December 8, 2017 RE: Two Tax Bills Walk Into a Bar…

Re: Two Tax Bills Walk Into a Bar

Planning With an $11,200,000 per Person Estate Tax Exemption by Alan Gassman, Brandon Ketron, Chris Denicolo, & Ken Crotty

Updated Important Bankruptcy Rules Excerpt From Gassman & Markham on Florida & Federal Asset Protection Law by Alan Gassman & Mike Markham 

Richard Connolly’s World 

Why Collaboration of Your Advisers is Vital by Martin Shenkman 

Humor! (Or Lack Thereof!)

We thank the dozens of people whose efforts make the Thursday Report possible every week, and the handful of people who read it.

We welcome questions, comments, suggestions and compliments, whether true or not.


Quote of the Week 

“On my income tax 1040 it says “Check this box if you are blind.” I wanted to put a check mark about three inches away.”

Tom Lehrer


On November 16th The House passed the “Tax Cut and Jobs Act”, and in the early hours of December 2nd, The Senate passed their version.  It remains to be seen whether Congress will iron out new tax legislation and which parts from each tax bill will make it into the final cut.  Due to the Republicans’ strong desire to pass a piece of major legislation, particularly “tax reform”, it seems quite likely that we will see a new comprehensive tax law in effect in 2018.

How did we get here?

The concept of taxing income is a modern innovation and presupposes several things: a money economy, reasonably accurate accounts, a common understanding of receipts, expenses and profits, and an orderly society with reliable records.

For most of the history of civilization, these preconditions did not exist, and taxes were based on other factors. Taxes on wealth, social position, and ownership of the means of production (typically land and slaves) were all common. Practices such as tithing, or an offering of first fruits, existed from ancient times, and can be regarded as a precursor of the income tax, but they lacked precision and certainly were not based on a concept of net increase.

Early examples

The first income tax is generally attributed to Egypt.  In the early days of the Roman Republic, public taxes consisted of modest assessments on owned wealth and property. The tax rate under normal circumstances was 1% and sometimes would climb as high as 3% in situations such as war.  These modest taxes were levied against land, homes and other real estate, slaves, animals, personal items and monetary wealth. The more a person had in property, the more tax they paid. Taxes were collected from individuals. Information gathered from Wikipedia


***Correction from last issue***

Our last Thursday Report discussed important possible roadblocks relating to the conversion of corporations into LLC.  Thanks to Professor Jerry Hesch for reminding us to mention the following:

–When a regular corporation or P.A. is converted to an LLC it will be considered for income tax purposes to have liquidated if there is only one owner, or to become a partnership if there are multiple owners unless a Form 8832 is duly filed to allow for continuation of C corporation or S corporation status. Otherwise the company will be considered to have sold its assets at fair market value and to have distributed them to the owner or owners.



Planning With an $11,200,000 per Person Estate Tax Exemption


by Alan Gassman, Brandon Ketron, Chris Denicolo, & Ken Crotty


It seems quite likely that taxpayers will have an $11,200,000 each estate, gift tax, and generation-skipping tax exemption beginning January 1, 2018, and that this will rise with the Consumer Price Index each year thereafter, as per the tax bill passed by the Senate on Friday, December 1 by a 51 to 49 vote.

Estate tax planners can be pleased that there were no other significant changes made to the estate and gift tax rules, meaning that re-education and adjustment of knowledge and planning techniques will be minimized in the estate and gift tax area.

The first questions that come to mind will be what impact this has on the various categories of taxpayers, and what should be done, if anything, before year-end and in early 2018 as the result of these changes.


