Читать книгу GOAL! The Financial Physician's Ultimate Survival Guide for the Professional Athlete - Mitch Ph.D. Levin - Страница 20

1) A charging order does not transfer the interest in the LLC to the creditor or force the debtor to sell his/her interest and turn over the sales proceeds to the creditor.

2) A creditor cannot force the LLC to sell assets.

3) A creditor cannot force an LLC to distribute income

What does a creditor get with a charging order? The right to pay income taxes on income generated in the LLC but NOT distributed.

There was a revenue ruling issued in 1977 (77-173) which states that a creditor who obtains a charging order can be treated as a partner for federal income tax purposes. Why does 77-173 matter? Following is an example to illustrate the power of 77-173:

Using the example with Mr. Lucky who has a $3,000,000 judgment against the athlete who only had $1,000,000 worth of auto coverage, assume that Mr. Lucky obtained a charging order against the athlete’s LLC, which owns the athlete’s $1,000,000 brokerage account.

Further assume that the athlete earns dividend income of $25,000 a year from the brokerage account. Normally, the athlete takes the $25,000 home as income from the LLC and spends it as he sees fit.

When Mr. Lucky obtains his charging order, the athlete, as the managing member of the LLC, decides not to take any of the $25,000 out as income, but instead leaves the income in the LLC.

Normally, when a corporation does not distribute all the income out of the corporation, there will be corporate taxes levied on that income. If the LLC is treated as an S-Corp or partnership (which is the case 95% of the time), the income is passed through to the shareholder or member, and taxed at his/her individual tax bracket as if he/she took the money out of the LLC.

Now that Mr. Lucky has a charging order against the athlete’s LLC, he, not the athlete, will receive the income from the LLC. However, in our example, the athlete, as the managing member, did not distribute the income from the LLC.

What happens?

Mr. Lucky gets a K-1 for the taxes on what would have been distributed from the LLC to the athlete. If the athlete were a 100% owner of the LLC interest, Mr. Lucky would get a K-1 for all $25,000 that he NEVER received. I call this “phantom income,” which is income you do not receive but have to pay taxes on anyway.

The power of an LLC is derived from the fact that a creditor can only obtain a charging order against the LLC (vs. forced distribution of assets or income or, in the alternative, the sale of a debtor’s interest in the LLC) where, if the LLC creates income and does not distribute it, the creditor will get a K-1 for income they never did and never will receive.

The following is a little schematic that might help you visualize what happens (or does not) with a charging order.

More Differences between an LLC and S- or C-Corporations? If your assets are held in an S- or C-Corp, the judge has a few different viable remedies to implement upon request of a creditor. Those are:

1) The court can order a debtor’s interest in an S- or C-Corp sold to satisfy the judgment. (A client/defendant becomes a debtor after a judgment is entered against him/her and in favor of a plaintiff-who then becomes a creditor.)

This means, if you are a 100% owner of an S- or C-Corp that owns a $1,000,000 brokerage account and $1,000,000 vacation home, a judge can make you sell your stock, which should be worth $2,000,000 in the open market. (If you own less than 100% of the stock, a court can make you sell whatever interest you have.)

2) The court can order that the ownership interest of a debtor in an S- or C-Corp be transferred to the creditor.

Once the stock ownership in an S- or C-Corp is transferred to a creditor, that creditor can:

1) Vote as a stockholder and act as a stockholder of the company. If you had majority interest in an S- or C-Corp and your children had a minority interest, the creditor would then be the majority owner in that corporation with your children. The same goes if you have friends as partners.

As the majority owner, the creditor would have the right and power to vote to sell corporate assets and make distributions of income.

2) Sell the stock to any third party allowed by the corporation’s operating agreement.

In either scenario, the owner of the S- or C-Corp stock would lose that stock.

Real World Example. If the previous material confused you a bit, that is normal, you are not alone. Here is a real world example of how to protect your assets.

