Gallet, Dreyer & Berkey, LLP
As the year draws to a close, we offer valuable planning tips to our clients, colleagues, and friends of the firm regarding their assets, tax, and estate concerns.
Foremost, there are still some time-sensitive ways to save taxes that could result in much more money for your family.
By: Kate Stalter, Paul Curcio, and David Tony, Featuring Asher Rubinstein, Partner Gallet Dreyer & Berkey, LLP
Businesses and high-net-worth individuals have plenty of reasons to shield their assets. They’re frequently magnets for lawsuits or people claiming to be rightful heirs. Creditors may also make claims that could disrupt business operations or target personal wealth. For individuals and businesses who want and need to protect their assets, we’ve outlined several key strategies that can help accomplish that goal.
Jeremy Babener, founder and consultant at Structured Consulting in Portland, Oregon, said asset protection is a legal strategy to safeguard an individual’s or business’s assets from unanticipated liabilities and financial threats.
It often involves trusts, insurance and proper business structuring,” Babener said. “Asset protection is critical to avoid being wiped out financially in a worst-case scenario,” he added. Babener noted that using multiple asset protection strategies, including legal entities and insurance, is generally a wise move. “This is especially important when your assets are needed for basic living and medical expenses,” he said. It’s not just the stereotypical notion of the well-to-do who may need to consider these steps. “Ironically, an injured victim who receives money in a lawsuit has a particular need for an asset protection trust because a lawsuit against them by someone else could wipe out their medical funds,” Babener said.
Importance of asset protection
The threat of lawsuits drives many to consider mitigating their financial risks. “Asset protection is important because we live in a very litigious society where anyone can sue anyone else on the flimsiest of claims and potentially seize assets and property to satisfy a court judgment,” said Asher Rubinstein, partner at law firm Gallet Dreyer & Berkey in New York City. Rubinstein said asset protection is advisable for people who have accumulated significant assets. “Ideal candidates for asset protection include people who are in high-liability professions and anyone with assets who may be viewed as a ‘deep pocket’ and vulnerable to lawsuits,” he added.
Asset protection strategies
Fortunately, there are several ways to shield assets from potential litigants and others who believe they have a claim on property.
An APT is a particular type of legal entity that’s often used to shield assets, including an estate, from creditors, claims or legal actions. When assets are transferred into an APT, they are no longer part of the original owner’s estate. This can provide an extra measure of protection. The use of these trusts has evolved over time, Rubinstein said.
“For many years, the law was that a person could not transfer assets to a trust, benefit from that trust and then argue that his or her creditors could not reach the assets in the trust,” he said. “The logic was that if you benefited from the trust assets, then those assets should be available to satisfy a court judgment against you,” he added. More recently, some jurisdictions began to allow self settled trusts, or trusts where the person who establishes the trust is also a beneficiary. In legal parlance, that person is known as the “settlor.”
“Originally, foreign jurisdictions like the Cayman Islands and Liechtenstein began to allow self-settled asset protection trusts,” Rubinstein said. As of January 2024, 21 states allow these self-settled asset protection trusts, also called domestic asset protection trusts. “Delaware, Wyoming, Nevada and South Dakota are prominent asset protection trust jurisdictions,” Rubinstein said. “By conveying assets to trustees in these states, the trust property is protected from creditors and litigants, while the settlors can still enjoy benefits from these trusts.”
Asset protection insurance policies
Insurance is another way of protecting assets or transferring risk by covering potential financial losses from events such as accidents, lawsuits or property damage. “One of the most common forms of asset protection is insurance, including auto, home, life and umbrella,” Babener said. “The purpose is for the insurance company to step in to cover your liabilities so that you don’t have to sell your assets.”
How can prenuptial agreements help in asset protection?
A prenuptial agreement, signed before a marriage takes place, outlines each spouse’s assets and how these assets would be treated in the event of a death or divorce. The idea behind prenuptial agreements is to prevent future disputes over the distribution of assets.
