The Drywall Problem and Asset Protection:
Why and How Builders and Real Estate Developers Should Protect Themselves
by Asher Rubinstein, Esq.

Real estate developers are popular litigation targets.  Builders may be sued for a host of claims, including circumstances beyond their control, such as the presence of hidden, unknown environmental contaminants.  The latest litigation threat comes via Chinese drywall used in the construction of homes during the building boom that occurred from approximately 2003 through 2008.  Chemicals within the drywall have been linked to illness, as well as damage to homes and appliances, necessitating relocation and lowering property values.  Builders and real estate developers are targets of litigation, based on their use of such drywall in the homes they built.  Builders and developers should be aware that in the event of a judgment against them, they may lose their personal assets, as well as their real estate and business assets.  Insurance will offer limited protection.  It is critical for builders to protect their assets, including their real estate and their personal property.

The Extent of the Drywall Problem  
The current drywall issue is widespread.  Thousands of homeowners have already filed complaints against builders, as well as with the government.  The Consumer Products Safety Commission (CPSC), a federal agency, is conducting the largest investigation ever in its history, targeting drywall.  The problems have been reported mostly in Florida, Louisiana and Virginia; however, homes around the country (and in Canada) may be effected.  The building boom earlier this decade resulted in a domestic drywall shortage which led to the importation of Chinese drywall in many states.  It is estimated that some 60,000 homes may have been built with Chinese drywall.  One report claims that more than 10 million square feet of Chinese drywall was imported into southwest Florida alone during the housing boom.  There is currently one class action pending against a drywall manufacturer in China, although American-made drywall is also suspected of causing injury, and American drywall is also being investigated by the CPSC. Domestic drywall manufacturers such as National Gypsum and Georgia-Pacific have also been sued, along with suppliers such as Venture Supply, Inc. which was forced to close its business. The builders and developers who unknowingly built homes using such drywall are now facing numerous lawsuits.

To make matters worse, many insurance companies are now denying homeowners’ claims for damages suffered because of contaminated drywall.  Insurers such as Citizens Property Insurance Corp. (the largest home insurance company in Florida) are also dropping coverage of homeowners who file claims based on drywall.  Citizens is not paying for damages related to drywall because insurance policies specifically exclude “builder defects”.  Nevermind that the builder did not make the drywall, but merely bought it and installed it, unaware that the drywall manufacturer produced and distributed a dangerous product.  If homeowners are suffering damages that are not being covered by their insurers, homeowners now have even more cause to sue the builders and developers.

Impending Insurance Crisis
We can look to the medical industry as a guide for what happens when negligence litigation targets a class of defendants.  At a time when medical malpractice insurance policies are becoming smaller, plaintiffs’ malpractice awards grow larger and larger.  Insurance companies are not writing new policies and are not renewing existing policies.  Many jurisdictions have allowed insurers to increase premiums exponentially.  As a result, the medical community is facing a drastic, widely-publicized “insurance crisis”.  Doctors have staged “walk-outs” to protest the insurance crisis.  Some have chosen to close their practices, move to other jurisdictions or even leave medicine altogether, rather than endure a barrage of lawsuits and inadequate, expensive insurance coverage.

The proliferation of lawsuits based on defective drywall will result in increased insurance costs for builders and real estate developers.  If the medical industry is any example, insurers will soon balk at assuming these new risks.  One example from the litigation wave against builders and developers based on injuries from mold: State Farm, the largest U.S. home insurer, has eliminated coverage for mold in most states, and Allstate, the second largest insurer, has made its coverage for mold more restrictive and limited.  Like the medical malpractice situation, declining coverage for mold-based liability has already been termed a “crisis”.  Builders and developers will no doubt feel the pinch from both sides, as targets of lawsuits and as they pay more and more for decreasing coverage.
Builders must protect their assets from potential drywall liability.  The days of huge insurance policies serving as reliable umbrellas are gone.  There are, however, viable alternatives available to those who plan ahead.

Solution: Asset Protection
In light of the litigation and insurance risks facing builders and developers, the need for asset protection has never been greater.  Builders’ real estate holdings, as well as their personal assets, are at risk.
 
The best way to fend off a plaintiff is to discourage the lawsuit in the first place.  Typical contingency fee lawyers start out with the expectation that they are bringing an action against a wealthy, deep pocket real estate developer.  The sooner they learn that the builder has no attachable assets, the sooner the strategy will change and the lawyers will take whatever they might get from an insurance settlement.  After all, “one third of zero is zero”.  The process brings insurance back to doing what it is supposed to do – cover the builder, rather than invite the lawsuit.  Domestic asset protection (for example, a family limited partnership, or FLP) will, if properly established and maintained, be 100% effective against all future claims.  Such asset protection should discourage future lawsuits and give defendants significant leverage to force favorable settlements within the parameters of their insurance coverage.  Additionally, proper asset protection allows builders to reduce liability coverage to reasonable levels.  One caveat: it is imperative that builders protect themselves before the commencement of a lawsuit.