On November 16th the House passed the “Tax Cut and Jobs Act”, and in the early hours of December 1st, the Senate passed their version. Both the House and Senate versions of the bill propose to double the estate, gift, and generation-skipping tax exemption to approximately $11,200,000 in 2018, with the House bill completely eliminating the estate tax in six years. The Senate version would bring back the current $5,600,000 plus inflation level in 2026 due to the Byrd Rule which prevents the Senate from passing a tax cut that would increase the deficit for more than ten years without 60 or more votes. Compromises will have to be made in order to reconcile the two bills, but it appears likely that the estate tax exemption level will rise to $11,200,000 in 2018.



For Individuals who clearly have estate tax exposure because of present net worth and circumstances, the exemption increase by $5,600,000 gives the opportunity to make significant gifts.

For example, a typical well-planned wealthy married couple, Jack and Jill, may have a net worth of $30,000,000, and an exemption amount of $1,600,000 each in 2018 if they each made a $4,000,000 gift to a dynasty trust in 2012 (assuming that they made no other taxable gifts).

Now each of their exemption amounts will increase from $1,600,000 to $7,200,000, and they may want to gift another $5,000,000 in assets to the 2012 dynasty trust to have post-gift appreciation in those assets escape federal estate tax.

In addition, if the dynasty trust is structured as a grantor trust for federal income tax purposes, then they can continue to pay the income tax on the income of the dynasty trust, and any such tax payments are not considered to be gifts for estate and gift tax purposes.

The Dynasty Trust can be structured as a REAP Trust (Reversible Exempt Asset Protection Trust) as discussed in LISI letter #2500 that can be viewed by clicking here.

If you assume that their asset growth rate is 6%, and that the Consumer Price Index annual increase until the death of the survivor of them 20 years from now will be 3%, then their expected estate tax after the second death with no further planning will be $27,466,763, based upon an estate tax rate of 40%.

On the other hand, the above referenced $5,000,000 gift will reduce the estate tax by $4,799,127 to $22,667,636.

Assuming that they also make annual gifts to the 2012 dynasty trust for the benefit of their 2 children and 4 grandchildren based upon the $15,000 per person per donee annual exclusion (which totals $180,000 per year while the annual exclusion is $15,000 per donee, and which will rise as the exemption increases with the CPI at 3% per year in $1,000 increments to be $27,000 per year per donee in 2038), they would save another $3,644,344 in estate tax.  Thus, their total estate tax liability would be $19,023,292.

The above calculations do not take into account that they may want to put $5,000,000 of assets into a Family LLC, and then gift a 90% non-voting membership interest so that they can retain control over the entity.  Assuming that a 30% discount would apply to the value of the non-voting membership interest, the gift might be considered to use only $3,150,000 of their combined exemption amount, reducing their estate tax by an additional $740,000.

In addition, if Jack and Jill were to sell a non-voting membership interest worth approximately $15,775,000 to the 2012 dynasty trust (which accounts for a 30% discount on the sale price) in exchange for an interest-only, 9-year promissory note accruing interest at 2% per year from the dynasty trust, then there would be zero estate tax paid on the second death.

The above tax savings are practically doubled if their children are expecting to be subject to federal estate tax when they die because of their own wealth.  All of the wealth channeled into the dynasty trust in the above examples can benefit the children by dividing into separate “generation-skipping trusts” on the death of the survivor of Jack and Jill.  The generation-skipping trusts will not be subject to federal estate tax on the death of each child, notwithstanding that each child might control the trust as trustee, have the right to receive what the child needs for health, education, maintenance and support, and have the power to direct how the trust assets will pass for family members or spouses on the child’s eventual death.


Many wealthy individuals who have not done extensive planning in the past may view this new law change as a wake-up call and review their situation.

A great number of these are single individuals who have net worths in the $12,000,000 to $16,000,000 range, or married couples who have net worths in the $24,000,000 to $32,000,000 range, may learn that by using dynasty trusts and family limited partnership or family LLC type structures they can immediately reposition their situation to have zero or almost zero estate tax exposure.

As the result of the above analysis, many affluent families will continue to engage in ongoing estate tax planning activities, and some will accelerate efforts to be below the $11,200,000 exemption threshold because they now have the ability to completely avoid estate tax reporting requirements and paying estate tax on death, if certain actions can be taken.