What is the benefit of using an LLC for asset protection?
An LLC is a type of legal entity that separates a business’s assets from the owner’s personal assets. An LLC shields the owner’s assets from litigation or other claims. It’s a common structure in industries such as financial services, where the owner faces a higher-than-normal risk for lawsuits.
Can one asset protection method be sufficient?
In many cases, multiple asset protection strategies, including insurance, legal entities (such as trusts or LLCs) or contracts (such as prenuptial agreements) are necessary. The number and types of asset protection methods vary depending on each situation. Legal and financial counsel can help answer questions about which specific asset protection methods are best in any given case.
What are the benefits of offshore trusts for asset protection?
High-net-worth individuals often seek protection from an offshore trust. “This is where you transfer your assets into a trust in a foreign jurisdiction,” Schmitz said. “These trusts typically come with lower tax obligations which make them popular for those with high net worth.”
Offshore trusts may be suitable in situations where individuals seek benefits in addition to protection from lawsuits or creditors. For example, some may turn to offshore trusts if they want privacy or a more stable political environment than in their home country.
Written by Josephine Nesbit, U.S. News. Featuring Asher Rubinstein, Gallet Dreyer & Berkey, LLP.
The IRS has specific rules regarding how homebuyers qualify for certain tax credits. There are also credits that are only available to first-time buyers.
Through 2025, taxpayers who itemize their tax deductions can claim a deduction on their federal tax return up to $10,000 each year for local property taxes paid, according to Rubinstein. “When the tax law changed in 2017, this was very controversial, because taxpayers previously had an unlimited deduction. The $10,000 limit is significant for taxpayers in high-tax states like New York and California.” Asher Rubinstein, Partner Gallet Dreyer & Berkey, LLP
One of the biggest benefits of homeownership is tax breaks. If you’re a homeowner, tax credits and deductions could save you thousands of dollars per year. But are there tax credits for buying a house? And what about deductions? To help you come next tax season, here are tax credits and deductions you can get when you buy a house, and additional tax breaks that come with homeownership.
Both tax credits and deductions can help a homeowner save money on their tax bill, but they work differently. “Both lower one’s taxes, but a credit applies to the tax owed, while a deduction applies to one’s income that is subject to tax,” says Asher Rubinstein, partner and tax, asset protection and trusts and estates attorney at Gallet Dreyer & Berkey in New York City. “In other words, it’s a matter of timing and when the tax discount is applied.”
There are also refundable and nonrefundable tax credits. According to the IRS, if your tax bill is less than the refundable credit, then you get the difference back in your refund.
Credits are typically much more valuable than deductions. “For example, someone with a $1,000 tax credit in the 20% tax bracket will see their tax bill reduced by $1,000. Someone with a $1,000 tax deduction will only see $200 in tax savings,” explains Eric Presogna, founder and CEO of One-Up Financial and a certified financial planner public accountant.
There are two types of deductions available to all taxpayers: standard deduction and itemized deduction. If you take the standard deduction, you reduce your taxable income by a set amount. For the 2024 tax year, the standard deduction is $14,600 for single filers and $29,200 for married couples filing jointly. “There is no need for the taxpayer to keep records of individual tax deductions if the taxpayer takes the standard deduction,” Rubinstein says. Itemized deductions are individual tax deductions that could potentially add up to more than the standard deduction.
According to Presogna, homeowners should only take the standard deduction when they don’t have enough itemized deductions to exceed the standard. “With the SALT deduction (state, local, real estate taxes) currently limited to $10,000, a married couple would need more than $19,200 in mortgage interest, charitable donations and other qualifying deductions in order to warrant itemizing,” Presogna says.
The IRS has specific rules regarding how homebuyers qualify for certain tax credits. There are also credits that are only available to first-time buyers. You generally qualify as a firsttime homebuyer if you’re purchasing your first home. However, you may still qualify if you’ve not owned a home for three years prior to the date of purchasing the new home for which the credit is claimed, according to the IRS. That home must be your principal residence.