Separate and Contain Potential Liabilities
The Revised Uniform Limited Partnership Act (RULPA), which has been adopted as statutory law in all fifty states, provides that the assets owned by a limited partnership are not owned by the individual partners.  Therefore, those assets cannot be attached by the personal creditors of a partner.  If a real estate developer contributes real estate to an FLP, the properties are no longer owned by the developer (although, he may still control those assets as General Partner).  Thereafter, creditors of the builder may not attach those assets merely because they have a personal judgment against him.
As part of an asset protection plan tailored specifically to the builder and his holdings, each asset should be individually evaluated for its exposure to liability.  In general, each parcel of real estate should be placed into a separate FLP.  The reason for treating each real estate asset individually and placing each one in its own FLP is to isolate the litigation exposure of each asset.

“Equity Strip” the Property and Protect the Proceeds
Domestic asset protection via FLP’s is extremely effective against future claimants, but may not be as effective with respect to pre-existing claimants.  In such cases, a property developer may not be completely protected by domestic asset protection and may have to utilize international asset protection strategies.  International asset protection strategies are effective primarily because they involve the physical transfer of an asset to a safe and secure foreign locale where the asset is beyond the jurisdiction of U.S. courts.  Money, for example, may be wired offshore in order to be completely protected from U.S. creditors.  Real estate, however, cannot be moved offshore.

Although it is physically impossible to transfer real estate to a foreign jurisdiction, a builder may protect the real estate by turning it into cash and then protecting that cash by transferring it offshore.  This can be done by either selling or mortgaging the property.  The equity is thus separated from the property, i.e., “equity stripping”, and then protected.  The proceeds of the sale or mortgage can be protected offshore through a number of effective strategies, such as offshore asset protection trusts or investment in foreign deferred variable annuities.
If the real estate is mortgaged and the proceeds are protected offshore, a claimant will be frustrated because any judgment it may receive would be subordinate to the security interest of the mortgagee.  As with other effective asset protection strategies, the claimant will be more inclined to settle upon terms favorable to the builder, rather than receive nothing.

Conclusion
It is clear that the risks facing real estate developers, including new theories of tort liability, in addition to traditional areas of concern, all offer compelling reasons for builders to properly protect the assets they have worked hard to acquire.  In addition to their real estate holdings, developers must give thought to protecting their personal assets.  Proper asset protection strategies offer builders and developers piece of mind and provide the protection their properties need to withstand the inevitable attacks.

On the Proper Use of Family Limited Partnerships
by Asher Rubinstein, Esq.

An article in the Wall Street Journal, “Covering Your Assets” (WSJ, April 12, 2009), attempted to provide guidance on the proper use of Family Limited Partnerships.  Unfortunately, this article has led to much confusion.  Our comments below are intended to provide some clarity and guidance on the proper use of FLPs.

First, we address the general issue of whether FLPs may contain personal assets, in light of the Journal’s warning that FLPs should only be used for business purposes.  From that broad issue, we then discuss the narrow question of whether a personal residence may be owned by an FLP.  Finally, we analyze whether there is a certain percentage or amount of one’s assets that may be placed in a partnership.

The underlying premise of the article is that FLPs are strictly business entities.  Based on this premise, the Journal approves the transfer of stock of a family owned business and commercial real estate to an FLP, but warns against the transfer of non-business assets such as homes or cars to an FLP.  However, this premise is wrong.  Nowhere in the Revised Uniform Limited Partnership Act, or in the limited partnership laws of any state which govern limited partnerships such as Family Limited Partnerships, is there a limitation that such partnerships operate solely for business purposes.  In fact, FLPs do have important non-business purposes, including: estate planning benefits, tax planning advantages, consolidation of assets, centralization of family control over assets, better family succession, and, of course, asset protection benefits .  Establishing an FLP plan for both tax planning and non-tax reasons strengthens the FLP plan in the eyes of the IRS, as the Journal advises.  But, as the Journal also notes, if the sole purpose of an FLP is for tax avoidance, then the IRS might ignore that FLP for tax purposes only.  However, both the Journal and the IRS recognize the valid purposes behind FLPs, besides tax avoidance.  The discussion of underlying business or economic purpose for an FLP is relevant to the tax treatment of the FLP by the IRS, not to the validity of the FLP for asset protection or any other (non-tax) purpose.

Having established the non-business utility of an FLP, we may now address the Journal’s statement that one’s personal residence should not be placed in an FLP.  With all due respect to the Wall Street Journal reporter, we disagree with this conclusion.  The Journal offers no support for its assertion that a personal residence should not be placed in an FLP.  First, there is in fact no authority for this, because there is no law which prohibits this action.  Second, there is law which allows a personal residence to be owned by non-persons such as land trusts and Qualified Personal Residence Trusts (QPRTs).  In both cases, a personal residence is conveyed by its owners to a trust.  There is no logical reason why a trust may own a home, but an FLP may not.  Moreover, a transfer of a personal residence to a QPRT is done precisely for tax planning reasons – - one of the goals of transferring a personal residence to an FLP.  If such a transfer to a QPRT is sound, then so too is the transfer of a personal residence to an FLP.

Another source of confusion in the article was a quote from an asset protection attorney warning that “more than half of somebody’s wealth [should not] go into any one vehicle.”  From that quote, readers extrapolated that no more than fifty percent (50%) of a person’s assets should be placed into an FLP.