For example, a married couple in their 60s, Ozzie and Harriet, with a 20 to 25-year life expectancy, $10,000,000 in conservatively invested assets, and a $400,000 house would likely reach a $43,762,338 net worth in year 25 when their combined estate tax exemption would be only $34,700,000, assuming a 6% growth rate for investments and a 3% growth rate on the house and on inflation.  This would result in an estate tax liability of $3,624,935.

Ozzie and Harriet could avoid the estate tax by having one spouse fund a “Domestic Asset Protection Trust” for the other spouse and descendants that can benefit the donor spouse if ever needed while being creditor and estate tax-protected. A one-time gift of $1,250,000 worth of investments, or alternatively a gift of a 99% non-voting LLC interest in an LLC having $1,037,000 worth of assets would reduce the estate tax to zero in the above example (assuming a 30% discount would apply), and no other steps would need to be taken. This gives the asset protection trust a good business purpose and eliminates the need to do annual gifting or to engage in more complicated techniques in future years.

Alternatively, Ozzie and Harriet could make a seed capital gift to the trust of only $125,000 and sell a 99% non-voting interest in an LLC having $1,785,714 of assets for a $1,250,000, 9-year, 2% interest-only promissory note (assuming a 30% discount would apply) to cause no estate tax to be expected on the death of the survivor.

The above assumes that one spouse will die in year 20, and will fully fund a credit shelter trust for the surviving spouse and descendants based upon an estimate estate tax exemption amount of $16,260,000.  It further assumes that the survivor will die five years later, and that the above-described one time gift of $1,250,000 worth of investments occurred in 2018.

If Ozzie and Harriet will have no credit shelter trust funded on the first death and rely simply on the portability allowance for the surviving spouse, then the gift in 2018 would need to be $2,250,000 to avoid estate tax on the surviving spouse’s death.  Moreover, if Ozzie and Harriet do not have the portability allowance, then the gift in 2018 would need to be $6,000,000.

The surviving spouse will not have a portability allowance if the first dying spouse’s estate does not file an estate tax return that provides for the portability allowance, or if the surviving spouse remarries a new spouse who dies before him or her, and leaves a much smaller portability allowance than was received from the first dying spouse.

The decision of whether assets will pass into a credit shelter trust on the first dying spouse’s death to benefit the surviving spouse without being subject to federal estate tax, or whether they will rely upon a portability allowance will therefore be important for Ozzie and Harriet , and must be coordinated with the maximization of receiving an increased income tax basis on the death of the first dying spouse.

Practitioners who have not become comfortable with the concept or execution of a Joint Exempt Step-Up Trust (“JEST”) for concern that proper funding of a credit shelter trust would not occur from a joint trust may be more comfortable using the JEST, when no estate tax is expected.  This is because it can provide a full stepped-up basis for assets held under a singular joint trust and for protective trust arrangements for the surviving spouse to help protect the assets from potential loss due to creditors, remarriage, unwise conduct, or improvidence1.


Ozzie and Harriet may have been maintaining life insurance for the purpose of paying federal estate tax, which can now be expected to be avoided, as per the above.  They will be well advised to examine the economics of the life insurance situation to determine what is in the best economic interests of the family.

Typically, permanent life insurance will have a rate of return somewhere between the rate of return that the family is receiving on its bond portfolio or income-producing real estate and the rate of return that it is receiving on equity investments.

It is fairly easy to request an in-force ledger for each life insurance policy, and to ask what the performance of the policy would be if premiums were stopped and the death benefit were adjusted downward.  A helpful question is to ask what the cash value of the policy would support going forward if no further premiums were paid.  Some policies will have the equivalent of a partial surrender charge or loss of performance guarantees when this type of adjustment is made, and others will not.