One federal tax credit available to first-time buyers is through the Mortgage Credit Certificate (MCC) program. This program was designed to help lower-income families afford a home. The MCC program allows buyers to claim a dollar-for-dollar tax credit for a portion of the mortgage interest paid per year, up to $2,000. Eligible individuals must be first-time homebuyers, use the house as their primary residence and meet the program’s income and purchase price requirements.
There may also be tax credits available through your state. These buyer programs vary from state to state. You can research what may be available in your local area or look through the U.S. Department of Housing and Urban Development’s directory of local homebuying programs.
There are more tax deductions available to homebuyers and homeowners than there are tax credits, but Presogna says it depends on whether you itemize your deductions or take the standard deduction. Regarding homeownership, “If you have enough deductions to itemize, real estate taxes, home equity loan and mortgage interest are some of the larger deductible costs,” Presogna adds.
Keep in mind that not everything is deductible. According to Rubinstein, most costs associated with homeownership do not qualify for any tax benefits, including cosmetic upgrades, homeowners insurance and your mortgage principal, to name a few.
First-time homebuyer savings account (FHSA). Some states offer tax benefits to first-time homebuyers to open an FHSA. This is a specific type of savings account that helps first-time buyers save up to $15,000 or $30,000 per year for a down payment, closing costs and other expenses related to their home purchase. You can deduct the annual savings from your state-taxable income, but limits vary by state.
Mortgage interest deduction. This is a deduction for interest paid on mortgage debt, but you will need to itemize your deductions to qualify for this tax break. “Under current law, this applies to loans up to $750,000,” Rubinstein says.
Property tax deduction. Through 2025, taxpayers who itemize their tax deductions can claim a deduction on their federal tax return up to $10,000 each year for local property taxes paid, according to Rubinstein. “When the tax law changed in 2017, this was very controversial, because taxpayers previously had an unlimited deduction,” he says. “The $10,000 limit is significant for taxpayers in high-tax states like New York and California.”
Mortgage points deduction. Per IRS guidelines, mortgage points are fees paid to take out a mortgage. This also includes origination fees or discount points purchased in order to reduce the interest rate.
Home office deduction. “If you’re a business owner or selfemployed and work from home, you may be entitled to a deduction for the portion of your home used for business,” Presogna says. However, Rubinstein warns that this is the most audited deduction due to the amount of taxpayers who try to claim this deduction. “The IRS has specific rules to follow. For instance, you can’t work from home for an employer. You have to use a dedicated room and you have to use it regularly. And there are square footage limitations,” Rubinstein explains.
Many tax benefits extend beyond the initial purchase of a home. The IRS offers some tax benefits for certain capital improvements, such as renovating your home office, making energy-efficient improvements or making changes due to a medical condition. If you take out a home equity loan to buy, build or improve your home, you could qualify for the home equity loan interest deduction. The IRS would classify the interest you pay on the borrowed funds as home acquisition debt, which may be deductible.
First-time homebuyers could also potentially qualify for a traditional or Roth IRA penalty waiver. If you meet IRS qualifications as a first-time buyer and take out $10,000 or less, you can use those funds toward a down payment without a 10% tax penalty if you close within 120 days. However, the actual withdrawal may still be considered taxable income.
One of the biggest tax breaks for a homeowner is the exclusion of capital gains when they sell their home. Capital gains are the profit from the sale of the home. For married couples, the first $500,000 in capital gains are not subject to tax. For individuals, the first $250,000 in capital gains are not subject to tax. “However, the home has to be used as one’s personal residence for two out of the last five years in order to get this tax break,” Rubinstein says.
As the year comes to a close, we offer some planning tips to our clients, colleagues and friends of the firm regarding their assets, tax and estate concerns.
Foremost, there are some time-sensitive ways to save taxes that could result in much more money for your family.
