bill (69) and Beatrice (47) Bailey Case Example • The happily married couple of Bill (69) and Beatrice (47) Bailey have the following assets: • Personal Residence NV (Cost: $250 k - FMV: $500 k) • 1 Rental in CA (Cost: $100 k – FMV: $800 k) • 1 Rental in WY (Cost: $250 k – FMV: $260 k) • 1 Rental in ID (Cost: $200 k – FMV: $220 k) • Business for consulting and marketing • 401 k with Bill’s employer

Step One – Identify Potential Creditors INSIDE CREDITORS Creditors that arise from business related Step One – Identify Potential Creditors INSIDE CREDITORS Creditors that arise from business related dealings. 1. 2. 3. OUTSIDE CREDITORS Creditors arise from an INDIVIDUAL LEVEL. (i. e. sued in own name) Tenants Business Clients/Customers/Patrons Visitors 1. 2. Financial Creditors (Lenders, Credit Cards, etc. ) Personal Creditors – Tort/Criminal Liability Law Suit Claim or Creditor Business

Case Example - Application Personal Residence? NEVADA 1. Probably want in a Revocable Living Case Example - Application Personal Residence? NEVADA 1. Probably want in a Revocable Living Trust. (Provides probate avoidance and tax savings!) 2. File a Homestead Exemption (Exempts $350, 000 in equity from creditor claims) 3. Do not generally recommend placing in LLC or LP, etc. (Single Member? IRC 121 and Homestead) 4. Possibly take out a Home Equity Line Of Credit (“HELOC”) 5. Adequate Insurance

Case Example - Application Rental Properties? MULTIPLE STATES Our general recommendation is investments in Case Example - Application Rental Properties? MULTIPLE STATES Our general recommendation is investments in real property (income properties [residential/commercial] or raw land) should be held in an entity established for asset protection, usually a Limited Liability Company (“LLC”) or a Limited Partnership “LP”). Considerations: These are designed to give you protection from INSIDE CREDITORS using what is called the “corporate veil. ” (i. e. to protect the owner personally from causes of action arising from within the business). In some states, these also provide some level of asset protection from OUTSIDE CREDITORS as well. Is just one enough? It depends! We look at quality, not quantity.

Case Example - Application Rental Properties? MULTIPLE STATES CA Property • Good Equity ($700 Case Example - Application Rental Properties? MULTIPLE STATES CA Property • Good Equity ($700 k) • Need CA LLC = Keep separate from others. Keep all of your eggs out of one basket! • Insurance – Umbrella WY and ID Properties • Moderate Equity ($30 k combined) = Suggest single LLC and register in separate states. No need to create new LLC in both states. • Need WY LLC (Get Charging Order Protection for LLC in WY) and register the WY LLC in ID. • Insurance – Umbrella

Case Example - Application Operating Business? Establish S-Corporation 1. 2. These are designed to Case Example - Application Operating Business? Establish S-Corporation 1. 2. These are designed to give you protection from INSIDE CREDITORS using what is called the “corporate veil. ” (i. e. to protect the owner personally from causes of action arising from within the business). Same protection as LLC from INSIDE CREDITORS. Adequate Business Insurance. Possible Umbrella. 401 k? Qualified Plan under the Employee Retirement Income Security Act (“ERISA”) of 1974. = Not available to ANY creditors until the time that the funds are eventually distributed out to you personally. Bill and Beatrice Bailey Long term care insurance!! State will be the largest creditor.

"A Case Study in Self-Directing my Retirement Plan" What are the Possibilities? Mat Sorensen, Attorney at Law

Case Example • • Mary has $300, 000 in a traditional IRA with Merrill Case Example • • Mary has $300, 000 in a traditional IRA with Merrill Lynch. Mary wants to buy a rental property as an investment. She can acquire the property, including costs, for $300, 000. Mary’s brother Dave is interested in investing with her. Mary’s husband Tom has $50, 000 in a 401(k) from a previous employer. Mary’s goal is to make sound investments for her retirement.

Prohibited Transactions Cannot Buy From Or Sell To… Ø The IRA Owner. Ø Plan Prohibited Transactions Cannot Buy From Or Sell To… Ø The IRA Owner. Ø Plan Decision Maker. Ø Plan Service Provider. Ø Spouse, Parents, Children & their Spouses. Ø Corporation, Partnership, Trust, or Estate where 50% or more is owned by a prohibited party. Ø Officer, Director, 10% or more share holder, or highly compensated employee (highest paid). Ø Partner of Related Party.

Make it profitable… Wiggle Room Ø The IRS allows your Traditional IRA to sell Make it profitable… Wiggle Room Ø The IRS allows your Traditional IRA to sell to and buy from brothers, sisters, aunts, uncles, cousins, nieces, nephews, and step Relatives. Ø IRS Ruling 2004 -8: In a Roth IRA, brother and sister are considered a Prohibited Party, so you cannot sell to or buy from them in your Roth IRA.