The agent and carrier can also be requested to show other possible alternatives for the policy, and the team of advisers can review the situation to help the client determine what is in the family’s best interests.


Notwithstanding the above, given the possibility that the estate tax exemption could go back down to the $5,600,000 plus inflation level in 2026, (as per the Senate Bill, and because of the Byrd Rule without the vote of 60 Senators) the family may want to keep the life insurance intact.  Alternatively, they can purchase inexpensive 10-year term life insurance or low initial premium second-to-die life insurance that could be converted into permanent coverage with much larger payments after conversion and higher overall expense if the estate tax becomes a problem because of its return in 2026.  In addition, future payments might be funded using split dollar loans instead of gifts to an irrevocable life insurance trust (ILIT), if the couple would like to recoup what is contributed, with interest, once they know that the estate tax is gone for good, or if they need the money.


There may have been entity structuring in place for both creditor protection and discounting purposes, with the discounting no longer being needed, and actually being harmful because of the ownership of limited partnership or non-voting member interests in LLCs, which reduce what the value and step-up would otherwise be.

It may be best to give each spouse a put right, exercisable at any time during their lifetime, and by their trustee of his or her revocable trust or personal representative, to require that the entity buy their interest based upon the percentage owned multiplied by the value of the underlying entity assets to allow for a full or almost full step-up on the first death.

There may also be irrevocable trusts in existence, which were established to avoid estate tax, and are no longer necessary for that purpose.  The assets in these irrevocable trusts may not qualify for a new income tax basis on the death of the senior family members, unless the senior family members are given powers to appoint the assets upon death, which may be bestowed upon them by court order based upon the premise that the intent of the arrangement was to avoid taxes for the family, and that the installation of powers of appointment will facilitate this.


With the estate and gift tax exemption likely increasing to $11,200,000 beginning on January 1, 2018, it is important to consider how this will impact both clients over and under the proposed exemption amount.  Basis planning will become more important for clients under the new exemption amount, while tried and true estate planning techniques such as gifts and/or installment sales to grantor trusts will remain useful to clients over the new exemption amount.

The only way to be sure to have a solid grasp of how the numbers might work for each scenario is to actually run the numbers, at least until the planner has his or her sea legs on how the math works out under various scenarios.  Showing the numbers that may apply to a client’s scenario can help them to make more educated choices as to strategies.  This can also help them understand the risk of incurring much larger tax bills by not planning either to continue to be concerned with estate tax planning, or to dismantle past structures to save expense and/or help obtain higher income tax basis assets on death.

EstateView software offered by Interactive Legal was used extensively to provide the numbers indicated in this letter.  More information on EstateView and copies of the explanation letters and illustrations produced by the software can be obtained by e-mailing



Updated Important Bankruptcy Rules Excerpt From Gassman & Markham on Florida & Federal Asset Protection Law

by Alan Gassman & Mike Markham

The following constitute a number of bankruptcy rules that can dramatically impact creditor protection planning.  A full description of United States bankruptcy law is well beyond the purview of this book, and all advisors should confer with competent bankruptcy counsel before giving advice where bankruptcy law may apply.

Under the 2005 revisions to the Bankruptcy Code, Section 522(b)(3)(A), a debtor must maintain domicile within the state for 730 days (2 years) prior to filing a bankruptcy petition, in order to enjoy the exemption laws of that state.[1]  If the debtor did not live in a single state for the 730-day period, then it is necessary to determine where the debtor resided for 180 days preceding the 730-day period (days 731 through 910).  The court will use the exemption law of the state where the debtor was domiciled the greatest number of days during such 180-day period.