By Robert Farrington – Featuring Asher Rubinstein, Partner Gallet Dreyer & Berkey, LLP
Investors in digital assets like cryptocurrency and non-fungible tokens (NFTs) have been on a wild ride these last few years. After all, the price of a single bitcoin BTC 0.0% hit an all-time high of over $65,000 in November of 2021 before sinking to around $20,000 in June of 2022 and staying in that range ever since. In the meantime, the value of many popular non-fungible tokens (NFTs) has dropped like a rock or been erased completely.
With that in mind, plenty of crypto investors won’t have to worry about paying taxes on gains this year. With prices cratering and many investors hodling on to see better days, many won’t have any realized gains to claim…
Courts have been closed or working at a reduced schedule for much of 2020, but people and businesses are still suing each other. Are your personal and business assets protected from creditor threats?
We continue to utilize entities such as trusts, family limited partnerships (FLPs) and limited liability companies (LLCs), along with the laws of favorable jurisdictions, in order to protect our clients’ hard-earned assets from creditor threats and litigation.
The asset protection laws of offshore jurisdictions continue to interest both US and foreign clients. In 2020, we continued to establish offshore asset protection trusts, including for clients in Hong Kong and China who sought safe and stable jurisdictions at a time of increasing political, social and economic uncertainties in their home country.
Closer to home, the level of interest in offshore asset protection by our US clients peaks during each presidential election cycle and financial downturn, following rising doubts about government, banks and Wall Street. Our US clients have utilized offshore trusts for diversification, and as a hedge against political instability and economic uncertainty. During 2020, we have assisted clients in the US, Asia and throughout the world in achieving asset protection in jurisdictions that offer economic and political stability and strong banking laws.
We also note that in 2020, Connecticut became the twentieth US state to implement domestic asset protection trust (DAPT) laws. This follows similar legislation, including a 2017 Connecticut law that provides LLC members with stronger protections from creditors, including disallowing foreclosures on LLC interests and preserving charging orders as the exclusive remedy of creditors, as well as extending the benefit to single-member LLCs. Businesspeople are drawn to Delaware for its favorable corporate law and business-friendly courts. Asset protection clients consider Nevada, Wyoming and Delaware for their FLP and LLC formations. Connecticut is an increasingly interesting option.
There are multiple asset protections issues, from the effectiveness of single-member LLCs to the vulnerabilities of domestic asset protection trusts.
Please contact us for assistance.
When the tax law changed in 2017, the benefits to taxpayers were expected to last through 2025. The favorable tax changes included an increase in the amount exempt from estate tax, from $5 million to $11 million per person, and a maximum capital gains tax rate of 20%. With the upcoming presidential and congressional elections, and calls by politicians to undo these favorable tax laws, our clients wonder what they should do now, before the tax law changes again.
Fortunately, there are many strategies that allow us to benefit from the current tax law, and to lower our taxes through already-proven techniques, before the law changes again. There is no new “magic button” tax remedy for Election Year 2020. Instead, tax lawyers can rely on “tried and true” tax strategies that have already proven to be effective and are available now. An added bonus: the IRS has stated that it will not challenge taxpayers who implement these tax strategies now, before the law changes.
On a basic level, one can simply gift up to $11.58 million worth of assets in order to remove the assets from one’s taxable estate at death. However, most people are hesitant to part with such a high amount, and they may not want their relatives to be enriched with such a windfall, simply to lower a tax at death. Instead, the following strategies contemplate lowering tax, while still controlling or benefiting from the asset during one’s lifetime.
How to Lower Your Estate Tax;
More to Your Beneficiaries, Less to the IRS
The goal here is to remove assets from the reach of the estate tax, utilizing up to the full current $11.58 million exemption (before it may be reduced to $5 million or perhaps $3.5 million after the election), while still controlling or benefiting from the use of those assets. This generous exemption is per person; a married couple may remove $23 million combined from estate tax. Here are some techniques to keep the assets in the family, and still remove them from estate tax at your death. Some have acronyms that lawyers, but probably few others, find to be cute.
