Some Asset Protection Issues of Advised Life

An Advised and Custom drafted contract of life insurance or annuity contract may help further protect estate property from the highly litigious world clients sometimes find themselves living in.

Protection, by Way of Exemptions from Creditors
In a dozen or so states, the cash surrender or account value, of life insurance or annuities issued by insurance companies are partially or totally exempt (i.e. protected) from creditors as to the insured/annuities policy owner who is resident in such states. Florida[1], Texas and New Mexico for example, provide virtually unlimited protection for cash value in life insurance policies. Other states protect the cash value up to specified amount, a limited but often still a large number. Death benefits received from a policy on the death of the debtor insured, are also exempt in many states.

Most state exemption statutes do not provide exemption protection as to existing creditors at the time of purchase of the policy, or creditors who obtain a judgment against the policy owner within a certain period of time – typically three to four years after the purchase of the policy. However, if the policy is purchased when there are no creditor problems and no creditor problems arise within prescribed time period, residents of those states with favorable exemption laws as to annuity or life policies obtain protection over virtually unlimited amounts. Utilizing exemption status to protect annuity or life insurance cash values is a very simple, effective, low-cost, planning tool. Additionally, the policy owner, at the same time, enjoys US income tax deferral on the inside buildup of the cash value account.

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Protection of the Policy Cash Values, by Way of Ownership
As for residents of those states with small or no exemption protection for cash surrender on account values of policies, asset protection can be obtained by creating an asset protection entity such as an LLC or Asset Protection Trust to own the policy. Once created, cash is transferred to the entity such as an LLC or asset protection trust and it acquires the policy.

Title to the policy, is in the asset protected entity such that creditors whose claims do not exist on the day of the transfer of assets into the structure would have greatly increased difficulty piercing.

Of course, all of the above planning assumes that no creditor problems exist on the date of the transfer of cash to purchase the policy, or transfer to an entity to purchase the policy.

As to what type of asset protection entity is the best choice for the client, the following chart is designed to illustrate the degree of protection, complexity, cost and suitability for policy ownership.

TYPE ENTITY

Foreign Situs Asset Protection Trust

RANGE OF PROTECTION
(0-10, 10=highest)

6-9

COMPLEXITY/REPORTING
REQUIREMENTS

Some complexity annual tax reporting Forms 3520/3520A and Form 1041

ANNUAL COST TO
MAINTAIN STRUCTURE

$2,500-$5,000 largely for
foreign trustee fees

SUITABILITY TO OWN
INSURANCE PRODUCTS

Very suitable as it is generally a grantor trust

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TYPE ENTITY

Domestic Asset Protection Trust

RANGE OF PROTECTION
(0-10, 10=highest)

5-8

COMPLEXITY/REPORTING
REQUIREMENTS

Less complexity less tax reporting. Form 1041

ANNUAL COST TO
MAINTAIN STRUCTURE

$2,500-$5,000 largely for domestic trustee fees

SUITABILITY TO OWN
INSURANCE PRODUCTS

Very suitable as it is generally a grantor trust

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TYPE ENTITY

Irrevocable Life Insurance Trust (ILIT)

RANGE OF PROTECTION
(0-10, 10=highest)

3-5

COMPLEXITY/REPORTING
REQUIREMENTS

Very little complexity

ANNUAL COST TO
MAINTAIN STRUCTURE

Very few costs

SUITABILITY TO OWN
INSURANCE PRODUCTS

Very effective for estate planning as to life policy death benefit inclusion in estate

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TYPE ENTITY

LLC

RANGE OF PROTECTION
(0-10, 10=highest)

1-4

COMPLEXITY/REPORTING
REQUIREMENTS

Very easy

ANNUAL COST TO
MAINTAIN STRUCTURE

Very few costs (form 1065)

SUITABILITY TO OWN
INSURANCE PRODUCTS

Single Member LLC can own annuity, any LLC can own OF life policy

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TYPE ENTITY

Individual Ownership

RANGE OF PROTECTION
(0-10, 10=highest)

0, unless owner resides in a state with broad exemptions regarding cash values of life or annuity policies

COMPLEXITY/REPORTING
REQUIREMENTS

Very suitable

ANNUAL COST TO
MAINTAIN STRUCTURE

None

SUITABILITY TO OWN
INSURANCE PRODUCTS

Single Member LLC can own annuity, any LLC can own OF life policy

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Protection Derived from Policy Language
Drawing upon the asset protection experience of its founders, CastleRE Advised and Custom designed contracts of insurance can include provisions which greatly enhances protection for the custom contract owner. To find out more, if you are an attorney, please email us with questions. We also welcome comments.

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[1] Florida Statute, Title XV, Homestead and Exemptions; Chapter 222 Method of Setting Apart Homestead and Exemptions: 222.14 – Exemption of cash surrender value of life insurance policies and annuity contracts from legal process. The cash surrender values of life insurance policies issued upon the lives of citizens or residents of the state and the proceeds of annuity contracts issued to citizens or residents of the state, upon whatever form, shall not in any case be liable to attachment, garnishment or legal process in favor of any creditor of the person whose life is so insured or of any creditor of the person who is the beneficiary of such annuity contract, unless the insured or annuity contract was effected for the benefit of such creditor.

Advised Custom Life Insurance Contracts are not to be confused with private placement or variable life insurance policies marketed by U.S. life insurance companies. A CastleRE Advised and Custom completed life insurance contract is a tax compliant insurance contract designed, drafted and implemented solely for the client. CastleRE does not do rack policy work. We practice life insurance similar to the way attorneys practice law. Listen carefully, design and implement true custom solutions.