However, we interpret that attorney’s warning to apply to a situation where a client’s assets are all placed into one FLP; for example, the landlord who owns ten rental properties and places all ten into a single FLP.  When a tenant in Building 1 sues the landlord, Buildings 2 through 10, owned by the same FLP, are now vulnerable to the tenant’s judgment.  For this reason, we would counsel the client to place each building into a separate FLP.  Thus, the tenant plaintiff, if successful in court, might reach Building 1, but not the other buildings which are in different and distinct FLPs.  We thus agree with the attorney quoted in the Journal, to the extent his counsel is to isolate each asset that might generate a liability from all other assets by placing each “dangerous” asset in its own FLP.

Clients have asked whether there is a certain percentage of assets that should be transferred to an FLP.  The answer is that FLP law nowhere contains a numeric standard.  In fact, we have clients who have placed all of their assets into a series of  FLPs, with no adverse consequences.  There is no prohibition against this, neither in the FLP statutes, nor in the Internal Revenue Code provisions applicable to FLPs.

Clients should not confuse the concept, from fraudulent conveyance law, that a debtor’s transfer of all of his assets would render him insolvent vis-a-vis creditors, and would be an indicia of a fraudulent conveyance.  That doctrine has limited applicability when the person owns FLP interests, which have value, and hence the person is not insolvent.  Moreover, an FLP can make distributions of money, which could be used by the person to pay creditors, thus further obviating the suggestion of insolvency.

We agree with much of the guidance offered by the Journal article, especially with its warnings against using an FLP as a personal piggy bank, or taking aggressive valuation discounts , and its suggestion of obtaining appraisals for the property transferred to an FLP.

Please contact us with any questions regarding Family Limited Partnerships.

MEMORANDUM

To: Clients and Colleagues

Date: 26 January 2009

Subject: Your Ability to Discount the Value of FLP Gifts May Be Eliminated Soon
 

On January 9, 2009, Rep. Earl Pomeroy (D-ND) introduced a Bill (HR 436) in Congress which, if passed, would eliminate your ability to discount the value of family limited partnership interests (or interests in any entity – corporation, LLC, etc.) that are transferred. The Bill explicitly prohibits discounts for minority interest or lack of control where the receiver of the limited partnership interest (or other entity interest) and his/her other family members together have control of the partnership (or entity). This provision of the Bill would become effective as of the date of its enactment. The Bill has been referred to the House Ways and Means Committee. We believe there is a significant likelihood that this Bill will be passed by Congress and signed by President Obama in the near future.

Each of you currently has the right to give $1,000,000 free of gift tax. A gift of $1,000,000 worth of limited partnership interests may, under current law, benefit from discounts in the value of those limited partnership (LP) interests because they are minority interests and do not give the recipient control of the partnership. Such discounts may reduce the value of the LP interests by as much as 50%, thereby enabling you to give away twice as many LP interests with the same $1,000,000 gift. For example, if the partnership assets are worth $2,000,000, a gift of $1,000,000 of LP interests would get 50% of the partnership out of your estate (although you continue to control the partnership and all of its assets as general partner). With a 50% discount in the value of the LP interests, the same $1,000,000 gift of LP interests removes 100% of the partnership from your estate (although you still maintain control as general partner). Thus, for a married couple, gifting of LP interests at discounted values has been an easy and effectively way of decreasing their taxable estate by up to $4,000,000, while still maintaining control of the assets in their partnership. HR 436 will soon eliminate this valuable estate planning tool.

Many of you have either not made any gifts of LP interests at all or have only made $12,000 gifts. These $12,000 gifts have no relation to the $1,000,000 gift discussed above. We encourage you to consider making a $1,000,000 gift of LP interests ($2,000,000 for a married couple) at discounted valuations now, before this valuable estate planning tool is eliminated. Gifting at this time would also take advantage of current depressed asset values, allowing for even greater partnership percentages to be removed from your estate.

Gifting LP interests will require:

1. Determination and documentation of the current value of partnership assets;

2. Preparation of Memorandum of Gift;

3. Calculation of valuation discounts and percentage of partnership transferred via gift;

4. Preparation of calculation letter;

5. Preparation of IRS Form 706 (Gift Tax Return – There will be no gift tax, but the return is necessary in order to claim exemption from gift tax).

HR 436 also eliminates the unlimited federal estate tax exemption that was supposed to become effective January 1, 2010 and instead establishes a permanent $3,500,000 estate exemption. It also establishes a permanent federal estate tax of 45% on estates up to $10,000,000 and 50% on estates greater than $10,000,000. The above would be in addition to any applicable state inheritance tax.

Please note that HR 436 has no impact whatsoever on the asset protection aspects of family limited partnerships.

To discuss utilizing your discounted gifting opportunities before they are lost, please call us at 212.888.6600 or e-mail us at krubinstein@assetlawyer.com.

