Tag Archives: CCG

A prenup or a DAPT: Which is the better choice?

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If you or one of your adult children is getting married, you may be concerned about protecting your family’s assets in the event of a divorce. A prenuptial agreement can be an effective tool for overriding marital property rights and keeping assets in the family. But these agreements have disadvantages. For many families, a better alternative is a domestic asset protection trust (DAPT).

Why assets need protection

The laws regarding division of property in divorce are complex and vary dramatically from state to state. In general, however, spouses retain their “separate property,” which includes property they owned before marriage as well as property received by gift or inheritance during marriage.

Marital property, which is subject to division in divorce, generally includes all property acquired during marriage, regardless of how it’s titled. Depending on applicable state law, marital property may even include the appreciation in value of separate property (including the other spouse’s business) during marriage.

In light of these risks, it may be advisable to take additional steps to protect separate property from potential loss in the event of divorce.

Prenup drawbacks

The emotional issues involved can make putting a prenup in place difficult. In addition, the requirements for an enforceable prenup make it vulnerable to attack in connection with a divorce. For example, a prenup may be unenforceable if one spouse can show that:

  • The agreement was signed under duress,
  • He or she didn’t have independent legal counsel,
  • The agreement was unconscionable when signed, or
  • The other spouse didn’t provide full financial disclosure.

Even if you dot all the i’s and cross all the t’s, there’s a risk that the other spouse will challenge the agreement, which can be costly and time consuming.

Benefits of an asset protection trust

A DAPT can solve many of the problems associated with a prenup. In particular, it eliminates the emotional component, because there’s no need to obtain the consent of, or even inform, the future spouse. Provided the DAPT holds legal title to assets — and an independent trustee has discretionary control over distributions — it generally will be difficult for a divorcing spouse to reach those assets.

A DAPT is an irrevocable, spendthrift trust established in one of the 15 or so states that authorize them. What distinguishes DAPTs from other types of trusts is that, in addition to offering gift and estate tax benefits, they provide creditor protection even if the grantor is a discretionary beneficiary.

DAPT protection varies from state to state, so it’s important to shop around. Ideally, you should look for a jurisdiction that provides grantors with the greatest degree of control over trust investments and protects trust assets from a broad range of creditors, including divorcing spouses.

To take advantage of this strategy, it’s critical to transfer assets to the DAPT well before marriage. Otherwise, the transfer may be deemed fraudulent. Contact us for additional information at 205-345-9898.

© 2018 Covenant CPA

Why hotel owners should keep an eye on their management companies

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It’s common for hotel owners to outsource the management of their properties. Unfortunately, hotel management companies sometimes fraudulently profit at the owners’ expense.

Case studies

Fraudulent mismanagement can take several forms. In one instance, a real estate property developer hired an international hotel management company to run his new hotel in Miami. The developer installed his own executive to oversee operations. But when the executive questioned a management company invoice to the hotel for $8,000 in unspecified sales and marketing services, the company couldn’t provide an adequate explanation. The hotel’s developer sued, accusing the management company of fraud, accounting irregularities and mismanagement.

In another case, fraud experts discovered that vendor contracts were supplying a hotel management company with millions of dollars in undisclosed rebates. Yet the management contract restricted compensation to basic fees and incentives. By failing to disclose the rebates it received from vendors, the company could be accused of accepting bribes. The forensic investigation also uncovered hidden management company ownership interests in several vendors.

Contract violations

When hotel owners suspect their management agents of fraud and self-dealing, forensic accounting experts are available to help sort out the facts. An operational audit can determine if the management company is complying with the management contract. Legal action may be appropriate if fraudulent activity is found.

Most lawsuits against hotel management companies target purchasing practices. In addition to hiding rebates, self-dealing operators may levy extra fees and conceal documents from owners. If the management contract specifies that the management company may receive only purchasing fees for their purchasing services, then rebates and extra payments represent profits unlawfully withheld from hotel owners.

With the help of fraud experts, owners may be able to recover all or a substantial part of vendor discounts and rebates. Experts can also uncover excessive fees that end up doubling or even tripling charges specified in the management contract. A thorough forensic investigation may help owners negotiate new purchasing agreements that will provide them with substantial proceeds from rebates or discounts.

True cost

To ensure a decent rate of return on your hotel investment, it’s essential that you evaluate the true cost of hiring a management company. If fraud is involved, the cost is probably too high. We can help you and your attorney make an informed decision. Call us today at 205-345-9898.

© 2018 Covenant CPA

Turn down an inheritance using a qualified disclaimer

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If you are about to receive an inheritance from a family member, you can use a qualified disclaimer to refuse the bequest. The assets will then bypass your estate and go directly to the next beneficiary in line. It’s as if the successor beneficiary, not you, had been named as the beneficiary in the first place.

But why would you ever look this proverbial gift horse in the mouth? For beneficiaries who already have large estates themselves, using a legally valid disclaimer can save gift and estate taxes, often while redirecting funds to where they ultimately would have gone anyway.

Estate planning benefits

Federal estate tax laws are fairly rigid, but a qualified disclaimer offers some unique flexibility to a forward-thinking beneficiary. Currently, the gift and estate tax exemption can shelter a generous $11.18 million in assets for 2018. By maximizing portability of any unused exemption amount, a married couple can effectively pass up to $22.36 million in 2018 to their heirs free of gift and estate taxes.

However, despite these lofty amounts, wealthier individuals, including those who aren’t married and can’t benefit from the unlimited marital deduction or portability, still might have estate tax liability concerns. Plus, the gift and estate tax exemption is currently scheduled to drop roughly by half in 2026.

By using a disclaimer, you avoid having the exemption further eroded by the inherited amount. Assuming you don’t need the money, shifting it to the younger generation without it ever touching your hands not only allows it to bypass your taxable estate, but saves gift and estate tax for the family as a whole.

5 legal requirements for qualified disclaimers

To be legally valid as a qualified disclaimer, the following five requirements must be met:

  1. The disclaimer must be made in writing and signed by the disclaiming party.
  2. The disclaimer must be irrevocable and unqualified.
  3. The disclaimant (that is, the person disclaiming) must not accept the interest or any of its benefits.
  4. The disclaimer must be delivered to the person or entity charged with the obligation of transferring the assets no more than nine months after the date the property was transferred or nine months after a disclaimant who is a minor reaches age 21.
  5. The interest must pass to a person other than the disclaimant without any direction by the disclaimant. Bear in mind that the spouse of the deceased is specifically authorized to be the person receiving the property by virtue of a disclaimer.

Look before you leap

Using a qualified disclaimer can provide flexibility if your net worth is already high and you’re in line for an inheritance from your parents or other loved ones. Before taking action, consult with us to help ensure a disclaimer is right for you and, if it is, that it meets the five legal requirements. Call us at 205-345-9898.

© 2018 Covenant CPA