Assume Athlete X is 35 years old, married with two children, lives in Michigan, and has the following assets:

	Value
Personal residence	$1,000,000 (with a $400,000 mortgage)
Vacation Home	$450,000 (with a $200,000 mortgage)
Brokerage Account	$500,000
401(k)/Profit Sharing	$400,000
Airplane	$125,000

The following is the recommended asset protection plan using LLCs.

	Title
Personal residence	Tenants by the Entireties

Not typically in an LLC due to the fact that the client will eventually sell the house and will want to take advantage of the $500,000 joint capital gains tax credit.

Vacation Home

LLC #1

If the clients choose to rent the vacation home, we would suggest transferring the vacation home to its own individual LLC to protect it from a suit for negligence by a tenant.

Brokerage Account

LLC #1

Again, if the vacation home were ever rented, the brokerage account would get its own LLC.

401(k)/Profit Sharing

Qualified retirement money is federally protected

Where to Incorporate. Most states do not have the magic language (that a charging order is the “sole” remedy of a creditor) in their state LLC or FLP statutes. Because of this, you will want to use LLC/FLPs filed in states like AK, DE, AZ, NM, NV, and a few others that have this magic language in their statutes.

Trusts as Asset Protection Tools. The general rule of thumb is: Unless a domestic trust is irrevocable, it provides NO asset protection!

That means the revocable living or marital trusts (names used interchangeably) you setup and fund for estate planning purposes provide no asset protection.

Irrevocable trusts on the other hand provide complete asset protection when setup and funded correctly. The problem with irrevocable trusts is that you have to give your money away for them to work and most athletes will not want to use them as a primary asset protection tool.

Domestic asset protection trusts (also known as self settled trusts, AK, DE, NV asset protection trusts) are fairly new tools that have not, to date, been tested. They are basically irrevocable trust setup for your own benefit. In my opinion they are against public policy and until they are tested and are upheld on appeal, I do not recommend then and I do not recommend you use them as a primary asset protection too.

Offshore Asset Protection Strategies. Because this chapter is a scaled down version of the material I’ve written over the years and because of space constraints, I cannot cover offshore asset protection strategies.

Offshore asset protection is “the best” way to protect liquid (stocks, mutual funds, etc) assets. When done properly no U.S. court, the IRS, or the federal or state government will ever be able to touch your money.

If you’d like to read about the use of international LLC, offshore asset protection trusts, captive insurance companies and other offshore tools, please e-mail me at roccy@retiringwithoutrisk.com and I’ll forward you my 125 summary for your reading pleasure.

Conclusion/Summary on Asset Protection. I will make this short and to the point: every “athlete” should have an asset protection plan.

In the U.S. today, lawsuits run wild; and “professionals” specifically have the added burden of working in an industry where they can be sued individually.

If you have any substantial assets, then you need asset protection. Most of the time you can use domestic LLCs to own all of the above-stated assets except the IRA (which should be rolled into a Profit Sharing Plan).

Athletes work too hard to get to the point of making significant money and to have it wiped out because their advisors know nothing about asset protection planning would be a travesty.

Whether you have been a successful athlete for many years or whether you are just getting ready to run pro so you can start your professional career, I encourage you to look critically at the team of advisors you surround yourself with.

If you think your agent or a professional athlete management firm knows something about asset protection, you are kidding yourself. After reading this chapter, you already know more about asset protection than every sports agent in the business and 95-99% of the attorneys who represent athletes (either personal attorneys or ones hired and used by management companies).

My hope with this chapter is to arm athletes with enough knowledge so they can determine if they are getting the help needed from their current advisors. If not, then readers should be able to use their new knowledge on asset protection to interview and seek out advisors who have the need skills/knowledge to help them protect their wealth from “all” creditors (remember there are other creditors besides those that arise from negligence lawsuits (like the IRS and the stock market)).

For more information please visit http://www.thewpi.org/

Contact:

Roccy DeFrancesco, Jr, JD, CWPP, CAPP, MMB

roccy@retiringwithoutrisk.com