Step One: Protect What You Have Left

To paraphrase an ancient Chinese curse, we live in interesting times. Indeed, it may be appropriate to abandon subtlety and state that we live in dangerous times. Many of us are experiencing significant loss of income as a result of either unemployment or reduction of business revenue. Those of us who are not yet in this position have seen it happen to neighbors, friends or colleagues. We are, or should be, afraid that this could happen to us. We have all suffered serious depreciation of our investment assets. Our homes are devalued, our retirement plans are decimated and our nest egg is shrinking daily, with no end in sight.

There is no shortage of financial planners and investment managers eager to offer free advice in these troubled times: “Buy Low”, “Hoard Cash”, “Invest in Bonds”. Yet, all of these advisors ignore the first, most obvious and most important piece of advice: PROTECT WHAT YOU HAVE LEFT!

Now is the time for each of us to adopt a plan to protect our current assets from threats that may arise as a result of further financial deterioration. If we lose our jobs, if our income further declines, if our savings vanish: Will we be able to pay all of our debts? Will we go further into debt? Could we lose our assets? Could we get sued?

Although asset protection strategies may be adopted at any time, such strategies are most effective and least expensive when they are adopted early, while all debts are current. Consider transferring assets to legally protective entities like family limited partnerships that will, in effect, erect “bullet-proof shields” around your home and other assets. Consider moving your nest egg to a safer jurisdiction — one where banks have not failed and where the black plague of sub-prime mortgages and credit default swaps has not reached.

Whatever financial strategies you chose to follow, your fist step should be a legal strategy: PROTECT WHAT YOU HAVE LEFT through timely, legal asset protection.

For advice regarding legal asset protection strategies, contact Rubinstein & Rubinstein, LLP., at www.assetlawyer.com, or (212) 888-6600

Creating a Safety Net for Landlords:
Protecting Assets From “Scaffold Law” Claims

by Asher Rubinstein, Esq.1

Ownership of real estate carries with it the threat of litigation from tenants, guests or even passers-by.  In 2002, New York City changed its law, increasing property owner liability for injuries sustained on sidewalks (notwithstanding that the City owns the sidewalks).2  Moreover, property owners also face liability based upon lead paint, mold and other environmental risks.  Now an additional threat exists based upon a newly strengthened New York State “scaffold law.”

“Scaffold Law” Increases Property Owner Liability

For years, property owners have known that Labor Law § 240(1), more commonly known as the “scaffold law,” imposes liability on a property owner for elevation-related injuries to a worker on the property.  Elevation-related injuries are defined by the “scaffold law” as those involving the use of scaffolding, hoists, stays, ladders, slings, hangers, blocks, pulleys, braces and ropes.  The most common injuries covered by Labor Law § 240(1) are falls from scaffolding or ladders, or when a worker is injured by a falling object.  Because most multi-family buildings must utilize scaffolding and ladders, this law has broad reach.  Most importantly, this liability is absolute; i.e., the owner is liable even if he did nothing wrong!

Further, the duty created by this statute to provide safe working conditions is nondelegable.  When a duty is nondelegable, a person may not transfer that obligation to another party to avoid responsibility.  Thus, under the “scaffold law,” the property owner may not transfer the responsibility to provide safe working conditions on his property to, for example, a contractor.  Therefore, the property owner himself is held liable for injuries covered by the law even though the work was performed by an independent contractor over which the property owner exercised no control.  For example, if a managing agent hires a painting contractor as part of a renovation project and the painter’s employee falls from a ladder and is injured, the injured worker can seek recovery from the property owner under Labor Law § 240(1), irrespective of the painter’s workers’ compensation insurance or even the owner’s lack of wrongdoing.

A recent New York State Court of Appeals decision, Sanatass v. Consolidated Investing Company, 10 N.Y.3d 333, 858 N.Y.S.2d 67 (2008), expanded the scope of the “scaffold law.”  That case held that a property owner was liable even when the contractor was hired by a tenant in direct disregard of a lease provision prohibiting the tenant from altering the premises without the property owner’s permission.  The lease provision in Sanatass required the tenant to obtain written permission from the property owner before the tenant performed any alterations to the property.  The tenant employed a contractor without permission from the property owner.  An employee of the contractor was injured when an air conditioning unit, which was being hoisted to the ceiling, fell on top of him.  The employee won a judgment against the property owner, notwithstanding the tenant’s breach and notwithstanding that the property owner was not even aware that the contractor was performing work on the property.

The result after Sanatass effectively treats property owners as insurers and will translate into more expensive insurance premiums and a significant increase in the potential for lawsuits.  In Sanatass, the Court made it clear that even the lack of ability by the property owner to ensure compliance with the “scaffold law” is irrelevant to his liability.  In Sanatass, even though the property owner did not know that the tenant hired a contractor, and even though the work was performed in direct violation of the lease, the property owner was still strictly liable for the injury to the worker.

With the new interpretation of Labor Law § 240(1), owners of real property can expect more lawsuits resulting from elevation-related injuries on their property.  This expansion of property owner liability comes at a time when property owners are already facing significant legal challenges, such as lawsuits resulting from slips and falls, and from the presence of lead paint, mold and other toxic substances.

Considering the litigation risks and changes in the interpretations of the law, it is clear that property owners must take steps to protect their assets from potential plaintiffs.  Property owners can protect their real estate holdings, as well as their personal assets, by employing various asset protection strategies.