Notwithstanding the 180 days required above, a 1,215-day rule applies to qualify protection of a Florida homestead in bankruptcy. Pursuant to 11 U.S.C. § 522(p), a debtor cannot exempt any amount of the homestead property worth in excess of the current cap—$160,375—that is acquired during the 1,215 days before the bankruptcy filing. As a result of the above rules, a non-Floridian might want to purchase a Florida residence, move to Florida and make it homestead 485 days after the purchase, and then the 1,215 days and 730 days will be completed at the same time.  For homestead tax purposes, the $50,000 exemption and 3% cap can begin to apply on the January 1st after the move in date, provided that an appropriate application is made with the County Property Appraiser on or before March 1st of the calendar year following when the residence becomes the homestead of the client.

The 730-day rule does not apply to property protected by reason of tenancy by the entireties status where one spouse files bankruptcy. Section 522(b)(3)(B) of the Bankruptcy Code is available to all bankruptcy debtors even if they are domiciled in a state that has opted out of the federal exemption scheme listed in Section 522(d). Section 522(b)(3)(B) provides for an exemption from creditors’ claims of “any interest in property in which the debtor had, immediately before the commencement of the case, an interest as tenant by the entirety . . . to the extent that such interest as a tenant by the entirety . . . is exempt from process under applicable non-bankruptcy law.”[2] (emphasis added). Under Florida law, a tenancy by the entirety is exempt from process to satisfy debts owed to individual creditors of either spouse since the property belongs to neither spouse individually.[3]  Additionally, residents of other states may take advantage of this protection, despite the fact that the couple never resided in Florida.[4]

Clients moving from community property states to Florida should be careful to ensure that the former community property is converted into non-community property under the transmutation rules, which will vary based upon the client’s state of origin. The specific rules that apply for California, Nevada, Texas, and Wisconsin are discussed in further detail in Chapter 2, Section V.

Federal bankruptcy law will have a significant impact on planning for a great many debtors, and Alan Gassman’s 117 page outline entitled What Estate Planners Need to Know About Bankruptcy is available upon request by e-mailing

While a full discussion of bankruptcy is outside of the purview of this book, advisors who are not well versed in that area should be aware of the following, and review the definitions and article that follows:

  1. Florida is an “opt-out” state, meaning that individuals who have Florida law apply to their bankruptcy are required to utilize the Florida creditor exemption laws, in lieu of the bankruptcy exemptions that can apply for residents of “opt-in” states, as explained below.  If a state is an “opt-in state”, then its residents are able to decide to claim either the state law exemptions or the federal law exemptions.

Although Floridians do not have the ability to use the federal law exemptions that apply for opt-in state residents, all individuals, no matter what their state law says, are able to exempt the following two items in bankruptcy:

  1. Pension and other qualified plan accounts, which are more thoroughly described in Sections 401, 403, 408, 408A, 414, 457, or 501(c) of the Internal Revenue Code.
  2. IRAs, but subject to a contributory IRA limitation that at the time of publication is $1,283,025.  This will increase with the Consumer Price Index each three (3) years.  Assets held under IRAs that have been rolled over from qualified pension accounts are not counted under this limitation.

In Clark v. Rameker, the United States Supreme Court held that inherited IRAs do not qualify for this exemption because they are not “retirement accounts.”  This limitation will not apply to debtors who are able to use the state law exemptions that protect inherited IRAs.

  1. Assets held by a married couple as tenants by the entireties pursuant to the law of the state that is controlling will be protected.  A married couple owning real estate as tenants by the entireties in a state that recognizes tenancy by the entireties will therefore have this protection in bankruptcy, subject to an exception that may apply when there is joint debt other than homestead debt, as discussed in Section 522(b)(3)(B).  This means that married couples residing in non-tenancy by the entireties states can purchase Florida real estate as tenants by the entireties, and have it protected from a creditor or creditors of one spouse in bankruptcy, subject to certain joint debt other than the homestead debt, as discussed in this book.
  2. The rules of evidence in bankruptcy court are different than the Florida law rules of evidence.  Most notably, there is no CPA client privilege under the federal rules of evidence, but a lawyer may hire an accountant to assist in giving legal advice while maintaining communications privileged under the lawyer accountant communications.

