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Scams And Caveats In The Domestic ArenaYou probably don't need an attorney to tell you that there are operators out there on the internet who don't even have a good name to protect, much less a professional license. Nevertheless, they are only too willing to separate you from your money; preying on your greed, your patriotism, your eagerness to avoid taxes, or all of the above. If you are a crook this article will not interest you. If you are interested in working within the law, this article will help you do so, while learning to recognize the scams and caveats that are becoming so prevalent on the Web. I will divide this discussion into four general areas: 1. Criminal, fraudulent and illegal acts. 2. Borderline fraudulent and illegal acts. 3. Legal acts which may have unintended or unexpected consequences. 1. Criminal, Fraudulent and Illegal Acts. I am less concerned with this category than with any other. It is not likely that many of you would be fooled by someone telling you that it is perfectly alright to lie, cheat, steal, forge signatures, back date documents, or launder money. Hopefully, you don't need much help in these areas. But there are actions that may seem perfectly legal in one context, which are strictly illegal in another. 2. Borderline Fraudulent and Illegal Acts. The most common borderline and illegal acts are fraudulent conveyances. After all, what could be more commendable than giving your mother a house and setting her up with a bank account, to insure her comfort for the rest of her life? Absolutely nothing; UNLESS you happen to have judgements against you, and your generosity will impede your creditors from collecting on your debts. As you will learn from my other articles, I make my living helping people protect their assets; but one must be very careful in doing so. It may, in the long run, be better to let your creditors have your assets, or a part of them, than it would be to cool your heels in the hoosegow for a period of time. This article is by no means intended as an exhaustive legal treatise on fraudulent conveyances; nevertheless, consideration of the concept of fraudulent conveyances in the context of asset protection, is absolutely crucial. In the most straight forward and simple terms, if you even suspect that you may have a problem in this area, consult an attorney. Generally speaking, the law will not allow one to give away his property, or sell it for less than full value, simply to prevent a creditor from seizing it. On the one extreme, would be the case of a man with a newly acquired judgment against him, who states in writing, that he is making a gift of all of his property to his wife, so that his judgment creditor won't get it. There is almost no question at all, that conveyance would be set aside as fraudulent. At the other extreme would be the person who, having no indication that anyone, anywhere, has any sort of claim against him, transfers his property to a Foreign Trust, for the purposes of estate planning, income tax savings, and of course protection of his assets. In the event that person later has a judgment rendered against him, in this writer's opinion, there would be almost no chance whatsoever that a court would find that the transfer to the trust was a fraudulent conveyance. Situations between these two extremes should be considered very carefully. Again, generally speaking, the critical issue is intent. If a creditor can prove that the debtor made a transfer of his property with the intent to frustrate the creditor, the transfer will be set aside. Moreover, the courts recognize that it is often impossible to establish intent one way or the other. Accordingly, the courts may still set aside a conveyance, even where intent to defraud cannot be established, if there are certain "badges of fraud" present. In other words, if the "circumstances" indicate that the transfer was made to frustrate a creditor, the transfer may be set aside. For example, if a debtor transfers his property to his children for less than fair market value, thus rendering himself insolvent, or nearly so, and especially if he continues to exercise complete control over the property, chances are very good that the conveyance will be set aside. It is important to recognize that making a transfer before a judgment is rendered will not remove the concern about fraudulent conveyances. Even if a lawsuit has yet to be filed, if you know or should know, that a claim or lawsuit is coming, any transfers may be set aside. On the other hand, some practitioners take the position that almost no transfer to an entity such as a limited partnership would be fraudulent. This position is supported by pointing out that the transfer does nothing more than alter the form of the property; it is made for full value, and therefore does not render the transferor insolvent. Frankly, this writer does not join in that position. It is true that transfer to a Family Limited Partnership might discourage a lawsuit in the first place. It is also true that if a creditor exhausts all his resources obtaining a judgment against his debtor, the prospect of beginning a new lawsuit to set aside what the creditor might consider to be a fraudulent conveyance, would be very discouraging and might prompt a favorable settlement. However, if the matter did come to trial, it is this writer's opinion, that especially where a claim was pending when the transfer was made, the court would set the transfer aside. If a fraudulent conveyance is proven, the transfer will be set aside, as a matter of course. But there may also be other penalties, as well. There could also be recovery of costs involved, punitive damages, and in many states, under flagrant circumstances, there may even be criminal sanctions. As is almost always the case, "an ounce of prevention is worth a pound of cure." Have your house in order before any claim arises! 