Domestic and International Asset Protection Strategies

Perhaps the best way to discourage a plaintiff from bringing a lawsuit in the first place is to ensure that the property owner has no attachable assets.  The sooner a potential claimant learns that a property owner has no attachable assets, the sooner the claimant will forego his plans to initiate a lawsuit and agree to an insurance settlement.  This process brings insurance back to doing what it is supposed to do — cover the property owner rather than invite a lawsuit.

Domestic asset protection will, if properly established and maintained, be 100% effective against all future claims.  For example, ownership of real estate within a family limited partnership (FLP) should discourage future lawsuits and give property owners significant leverage to force favorable settlements within the limits of their insurance coverage.  However, it is imperative that property owners engage in asset protection before the injury occurs and a lawsuit is commenced.
The Revised Uniform Limited Partnership Act (RULPA), which is the law in all fifty states, provides that property owned by a limited partnership is not owned by the individual partners.3  If a property owner transfers property to an FLP, the property is no longer owned by that person (although the former owner, as General Partner of the FLP, still controls the property).  A creditor with a judgment against the property owner may not attach FLP assets to satisfy the judgment.  In most cases, each parcel of real property should be placed into a separate FLP to isolate the litigation exposure of each asset.  If all of the owner’s assets are held in FLPs, a claimant can do nothing more than settle with the insurance company.

In cases where a property owner is faced with pre-existing claimants, domestic asset protection may not be completely effective.  However, international asset protection strategies can be effective in such situations.  Although it is impossible to transfer real estate to a foreign jurisdiction, a property owner may turn the property into cash and transfer the cash offshore.  This can be accomplished by either selling or mortgaging the property.  The proceeds of the sale or mortgage can then be protected offshore by using strategies such as offshore asset protection trusts or investment in foreign deferred variable annuities.  The claimant will be more inclined to settle upon terms favorable to the property owner rather than pursue litigation in a foreign jurisdiction, without contingency fees, where the burden of proof and statute of limitations will be against the claimant.

Conclusion

The increasing risks facing real estate owners are clear and compelling.  Now property owners may face claims based upon injuries which, as in Sanatass, they are powerless to prevent.  Property owners must give thought to protecting their real estate holdings as well as their personal assets.  Proper asset protection strategies offer property owners a viable safety net for their property when faced with inevitable litigation arising from real estate ownership.

Asset Protection in a Bear Market
by Asher Rubinstein, Esq. 1

Recent events have been alarming and historic in scope:   Bear Stearns, Lehman Brothers, IndyMac and Washington Mutual, all once pillars of our financial system, have failed.  The federal government bailed out AIG, Fanny May and Freddie Mac.  Countrywide, Merrill Lynch and Wachovia were forced to sell themselves rather than go under.  The Dow is below 10,000.  Layoffs are wide-spread in many industries.  The foreclosure rate, unemployment rate and inflation are all increasing.  The real estate sector is at its lowest point in twenty years.

You should be concerned about the protection and preservation of your assets in this environment.  In this economy, the threat of creditors taking your assets is real and frightening.

You need asset protection if:

- the value of your home has been reduced to less than the amount of your mortgage;

- you are having trouble meeting your mortgage or other loan payments;

- you are concerned about losing your job or your business;

- the value of your retirement plan and investment portfolio has fallen to the extent that now your most valuable asset is your home;

- you are facing a lawsuit;

- you are in a profession with a high degree of liability (doctor, financial advisor, landlord, real estate developer, real estate investor).

Suppose that during the “good” economic times, say 2002 through 2007, you took out a mortgage to buy investment real estate with the hopes of “flipping it” for a profit.  Now, you’re left with the property, but no prospects of selling it all, let alone for a profit.  To make matters worse, when you took out that mortgage, the property was worth more than the mortgage, but now it’s worth considerably less.  You cannot keep up with the mortgage payments.

In this scenario, the bank is likely to foreclose and you may lose the property.  The bank will then go after you personally and will target your personal assets to cover the deficiency between the mortgage and the proceeds the bank receives from a foreclosure sale.  It is important to “compartmentalize” your losses and prevent them from affecting your other assets.

You must protect your personal assets, such as your home and your liquid assets (bank and brokerage accounts).  In other words, while you may not prevent the bank from taking the property, you can still prevent the bank from taking your other assets.

There are two options available for asset protection: domestic and offshore.

Domestic asset protection normally involves the transfer of assets into one or more Family Limited Partnerships.  If set up correctly, Family Limited Partnerships are the most effective tool for domestic asset protection, in addition to providing estate planning and tax minimization benefits.
However, the effectiveness of Family Limited Partnerships may be limited with respect to pre-existing creditors, like the mortgage bank.  In such a case, you may want to consider offshore asset protection.  Offshore asset protection involves the transfer of liquid assets to one or more entities established in a confidential and secure foreign jurisdiction.  This must be done with the help of professionals to avoid violation of the many complicated I.R.S. rules and regulations governing ownership and control of foreign entities.

While you are protecting your personal assets, it may also be possible to negotiate with the mortgage bank to achieve a “workout” or restructure of your loan.  Such negotiations should be conducted by an attorney skilled in negotiation and experienced in dealing with banks.  As asset protection lawyers, we can negotiate on your behalf with the mortgage bank in order to avoid foreclosure.