Leveraged Gifting
This method to reduce estate taxes utilizes discounted transfers of interests in closely held entities (Family Limited Partnerships, LLCs, family corporations) to family members. Such “leveraged gifting” has been an extremely important, effective and common method used to reduce or eliminate estate taxes. As long as you retain your controlling interest (e.g., LLC Manager, General Partner), you will continue to control all assets within the entity, while still escaping the estate tax.
If you own a Family Limited Partnership (FLP), you can gift Limited Partnership (LP) interests (or membership interests in an LLC) to your heirs, and take advantage of discounting, to get even more out of your estate, tax-free. In some cases, as much as $46,000,000 worth of FLP interests can be conveyed to your heirs and escape the estate tax. FLPs also provide the additional bonus of excellent asset protection. It should also be noted that in the past, politicians have called for the elimination of such discounting benefits. Once again in this election year, discounting is in jeopardy of legislative repeal. However, until the tax law changes once again, leveraged gifting utilizing favorable discounting is a legal, available and very worthwhile strategy.
GRAT (Grantor Retained Annuity Trust)
GRATs are particularly effective for assets that you think will appreciate over time. The IRS sets a very low “hurdle rate” which in today’s COVID economy is at 0.4%, a historic low. (The rate was 2.2% in September 2019.) So long as the assets in the GRAT perform better than the IRS’s hurdle rate, they escape taxation.
If you contribute assets into a GRAT, you can receive a regular payment akin to an annuity over many years. When the trust term ends (from two to ten years), the appreciated assets pass to your heirs, are not considered part of your estate and will not be subject to estate or gift tax.
There are calls to eliminate GRATs, like discounting, after the election. However, GRATs are an effective and completely legal strategy, currently available for tax savings.
SLAT (Spousal Lifetime Access Trusts)
Spouses who are uncomfortable gifting significant monies to their heirs may instead set up trusts for each other and utilize the current $23 million joint exemption while still benefiting from the assets. The trust would provide distributions to your spouse (which would also benefit you) and would distribute the remaining assets to your heirs after your spouse’s death.
QPRT (Qualified Personal Residence Trust)
If you contribute your personal residence into a QPRT, you may still live in the residence for a term of years, and when the trust term ends, the home is removed from your estate while passing to your heirs, free of estate taxes.
ILIT (Irrevocable Life Insurance Trust)
If you own or control life insurance policies, the IRS deems the death benefit to be in your estate and subject to estate tax, even though you will never receive the death benefit during your life. If you contribute these life insurance policies to an Irrevocable Life Insurance Trust, you may remove the insurance policies from your estate. Your family members may receive the death benefit from the trust, free of any estate tax.
Dynasty Trust
A Dynasty Trust allows for the preservation of assets for one’s immediate and remote descendants, along with offering asset protection from creditors, as well as delay of the estate tax bite for many generations. The trust can distribute income to beneficiaries, but principal is preserved, asset-protected and grows tax-free.
CRUT (Charitable Remainder Trust)
In addition to the loss of an $11.58 million exemption from estate tax, politicians are also calling for an increase in the income tax on capital gains from the current 20% to 39.6% (plus the 4.3% investment tax). This will affect taxpayers who own appreciated assets; if the law changes, they will pay double when they sell those assets. In addition, politicians are also calling for the repeal of the basis “step up” at death. (Under current law, assets passing at death are entitled to a “step up” to their current value, rather than their original value. This means, for example, that when the heir inherits and sells the inherited asset, the heir pays no tax. Such a “step up” in basis may be eliminated after the election.) To avoid this, taxpayers should consider a Charitable Remainder Trust. CRUTs are effective for both income tax and estate tax savings.
By contributing appreciated assets to a CRUT, the sale of these assets by the CRUT is exempt from all taxes; you are entitled to a charitable deduction; the trust makes regular payments back to you during the trust term; and at the end of the term, 10% of the assets pass to the charity, are not subject to income tax and are removed from your estate.
When?