Rules are specific to real estate Real Estate is the “Key” Must be Real Rules are specific to real estate Real Estate is the “Key” Must be Real Estate Operating Company if the Retirement Plan and IRA Owner own more than 25% of the LLC/LP. See 29 CFR Section 2510. 3101. Ø Ø Cannot have 100% control of LLC/LP. If not Real Estate or you want to take a salary for managing the company, your SDRPs and Prohibited Parties Cannot own 50% or more of the company. Ø

The Right Structure for You Rental Mary wants to buy. $300, 000 Option 1 The Right Structure for You Rental Mary wants to buy. $300, 000 Option 1 Mary’s IRA at Merrill Lynch (could be an old employer 401(k) or other plan) $300, 000 For Illustration Purposes Only May not be reproduced without the Express written permission of KKO Lawyers© Transfers To a Self Directed Custodian Mary now Has an IRA With a Self Directed Custodian - No Debt - No LLC/LP - No Partners - Direct Investment in name of IRA Other investment options for Mary Raw Land $$ LOAN Secured by Real Estate to Third Party

Make it profitable… The Right Structure for You Option 2 Mary’s IRA at Merrill Make it profitable… The Right Structure for You Option 2 Mary’s IRA at Merrill Lynch (could be an old employer 401(k) or other plan) $300, 000 For Illustration Purposes Only May not be reproduced without the Express written permission of KKO Lawyers© Transfers To a Self Directed Custodian Mary now Has an IRA With a Self Directed Custodian Mary Invests $100 K from IRA - Non-Recourse Debt - No Personal Guaranty - No Sweat Equity - No LLC/LP - No Partners - Direct Investment in name of IRA Rental Property (Income Producing) $300, 000 Non-Recourse Loan $200, 000 Mortgage Company

Make it profitable… The Right Structure for You Rental Mary wants to buy $300, Make it profitable… The Right Structure for You Rental Mary wants to buy $300, 000. Option 3 Mary’s IRA at Merrill Lynch (could be an old employer 401(k) or other plan) $300, 000 Real Estate Operating Company Transfers To a Self Directed Custodian For Illustration Purposes Only May not be reproduced without the Express written permission of KKO Lawyers© Mary now Has an IRA With a Self Directed Custodian Single Member LLC owed 100% by Mary’s IRA - Non-Recourse Debt - Single Member LLC - No Personal Guaranty - No Sweat Equity - No Partners - Direct Investment in name of IRA Other investment options for Mary Raw Land $$ LOAN Secured by Real Estate

Make it profitable… The Right Structure for You Mary Invests $100 K from IRA Make it profitable… The Right Structure for You Mary Invests $100 K from IRA Option 4 Real Estate Operating Company Mary’s IRA at Merrill Lynch (could be an old employer 401(k) or other plan) $300, 000 For Illustration Purposes Only May not be reproduced without the Express written permission of KKO Lawyers© Mary now Has an IRA With a Self Directed Custodian Single Member LLC owed 100% by Mary’s IRA - Non-Recourse Debt - Single Member LLC - No Personal Guaranty - No Sweat Equity - No Partners - Direct Investment in name of IRA Rental Property (Income Producing) $300, 000 Non-Recourse Loan $200, 000 Mortgage Company

Make it profitable… The Right Structure for You Real Estate Operating Company Option 5 Make it profitable… The Right Structure for You Real Estate Operating Company Option 5 Rental Property $300, 000 Mary’s IRA at Merrill Lynch (could be an old employer 401(k) or other plan) $300, 000 Transfers To a Self Directed Custodian Mary now Has an IRA With a Self Directed Custodian - Recourse Debt - YES - Partners -YES - LLC/LP- Yes For Illustration Purposes Only May not be reproduced without the Express written permission of KKO Lawyers© 50% $30 K Mortgage Company Limited Liability Co. or Limited Php. 5% Cash $3 K 3 rd Party Owner Brother Dave $240 K 20% IRA Owner Mary Guarantor 25% $15 K Husband Tom’s old 401(k) is rolled into a self directed IRA

Self Directed IRA Issues Prohibited Transactions with Prohibited parties Use of Property Compensation of Self Directed IRA Issues Prohibited Transactions with Prohibited parties Use of Property Compensation of IRA owner Unrelated Business Taxable Income (“UBTI”) 1. Rents, interest, dividends and capital gains exempt. 2. Watch out for development activities and non-real estate activities. Unrelated Debt Financed Income (“UDFI”) 1. Tax is paid on the portion of gains attributable to the debt on the property. Administration Duties Annual report/valuation to Custodian Bookkeeping and tax return

Self-Directing Your Retirement Plan for Real Estate: What Can I Really Do? Self-Directed Plan Self-Directing Your Retirement Plan for Real Estate: What Can I Really Do? Self-Directed Plan Compliance Issues • Must be Real Estate Operating Company if the Retirement Plan and IRA Owner own more than 25% of the LLC/LP See 29 CFR Section 2510. 3 -101 • Can’t have 100% control of LLC/LP • Prohibited Transactions with Prohibited parties Use of Property Compensation of IRA owner • Administration duties Annual report/valuation to Custodian Bookkeeping and tax return BEWARE!! This is not a comprehensive list, and also requires a properly drafted Company document!!

For more information, please contact us at: KYLER KOHLER & OSTERMILLER, LLP Tel: 435. For more information, please contact us at: KYLER KOHLER & OSTERMILLER, LLP Tel: 435. 586. 9366 Fax: 435. 586. 9491 www. kkolawyers. com