We can also help you challenge the foreclosure.  In this economy, courts are increasingly pro-borrower and less sympathetic toward lenders.  Courts are now recognizing claims by borrowers that mortgage brokers and banks over-reached; engaged in predatory lending; violated the federal Truth in Lending Act, Fair Debt Collection Procedures Act or Real Estate Settlement Procedures Act, or that they disregarded information that would have suggested difficulty of mortgage repayment.  At the same time that we are negotiating with or challenging the bank, we can also protect and preserve your hard-earned assets from future creditors.

The best time to act is now, before claims are filed against you.  If you are current on your mortgage, you are in the best position to protect your assets, because it will be difficult for a creditor to prove that you protected assets in order to avoid a debt that is not in default.  However, if a claim already exists against you, for example if you’ve defaulted on the mortgage, you can still engage in asset protection; however, you may need more effective strategies like offshore asset protection.

Although the current financial environment brings unprecedented challenges, you need not sit back and watch the value of your assets decline and be exposed to predatory creditors.  You owe it to yourself and your family to be proactive.  First, protect and preserve your assets amidst the financial uncertainty.  Next, negotiate with your lenders to restructure your loans and avoid foreclosure.  If foreclosure is unfortunately upon you, challenge it, and at the same time make sure that your personal assets are protected from the bank’s reach.  Qualified and experienced asset protection counsel can help you accomplish all of these goals, keeping creditors at bay and your assets secure for you and your family.

Year-End Notes

As the year comes to a close, we take this opportunity to remind clients of several important issues that might impact upon their estate, tax and asset protection planning.

I.    Reduce Your Estate Taxes Via 2008 Gifting

The amount that an individual may gift to another individual, without tax consequences, is now $12,000.  Gifting is an effective strategy to utilize in reducing estate tax liability.  For example, if a husband and wife each gift $12,000 to three children, then the value of the couple’s estate is decreased by $72,000.

Additionally, you may utilize your unified lifetime credit to avoid gift taxes and make one or more gifts of limited partnership interests equal in value to $1,000,000 (total value for all gifts).  You will be required to file a gift tax return, but the gift taxes will be offset by your $1,000,000 unified lifetime credit.  A husband and wife, together, may make joint gifts equal in total value to $2,000,000 in this manner.

Clients with Family Limited Partnerships should consider gifting an equivalent amount of limited partnership interests, so as to decrease the value of the clients’ estate.  Clients have until December 31, 2008 to effectuate a gift for calendar year 2008.  Clients should, in fact, make annual gifts of limited partnership interests, so that the value of their estates, over time, would decrease for estate tax purposes.  As general partner, however, clients will continue to control all assets within the partnership.

Gifting of partnership interests works hand-in-hand with the principal of discounting of those interests.  Once discounted, more FLP interests can be gifted tax-free to the next generation, which results in more assets passing out of an individual’s taxable estate. When FLP interests are discounted, more of those interests can be gifted away, resulting in decreased estate taxes.

One short example may clarify how discounting and annual gifting work together to lower estate tax liability.  If a client owns real property valued at $120,000, the client might gift the property to his or her child over a ten year period ($12,000 annual gift tax exclusion, over ten years).  However, if the same property is owned by an FLP, the client may claim a 50% discount in the value of the limited partnership interests (for lack of marketability and lack of control).  Now, with a discounted value of limited partnership interests of $60,000, via annual gifts of $12,000 worth of partnership interests, it would take the client only five years to gift away her partnership interests and eliminate estate taxes due on that property.  This is because a $12,000 gift equals 10% of the non-discounted FLP value ($12,000 = 10% of $120,000) but $12,000 equals 20% of the discounted FLP value ($12,000 = 20% of $60,000).

Further, in the current recessionary economy, now is the time to consider gifting assets that are at presently abnormally low values.  The severe decline in the stock and real estate markets have created further built-in discounts for many assets.  When the economy rebounds, these assets will begin to increase in value, and that future appreciation will occur outside your estate.

Furthermore, it is likely that the Obama government will initiate unfavorable changes to the estate and gift tax laws in order to compensate for government deficits.  Clients should consider taking advantage of current favorable laws while they still exist.

We realize that these are not simple concepts, and we welcome your questions.  We can advise you as to appropriate FLP discounts, prepare memoranda of gift for you, as well as the partnership valuation and gift valuation calculation letters (necessary for the IRS).

II.    Rubinstein & Rubinstein Star Exemption Court Victory Now Codified as Law

Rubinstein & Rubinstein’s 2003 court victory against a New York State municipality that had denied the STAR exemption for personal residences owned by Family Limited Partnerships has been codified as law in New York.  In 2008, the New York State legislature in Albany amended section 425 of the Real Property Tax Law to include dwellings owned by qualified limited partnerships, including FLPs, as eligible for the STAR exemption.

There is an opportunity here for clients interested in pursuing refunds based upon an improper denial of the STAR exemption in past years.  If you are interested in pursuing the opportunity of refunds for past denials, please contact our office.