The U.S. Supreme Court has opined that under certain circumstances the “crime fraud exception” to the attorney/client privilege will apply to allow a creditor to receive lawyer file materials and testimony that would otherwise be privileged where a crime, fraud, or certain “fraudulent transfer” activity has occurred, with the active assistance of the lawyer’s services, regardless of whether the lawyer was aware of the applicable conduct.

In a corporate bankruptcy, or where an independent trustee is appointed to serve in an individual Chapter 11 bankruptcy, the trustee in bankruptcy will own and be able to waive the attorney/client privilege.

This may go hand-in-hand in pursuing a cause of action against the law firm that helped the debtor, if the services it rendered resulted in the award of assets to creditors or the court finds that the result would have been more favorable but for the negligence or misconduct of the law firm.  This can be a double benefit for creditors who receive not only assets that were unprotected as the result of lawyer malpractice, but also damages against the law firm in the same amount if the malpractice suit is successful.

A debtor who files bankruptcy within one year after making a transfer for the primary purpose of avoiding a creditor (a “fraudulent transfer”) will permanently lose the ability to discharge all indebtedness owed at the time that bankruptcy is filed.  The same result applies if the debtor has been concealing an asset from creditors and does not report it as an asset on the bankruptcy schedules that will be available to creditors in the bankruptcy.

Additionally, it may not be possible for a “transferee” who has received a “fraudulent transfer” from another debtor who was in bankruptcy to bankrupt out the transferee liability.   This was the result in the case of Elliott v. Kiesewetter, where the husband transferred cash and other family assets to his wife for the purpose of avoiding creditors.  The court found that the fraudulent transfer rules applied to make the wife liable, because she knowingly cooperated with the transfers.  The bankruptcy court held that she could not bankrupt out the liability because of the application of Bankruptcy Code §523(a)(2)(A), which provides that an individual debtor is not discharged from any debt for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by false pretenses, a false representation, or actual fraud.

Dishonesty with respect to the filing or administration of a bankruptcy estate, or intentional destruction of records to obfuscate pertinent information, can also result in the loss of the right to a discharge and criminal prosecution.

Malicious or willful misconduct, breaking of certain laws, and a number of actions or inactions can result in the indebtedness resulting therefrom from not being dischargeable in bankruptcy, notwithstanding that other indebtedness may be dischargeable.

While an individual may receive a discharge of all debt in a successful Chapter 7 bankruptcy, a corporation or other entity will not. Thus, non-individual debtors, like companies and partnerships, normally do not file bankruptcy, but instead simply share their assets with creditors in an appropriate manner, or file for state court supervision thereof under an “assignment for the benefit of creditors” (“ABC”) to help assure that there will not be fiduciary exposure for failure to properly administer assets for creditors.

Individuals with more than 50% of their debt characterized as “consumer debt” and who have income exceeding a certain amount available, which generally corresponds to the mean income for individuals with similarly sized families residing in their region, will normally be required to have a Chapter 13 five-year payment plan of a certain portion of their post-filing income to be shared ratably among the creditors.

While the Bankruptcy Code only has a two-year fraudulent transfer statute, courts may also choose to enforce the state law fraudulent transfer statute.  In Florida, this is either four (4) years, or until the later of four (4) years from the transfer or one (1) year from when the creditor knew about the transfer.  The “one year from when the creditor knew about the transfer” exception that can benefit a creditor will not apply in bankruptcy.

The 2005 Bankruptcy Act provides exceptions to the ability to protect a homestead in bankruptcy.  This was a reaction to Florida’s unlimited homestead exemption, and the Florida Supreme Court’s 2001 decision in Havoco of Am., Ltd. v. Hill that the homestead protection laws trump the fraudulent transfer statute.

