Keeping It Simple in Asset Protection or Estate Planning

In my last post,I talked about how too much planning to protect your assets can go badly.  That post was in the context of trying to make too many transfers and getting burned under UFTA.  In this post, I’d like to show another example of “too much” or overly complex planning.

In Leeds LP v. US, 807 F.Supp. 946 (S.D.Cal. 2011), the debtors in question had large federal tax debts.  Under federal law, the IRS can file liens against  all of the debtor’s property in such a situation.  In order to avoid having IRS liens attach to their many real estate investments, the debtors engaged in a series of “sales” of property into various entities in exchange for mortgages.  In a series of complex transactions, some of the entities foreclosed on the mortgages given by other entities, and the properties were sold at foreclosure sales in order to further shift properties away from the debtors.  There are so many entities, mortgages, and foreclosures in the opinion that it’s hard to keep track of exactly what happened while reading it.

The bottom line, however, is that the sheer volume of transactions (none of which had any real financial substance) only served to demonstrate that the debtors clearly had bad intent when engaging in these transactions.  It is hard to argue that it would have been commercially reasonable to engage in the volume and complexity of transactions in which the entities participated without a substantial profit motive.  The court shot down the debtor’s actions and held the entities to be no more than nominees of the debtors.  It also didn’t help that the debtors didn’t follow through on many formalities of the transactions.  [For example, one of the deeds in question remained unrecorded for two years.]

Leeds teaches an important lesson in all of the planning we do.  Many times the KISS (Keep It Simple Stupid) method can be the most effective, as it opens up the least arguments that the planner has any nefarious intent.  Although Leeds was a case involving a debtor seeking to protect its own assets while alive, the same theory often applies in more traditional estate planning where lifetime aset protection isn’t a major goal.  In such estate plans, our major goals are usually two: protecting beneficiaries from divorce and/or other debts, and minimizing taxes.  When we set up testamentary trusts to protect children’s inheritances, excessively complex provisions designed to give too much control to beneficiaries can sometimes reduce the efficacy of the protection.  When we are seeking to minimize federal or New Jersey Estate Tax, some of the more “cute” strategies serve only to draw more scrutiny as to their real economic substance from the IRS or New Jersey Division of Taxation.

Keeping it simple serves the additional benefit of making the necessary formalities easier to follow.  Failure to follow formalities is one of the things that tripped up the debtors in Leeds and can trip up any asset protection or estate plan.

If you’re interested in any asset protection topics, or in planning your estate to minimize taxes and protect your children, feel free to contact me.

TAX ADVICE DISCLAIMER: Any tax advice contained in this communication (including attachments) was not intended or written to be used, and it cannot be used, by you for the purpose of (1) avoiding any penalty that may be imposed by the Internal Revenue Service or (2) promoting, marketing, or recommending to another party any transaction or matter addressed herein.
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