III.    Victory for Rubinstein & Rubinstein: Real Property Transfer Tax Exemption

While on the subject of important developments during 2008, Rubinstein and Rubinstein was successful in arguing that the City of New York improperly taxed an upfront, lump-sum payment of rent in a long term lease.  Our client was the owner of two brownstone buildings on Madison Avenue in Manhattan.  The client entered into a long-term lease in return for a single, upfront rent payment.  The City then assessed Real Property Transfer Tax (RPTT) against our client, claiming that the upfront payment was not rent because it was paid in a single payment rather than periodically.  We successfully argued that the legal definition of “rent” does not include a requirement that rent be paid in installments.  This decision should pave the way for the proper characterization of rent for tax purposes in long-term leases.

Recently, Rubinstein & Rubinstein was also successful in arguing that RPTT imposed by the City of New York on transfers of real property from an individual to an FLP were improper.  Rubinstein & Rubinstein also successfully represented clients in income tax audits.  We have achieved significant reductions in tax assessments and penalty abatements and we have successfully negotiated favorable settlements for unpaid taxes.

We can assist you in protesting improper assessments of transfer taxes, in seeking refunds on transfer taxes already paid, or in any other local, state or federal tax matter.

IV.    Offshore Considerations

The past year brought with it several significant developments in the offshore world:

A.        Tax Compliant Asset Protection Still Safe; “Hiding” Assets Not Safe

Two 2008 news stories have led to hasty and unfounded pronouncements of the “death of offshore asset protection”.  The first was the theft of confidential banking information from  Landesbank and its sale to German tax authorities.  The second was the exposure of banking giant UBS as a complicitor in U.S. tax fraud.  We are pleased to report that none of our clients need be concerned by these events.  Both stories have at their core tax fraud involving strategies based on “hiding assets”.  We have long counseled that non-reporting of foreign assets to the IRS and relying on supposed offshore “secrecy” in order to avoid taxation is unlawful, unwise and would negate effective asset protection.

This firm has various tax-compliant offshore strategies to accomplish both asset protection and tax minimization benefits.  These strategies do not rely upon secrecy.  Rather, the strategies involve complete disclosure, compliance and safety in utilizing well-credentialed offshore institutions.  In a 2008 ruling, U.S. v. Boulware, 128 S. Ct. 1168, the U.S. Supreme Court reaffirmed the position that it is the legal right of a taxpayer to decrease the amount of his taxes by means which the law permits.  Clients can be assured that their offshore assets, and the tax-favorable profits that they earn, may be absolutely legally protected.  We will be pleased to answer your questions regarding  tax compliant offshore planning.

B.     Antigua Asset Protection Laws Drafted by Rubinstein & Rubinstein, Passed in 2008

Both chambers of the Parliament of Antigua voted on and passed the advanced asset protection, trust and foundation laws drafted by Rubinstein & Rubinstein and the legislation has been signed by the island’s Governor-General.  The new laws offer the world’s most secure and confidential environment for offshore asset protection, wealth preservation and tax minimization.  The new laws make it nearly impossible for foreign creditors to reach assets protected by Antigua trusts or foundations, include a very short statute of limitations for creditor claims and limit a creditor’s ability to prove fraudulent conveyance claims.  In addition, the legislation contains strong protections against asset repatriation, which prevent foreign courts and creditors from reaching assets protected in Antigua.  As a result, Antigua has become the world’s premier jurisdiction for offshore asset protection.

C.        2008 Asset Protection Victories: Foreign Trust Survives Creditor Challenge

Our clients have enjoyed more than a few significant victories in the areas of domestic and offshore asset protection.  Here is one noteworthy example.

In 2004, our client established an irrevocable asset protection trust in Liechtenstein with funds totaling $1.2 million.   The client filed all required IRS forms relating to the funding of the trust and paid U.S. tax annually on all trust income.  In 2006, a U.S. creditor obtained a judgment against the client.  However, the client had minimal attachable assets in the U.S.

In 2008, the creditor commenced a legal action in Liechtenstein, hoping to get to the assets in the trust.  A Liechtenstein court ruled against the creditor and determined that the Liechtenstein courts lacked jurisdiction over our client.  Thus, the trust assets could not be taken to satisfy the creditor’s judgment.  There is an appeal currently pending with the highest Liechtenstein court.  However, based on the positive appellate opinion and relevant Liechtenstein law, we expect the favorable appellate decision to be upheld.  Our client’s assets will remain safe in Liechtenstein.

This case proves that offshore asset protection, when done properly and lawfully and with complete disclosure to the IRS, is completely legal and 100% effective.

D.        Pro-Debtor Offshore Development

In United States v. Grant (Federal Court, Southern District of Florida), Mr. Grant established two offshore trusts.  Several years later, the I.R.S. determined that Mr. Grant and his wife owed back taxes.  When the Grants failed to pay, the I.R.S. went to court and obtained a judgment against the Grants.  In the interim, Mr. Grant passed away, leaving his wife as the beneficiary of the offshore trusts.  Mrs. Grant had no significant U.S. assets, so the I.R.S. filed a motion to force her to bring the offshore assets back to the U.S.  The court decided in favor of the I.R.S and ordered Mrs. Grant to dismiss the foreign trustees and repatriate the assets.  She complied with the court’s order and wrote to the trustees, requesting distribution of the trust assets to her and advising that she was dismissing the foreign trustees.  The Trustees refused to comply.