An individual or a married couple who file bankruptcy will lose all equity above $160,375 for a single owner or $320,750 for a married couple owning a homestead if they have not owned the property or a previously qualifying exchanged residence for 1,215 days or more before filing bankruptcy, or to the extent that they have made fraudulent transfers into the homestead by purchase, improvements and/or debt reduction within ten (10) years before filing a bankruptcy.

A creditor can force an individual into bankruptcy, but if that individual has twelve (12) legitimate qualified creditors, it would take three (3) of them to file together to force an involuntary bankruptcy.  Many Floridians therefore have eleven (11) or twelve (12) friendly creditors and a large home that is the mainstay of their continuing creditor protection.

Bankruptcy statutes include not only preferential transfer rules, which enable the trustee in bankruptcy to recoup distributions made to owners and creditors, but also claw back provisions which may cause creditors who received “more than their fair share”, as defined under the Bankruptcy Code, to refund such excess amounts.

The above summary no doubt oversimplifies a number of items, but does point out important information that should at least be known.

The following definitions, and an article by bankruptcy lawyer, Alberto F. Gomez and Alan S. Gassman may be of further assistance to the reader with respect thereto.


The following definitions have been written to give the reader a background in basic bankruptcy terminology and methodology.  It may be useful to read these before proceeding through the outline, and to refer back when helpful.

  1. Bankruptcy –           The federal law and process that permits debtors to adjust creditor situations and receive a “fresh start” under the separate bankruptcy court system.
  1. Chapter 7 Bankruptcy – A process that provides for the appointment of an independent trustee to liquidate the non-protected assets of a debtor as pre-bankruptcy debts are discharged if certain requirements are met.
  1. Bankruptcy Estate –           Upon filing bankruptcy, assets of a debtor become property of the bankruptcy estate, and are then under the control of the trustee in bankruptcy or the debtor in possession, pursuant to 11 U.S.C. § 541.
  1. Discharge –           The actual Order that results in debt being cancelled under a Chapter 7 bankruptcy, or upon completion of a successful Chapter 11 or Chapter 13 bankruptcy payment plan.  No discharge is issued to non-individual entities (such as corporations and partnerships) under the Bankruptcy Code.
  1. Loss of Discharge –           What occurs when a debtor in bankruptcy is denied the right to discharge by reason of pre-bankruptcy or post-bankruptcy conduct which causes the debtor to never be entitled to receive a discharge of debt then existing, leaving the debtor in “debtor purgatory.”
  1. Chapter 13 Bankruptcy                 –           A payment plan arrangement that individual debtors meeting certain requirements must comply with under payment plan rules in order to adjust their debts and the terms of payment thereof.
  1. Consumer Debt                            –           An individual or married couple that would otherwise desire to discharge debt in a Chapter 7 liquidation will be required to have a Chapter 13 or 11 payment plan if most of their debt is “consumer debt,” which does not include debt that is the result of typical negligence, such as automobile accidents caused by a debtor.
  1. Means Testing –           The term denoting the criteria by which a debtor who would file a Chapter 7 bankruptcy may be required to instead enter into a Chapter 13 bankruptcy, with a payment plan, or a Chapter 11 bankruptcy, as applicable.

For example, an individual or married couple that might otherwise file a Chapter 13 bankruptcy will be required to file in Chapter 11 if they have more than $394,725 in unsecured debt or more than $1,184,200 in secured debt.

