Section 6: Risk Management and Asset Protection Flashcards
Spendthrift Trust
Refers to a trust that restrains Voluntary and involuntary alienation of all or any beneficiaries interest- been may not be able to access or pledge assets w/out consent of trustee- can add language to “avoid” distributions to bene is subject to creditor’s claims
Badges of Fraud
1.Transfer to family or insider
2. Debtor remains in control or possession of assets
3. Transfer was concealed
4. Before transfer debtor was sued or threatened
5. Transfer was almost all assets
6.Debtor moved or concealed assets
7. Debtor was or became insolvent after transfer
8. Transfer occurred shortly after or before debt was incurred
Perpetual Dynasty Trust
Distributions are entirely up to trustee, no ascertainable standard, a discretionary spendthrift provision can add significant amount of creditor protection
Takes advantage of the lifetime gifting $11M+ and GST exemption
Established as a long as jurisdiction allows
DAPT
Domestic Asset Protection Trusts
-Trust can be pierced under certain circumstances
-Irrevocable and self settled
-Spendthrift is extended to grantor-beneficiary of discretionary trust- grantor can receive distributions based on discretion of trustee
-Assets are often put into LLC before transferred to DAPT which is a separate tax entity
-If right to income/revoke/amend is kept by grantor must be included in estate
Uniform Trust Code
Most states adopted this code in 2000- standardizes trust laws
Offshore Trusts
Superior protection- creditor would have to go to the entity/country for claim- built on common law- protection doesn’t end when settlor and beneficiary are the same
Methods to quantify risk
- Loss range analysis
- Loss triangles
- Projected expected losses
-help determine which risks to retain and which to transfer
Parts of Automobile Insurance Policy
A. Liability
B. Medical Payments
C. Uninsured/underinsured motorist
D. Damage to insured’s vehicle
Homeowner’s Policy Basic Approaches
Normal Perils- Perils not listed are not covered
Open Perils- only perils specifically excluded are not covered
Comparative Negligence
A balance between Strict negligence and contributory negligence- usually results in partial recovery to plaintiff
Replacement cost vs. actual cash value
actual cash value is the depreciated value
replacement cost is the higher value which provides the value needed to replace/make whole
Three levels of risk management
Severe- potential to cause demise of business or severe financial damage (transfer this risk)
Important- Could cause serious hardship but not total loss
Optional- exposures have negligible consequences (retain this risk)
Risk Management Techniques
- Risk Avoidance
- Risk control/reduction/prevention
- Risk retention
- Risk transfer (non-insurance: indemnity, hold harmless agreement, require contractors to retain risk)
- Risk sharing (combo of 3 &4)
- Insurance
Four general categories or risk exposures
- Physical
2.Financial- liability due to intentional act or negligence - Contractual- loss due to contract or association of others
- Human- value of human life
Steps in risk management process
- ID- analayze and measure all loss exposures
- Select the technique or combo of techniques
- Implement design
- Monitor and adjust
Pure risk vs. speculative risk
Pure- only results in loss
Speculative- can result in gain or loss
livery conveyance
Rule that allows personal auto policy to cover commercial work- available at a higher premium - vehicle can not be held out for public hire
Basic examples of “personal and advertising injury”
false arrest, wrongful entry into a dwelling, slander, libel, copyright/patent infringement, slogan, etc
This is not generally covered in CGL
Two types of CGL coverage
Occurrence type- occurrence policy has lifetime coverage for the incidents that occur during a policy period, regardless of when the claim is reported.
Claims-made type: A claims-made policy only covers incidents that happen and are reported within the policy’s timeframe, unless a “tail” is purchased.
Representations Clause
by accepting insured agrees all statements made by him in the declarations page are accurate and complete- if not insurer can void contract
CGL Supplementary payments
Amount insurer promises to pay above policy limits
e.g. costs to defend, bail bonds, bonds attached to property, reasonable expenses including wages lost up to $250/day, court costs, etc
CGL Policy Structure
Coverage A: bodily injury and property damage
Coverage B: personal advertising injury
Coverage C: Medical payments- no regard to fault- must be reported w/in one year, submit to exam for insurer
Four major limits to liability insurance
- each occurrence limit
- personal and advertising limit
- General aggregate limit
- Products/completed operations aggregate limit
*can be sublimits which can be increased w/ additional premium
Theories of bodily injury
exposure- focuses on when exposed
manifestation- date of diagnosis
injurious process- aka triple trigger continuing process- any cgl policy in force at any point could be liable
Injury-in-fact - only when injury actually happens requires accurate medical records
Co-insurance requirements
Home value has significant growth above insurance limits- payouts can be significantly reduced
Flat or Straight dollar deductible
Per Claim- e.g. food poisoning, pay deductible for each person
per occurrence- pay one deductible no matter the number of people
*important distinction for risk manager
Contract of adhesion
insurer drafts contract- insured must adhere to it- insured has say over language- in court any benefit of doubt will go to the insured due to this
Surplus lines broker
Insurers are not subject to state regulations- insured not protected by state guarentee
Broker has relationships with “non-admitted” insurers
This is used for unique risks
Where to get benchmarking information for the cost of risk?
RIMS- Risk and insurance management sociciety
Industry and trade associations
Loss Development Factor
e.g. workers comp
based on development of similar cases that settled or closed in similar time period- used to calculate loss triangle
Five main loss categories
- Premisses liability- conditions of premisis- invitees, licensees, trespassers, etc
- Liability for operations (off premisis)
- Products liability
- Professional liability
- Liabilities for employees
Intangible assets of ability
Good will- reputation can be converted into dollar amount when company is sold or merged-when damaged it can evaporate
Other intangibles include relationships with venders and suppliers
Hazard
a specific situation that will increase the probability of the occurrence of loss arising from a peril
Levels of Asset protection
Level 1. Statutory protection- retirement plans, 529s, ira up to $1M, homestead, life ins, etc
Level 2- Trusts
Level 3- Protective trusts and entities
*Fill buckets starting at level 1- when balance sheet is protected- creditor will likely settle for something more reasonable
Asset protection using 529
-contribution limits vary by state
- can be used of education of child or family member including client
-cost is virtually zero
can take out w/ 10% penalty plus OI
Consider using when max out retirement plan
Use of distant fam member works well
Issues with creditor charging order
Compounding the problem for the creditor is the possibility (but, by no means, the certainty) that the creditor’s share of the LP or LLC may be charged with income based on the creditor’s “rights” pursuant to the charging order. If this occurs, the creditor may have “phantom income,” which obviously would not be to the creditor’s advantage. They may claim that the entity is a sham without business purpose or a device to hold the personal assets of family members.
DAPT Overview
The DAPT is an irrevocable self-settled trust in which the grantor is designated as a permissible beneficiary and allowed access to the funds in the trust account. The grantor should not retain any control over the transferred assets. The trust should have an independent trustee (not the grantor). The independent trustee is given discretion to distribute trust income and principal to a pre-defined class of beneficiaries that includes the grantor. Properly structured, the goal of the DAPT is to assure that creditors of the grantor will not be able to reach the trust assets. When located in a state without an income tax, the DAPT provides both asset protection and state income tax savings.
The following states have adopted varia- tions on the DAPT provisions: Alaska, Connecticut, Delaware, Hawaii, Indiana, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming. Connecticut and Indiana were added to this list in 2019.