In 2008, the I.R.S. urged the Court to jail Mrs. Grant for contempt of court because the assets had not been repatriated.  The judge refused and held that because she had repeatedly written to the trustees, requesting distributions and dismissing the trustees, she had complied with his order and had sufficiently established that she was not able to repatriate the assets.

This case is illustrative of the actual law: jail was not warranted because Mrs. Grant complied with the court order, even though the foreign trustees refused to comply.

The result after Grant confirms what we have long counseled: that offshore asset protection, when done properly and lawfully, is completely legal and 100% effective.  We can also advise regarding repatriation and/or legitimization of non-compliant offshore assets and any other offshore matters.

V.    Asset Protection for Doctors, Landlords and Other Professionals

In recent years, doctors have faced an ongoing, well-publicized “insurance crisis”, as malpractice insurance policies become smaller, while plaintiffs’ malpractice awards grow larger.  Insurance companies are not writing new policies and are not renewing existing policies.  This has resulted in doctors closing their practices and leaving medicine rather than enduring the risk of lawsuits and inadequate, expensive insurance coverage.

Landlords, in addition, are facing substantial increases in liability resulting from a  2008 New York Court of Appeals decision, Sanatass v. Consolidated Investing Co., which expanded the scope of the “scaffold law”.  Now, property owners are liable for elevation-related injuries (those involving the use of ladders, scaffolding, hoists, etc.) on their property.  The case held that a property owner was liable even when the contractor was hired by a tenant in direct violation of a lease provision prohibiting the tenant from altering the premises without the property owner’s permission.  Most importantly, this liability is absolute; i.e., the owner is liable even if, as in this case, he did nothing wrong!

With the new broad and absolute interpretation of the “scaffold law”, owners of real property can expect more lawsuits resulting from elevation-related injuries.  This expansion of property owner liability comes at a time when property owners are already facing significant legal challenges, such as lawsuits resulting from slips and falls, and from the presence of lead paint, mold, asbestos, fiberglass and other toxic substances.  Considering the litigation risks and changes in the interpretations of the law, it is clear that property owners must take proactive steps to protect their assets.

Effective asset protection will discourage lawsuits and offer security against future creditors.  It will also allow landlords, doctors and other professionals to reduce the amount of liability insurance they must carry to normal, affordable levels of coverage.

VI.    Looking Ahead to 2009

The current state of the economy, the election of a new President, as well as other recent changes, make 2009 a pivotal year for taxpayers:

A.    Tax Increases

The new presidential administration is likely to raise income and capital gains taxes for the coming year.  It may also amend the tax laws to eliminate some favorable tax planning strategies.  Clients are therefore advised to engage in tax planning now, in order to have the benefit of “grandfathering” current beneficial tax strategies before changes in the tax law.  Further, with the current estate tax structure set to expire in 2010, changes are inevitably on the horizon.  For many taxpayers, the impact may be significant.  We can help explain these changes, how they may effect your specific situation, and how to legally minimize your taxes.

There are various steps that taxpayers should consider now for maximum tax minimization, such as:

1.     Sell appreciated property before loss of capital gains treatment and avoid tax via Charitable Remainder Trusts and international tax planning strategies (e.g. tax advantaged foreign annuities and foreign private placement life insurance).

2.     Convert 401(k)s to Charitable Remainder Unitrust IRAs before the new administration taxes 401(k)s, which is expected.

3.    Clients should also consider, if possible, taking income in 2008, rather than deferring income to 2009 with its likely higher tax rates.  As a corollary, clients may wish to defer losses to 2009 to offset expected 2009 income at higher tax rates.

4.    Engage in income tax planning via tax complaint strategies that take advantage of favorable reciprocal tax treaties before the new administration raises taxes.

Please call our office to discuss any of these tax minimization strategies.

B.     Offshore Changes

1.    Deterring the Use of Offshore Jurisdictions for Tax Evasion

In 2007, Senator Carl Levin, together with then-Senator Obama, presented a bill to the Senate to prevent tax shelter abuses and increase disclosure requirements for assets held in many offshore jurisdictions.  With Obama set to take office in January 2009, it is very possible that this proposed measure could gain the support required to become law.  However, since our firm has long counseled complete transparency and proper disclosure with respect to foreign asset protection planning, our current and prospective clients will not be adversely effected if such laws are passed by the incoming administration.

2.    Liechtenstein Announces Intent to Cooperate in Tax Matters

Finally, 2008 brought with it an announcement from the Liechtenstein government that it is willing to cooperate in tax matters involving other countries and that it has renegotiated its Mutual Legal Assistance Treaty with the U.S..  Again, since our firm has always advised our clients to follow tax-compliant asset protection and tax planning strategies and to avoid strategies based on merely “hiding” assets, none of our clients will be negatively impacted by Liechtenstein’s change in policy.

We at Rubinstein & Rubinstein, LLP wish you a happy and healthy holiday season and a happy, prosperous and well-protected new year.