Some clients are availing themselves of the above strategies currently. Some clients are waiting until after the election on November 3 to see who wins, and which way the tax winds will blow. Even if final legislation may not be enacted until well into 2021, there are concerns that such legislation would be retroactive to January 1, 2021. The window from November 3 to December 31, 2020 is not wide.
Who?
These strategies are not only for the mega-wealthy. We have successfully utilized these strategies for clients of means at various levels who are concerned with leaving as much of their hard-earned assets for their heirs with as little as possible going to the IRS and state tax authorities. These are equally attainable goals with a $5 million estate as they are at $50 million. Moreover, these strategies are affordable, especially considering the amount of tax savings they offer.
Please contact us for more information.
On September 28, 2020, the New York City Council amended NYC Admin. Code Section 22-1005, which made personal guaranty provisions in some commercial leases unenforceable. The protection afforded to some business owners is now in effect until March 31, 2021.
In addition to extending the end date of the default period to March 31, 2021, the City Council clarified that the protections cover personal guaranty provisions that “relate to” to commercial leases or other rental agreements. The prior version of the law was unclear as to whether the guaranty provision had to be written into the lease document or could be in a separate document.
Now, the guaranty provision can be in the lease itself or in a separate document; both are covered.
In addition, even after the amendment, the law remains unclear whether the personal guaranty provisions are permanently unenforceable or merely suspended until March 31, 2021.
The legislation renders unenforceable (at least for now) only those guaranty provisions for tenants that were affected by Executive Orders 202.3 (restaurants), 202.6 (non-essential retail establishments), and 202.7 (barbershops, salons, tattoo parlors, etc.).
Please follow our blog for further developments.
For additional information, please contact us.
The New York City Council has attempted to give some business owners additional relief from the economic effects of COVID-19. If a commercial lease provides that a natural person who is not the tenant is personally liable under the lease, the statute prohibits landlords from enforcing that personal liability provision if the tenant has been impacted by COVID-19. Attempts to enforce such a provision against a non-tenant may constitute unlawful harassment. However, many lawyers and commentators argue that the law is unconstitutional and hence unenforceable.
Bill 1932-A, signed by Mayor De Blasio on Tuesday, May 26, 2020, applies to defaults that occur between March 7, 2020 and September 30, 2020, if one of the following conditions is met:
In many commercial leases, a person, often the tenant’s principal, will agree to be personally liable for a default by a commercial tenant. Some of these commercial leases contain only a “Good Guy Guaranty,” in which the “guarantor” is personally liable only under limited circumstances, which vary on a lease-by-lease basis from failing to vacate the property after a default, to filing a bankruptcy, to nonpayment of rent before the tenant vacates the premises. The new statute does not appear to make any distinction between full guaranties and Good Guy Guaranties.
The legislation is subject to dispute on two grounds. First, the language of the bill prohibits enforcement of a personal liability provision if it is found in “a provision in a commercial lease or other rental agreement.” If there is a separate guaranty document signed by a natural person who may or may not be the owner of the business, we expect that landlords will argue that the guarantor remains liable because, if read literally, the statute applies only if the personal liability arises in the commercial lease or other rental agreement.
Second, landlords will argue that the municipal legislation is an unconstitutional impairment of the parties’ contract rights. Whether the City of New York, as an instrumentality of the State of New York, has the authority to suspend contract enforcement in times of emergency, as argued by the bill’s prime sponsor, is likely to be ultimately decided by the courts.
A landlord may never be able to recover from the non-tenant guarantor, although the bill is unclear on that issue. The text of the bill appears to extinguish, rather than temporarily suspend, the landlord’s ability to enforce the personal liability provision. As long as the default occurred between March 7, 2020 and September 30, 2020, and one of the above conditions is met, the landlord’s claim against an individual guarantor appears from the bill to be unenforceable permanently. However, comments from the bill’s sponsor suggest that the enforcement of the personal liability provisions is only “temporarily suspended.” All interested parties should continue to monitor the situation for updates.