3. Legal acts which may have unintended or unexpected consequences. This is the area where most problems arise. The net is saturated with promoters praising the United States Constitution and pointing out our rights under that Constitution. The scams in this area are too numerous and varied to deal with individually. Many times it is years before the victim of a scam, or misinformation, learns through an audit or by other means, that he has been scammed, or given misinformation. By that time the promoter has moved on, and is nowhere to be found. Suffice it to say that while we do have a Constitutionally protected right to enter into contracts, and while those contracts that we enter into may be perfectly legal; third parties, most notably the Internal Revenue Service, are not bound by our contracts and most likely will not pay any attention to them. For example, if you exercise your right to contract, and agree to lend money to someone at the rate of 2% per annum, you will receive only 2%, but you will be taxed according to the IRS imputed rate, which is much higher. I have recently learned of a web site promoting deferred private annuities. I promote private annuities, and consider them to be the single best means for transferring funds offshore. More to the point in a domestic context, private annuities are an excellent way for a parent to pass funds or property to an adult child. But they must be drafted and implemented to strictly comply with the law. Commercial insurance companies routinely write deferred annuities and no one questions them. Not so with private annuities. This is another case of it being perfectly legal for a person to purchase a private annuity from a foreign corporation, or from an adult child; and for that foreign corporation or parent, to defer payment for ten, twenty or even fifty years. However, if you are audited and questioned about the annuity, it is my opinion, and fear, that the transaction will not be recognized as an annuity, but will be characterized as either a gift to the corporation or adult child; or worse, as an equity investment in the corporation. This, of course, would result in the foreign corporation being characterized as a controlled foreign corporation, if it wasn't already. In the case of the parent attempting to transfer funds or property to an adult child, if the transaction is characterized as a gift, the parent's lifetime exemption will be reduced, or if it is more than $625,000, an actual, out of pocket, gift tax will be owed. This is a good place to point out the fact, that as long as our legislative bodies and judges are compensated from taxes, they cannot be relied on to be too aggressive in protecting our right to contract. Even our juries are composed primarily of school teachers, postal workers and other public servants, who rely on the tax for their weekly paycheck. Don't be surprised if they don't show you very much sympathy. Most of the problems related to the ignoring of contracts, arise from the issue of control. If, for example, a single individual sets up several corporations, over all of which he has absolute control, and then tries to reduce taxes, or avoid financial liability, by having the corporations deal with each other, most likely the contractual fiction will be ignored. For tax purposes, the income will be combined and the higher tax rate will be charged. If we are talking about liability issues, if not carefully structured, the assets of one corporation may be available to the creditors of one of the other corporations. A specific example of contractual arrangements that may be ignored, by either creditors or taxing authorities, is the Pure Trust or the Pure Equity Trust. They simply do not work the way promoters claim that they do. This is an area wherein extreme caution should be exercised. Another area in which planners must be cautious, involves promoters convincing prospective planners that they need services that they simply have no use for. It has come to my attention that some promoters have taken the position that virtually everyone should establish and use a limited partnership to hold their assets. I vehemently dispute that stand; but lest I talk someone out of a LP, who really needs one, let me reaffirm the fact that the Limited Partnership is probably the single best tool for reducing taxes, and keeping creditors out of your pocket book. See my article on Limited Partnerships. BUT, THEY ARE NOT EFFECTIVE FOR EVERYONE. In my view, there are essentially two reasons for establishing a limited partnership. The first is the reduction of one's estate and therefore estate taxes and administration fees. The limited partnership is an excellent tool for transferring assets to children or other persons, without giving up use and control of those assets. But if your estate is not likely to increase in value above the threshold for triggering an estate tax, one should think twice before being talked into establishing one. The second reason, for establishing a limited partnership is to put your assets beyond the reach of creditors. I am at the front of the pack extolling the virtues of limited partnerships for that purpose. Even if you don't have an estate large enough to cause you to worry about paying estate taxes, a limited partnership will protect the property that you have worked so long and hard to accumulate. But if you are retired and the greatest risk of liability you have is driving to the market or to church on Sunday, make your promoter give you a very good reason before you shell out the price of establishing a limited partnership. A million dollar umbrella insurance policy will be a great deal cheaper and much less hassle. For those who can make use of a limited partnership, they are very inexpensive to establish and maintain. My fee for establishing a limited partnership is typically $1,000.00; a fraction of what some of my colleagues charge. But even that is too much to pay, if it won't help you. If you think a limited partnership may be of use to you, but you are still not sure, you may be interested in my booklet on limited partnerships. The booklet contains a detailed explanation of how a limited partnership works, how to set it up, and how to maintain it. It includes all the agreements, transfer documents, and even tax forms with instructions. Moreover, I will send you a floppy disk including all the agreements and transfer documents, so that you don't even have to retype anything. The price of the booklet is $59.00. Send check or money order to Ken Sisco, 11421 Orange Park Boulevard, Orange, CA 92869. Tell me what word processor you use, and give me two weeks for delivery. If you buy the booklet and establish your own limited partnership, I will review all of your documents for an extra $200.00, to make sure you have done it right. If you buy the booklet and then decide you want me set up the partnership for you, I will give you a $150.00 credit; but you must read the book so that I don't have to spend so much time educating you. Your best protection is to deal with a licensed professional. Not only is he more likely to have a better view of the big picture, but he has a great deal to lose if he steers you wrong. Moreover, he is more likely to be there if something goes wrong. Good Luck. Copyright ©1998 |
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