  1. Chapter 11 Bankruptcy                 –           A reorganization bankruptcy that will typically apply for businesses, investment entities, and individuals having large amounts of indebtedness or otherwise not qualifying for a Chapter 13 bankruptcy.
  1. Prepackaged Chapter 11                  –           A Chapter 11 bankruptcy where there is advance agreement between the debtor and most, if not all, creditors to allow for debt to be reduced in a bankruptcy proceeding in order to have the ability to avoid federal income tax on debt discharge or adjustment, and state law documentary, intangible and other transfer taxes that may not apply when transitions and transactions occur in bankruptcy.
  1. Debtor in Possession –           A debtor that files bankruptcy and has the right to maintain ownership and control of assets and activities in a Chapter 11 bankruptcy.
  1. Bankruptcy Schedules – The schedules that must be filled out accurately under penalty of perjury and filed with the bankruptcy court for a debtor to file a bankruptcy proceeding.
  1. Involuntary Bankruptcy                 –           A bankruptcy proceeding filed by creditors to force a debtor into a Chapter 7 or Chapter 11 bankruptcy liquidation.  This must be done in good faith, after reasonable negotiations, will require three creditors to join in the petition if the debtor has twelve or more legitimate creditors.
  1. Exempt Assets –           An asset that will not be accessible to creditors and may be retained by a debtor under state or federal law, such as homestead, IRAs, 401(k) plans and 529 plans where law permits.
  1. Non-Exempt Assets –           Assets which are subject to creditor claims and become assets of the bankruptcy estate upon the filing of a bankruptcy.
  1. 730 Day or 180 Day Rule                     –           A debtor will need to reside in the state where the bankruptcy is filed (to have the exemption laws of that state apply) at least 730 consecutive days before filing, or if not then the majority of days where the debtor has resided during the preceding 180 days will apply.
  1. Automatic Stay –           The law which requires creditors to not take actions without court approval to collect or otherwise proceed against a debtor once a bankruptcy has been filed, unless or until the creditor has successfully filed to have the stay “lifted.”
  1. Adequate protection –           Refers to the ability of a creditor to have protection of collateral where mortgage or security agreements exist and other requirements are satisfied.
  1. Suggestion of Bankruptcy                –           A document filed in a state court proceeding to indicate that one of the parties has filed bankruptcy, in order to stop or otherwise alter the state court proceeding.
  1. Attorney-Client & Work Product Privileges          –           The two common privileges which prevent a lawyer’s file and work product from being accessible to parties who are adverse to a client.
  1. Privilege Log –           A schedule that must be disclosed when the attorney/client privilege is claimed to let the opponent know basic information about each item in the attorney’s file for which the privilege is claimed.
  2. Crime Fraud Exception                    –           Federal and state laws which prevent the attorney/client privilege from being available if the conduct subject to the communication involved advice concerning the perpetration of a crime, defraudment, or possibly, in some cases, fraudulent transfer matters.
  1. Income from the Discharge of Indebtedness          –           As per Internal Revenue Code Section 108, a debtor may recognize taxable income when debt is discharged, which may be limited to the value of assets that will be owned after the discharge occurs, or which may not apply whatsoever if the discharge occurs in a bona fide bankruptcy proceeding.
  1. Fraudulent Transfer –           A transfer which may cause loss of the ability to receive a bankruptcy discharge, if it has occurred within one year before the debtor files bankruptcy, or which may be set aside or subject a transferee to liability if it has occurred within two years before the filing of bankruptcy under the federal Bankruptcy Code, or for whatever longer period of time may apply under state law.
  1. Voidable Transfer –           The same thing as a Fraudulent Transfer, as used in the new Uniform Voidable Transactions Act (“UVTA”) which has been adopted in many states and will help to avoid confusion for those who would think that a “fraudulent transfer” is the same thing as committing fraud.[5]
  1. Preferential Transfer –           A transfer made by a person or entity to a pre-existing creditor or shareholder that will be set aside under the “clawback” rules.
  1. Insider –           A category of individuals and affiliates who may have to repay certain amounts received within one-year from filing of bankruptcy under the Preferential Transfer Rules.  A 90-day rule from the filing of bankruptcy generally applies for non-insiders.[6]
  1. Antecedent Debt –           A debt owed because of a past situation – repayment of an antecedent debt will be considered to be a preferential transfer, if the 90-day or one year rule applies.
  1. Super Creditors –           The IRS, DOJ, SEC, FDIC, FTC, and federal agencies owed certain refunds and/or penalties are referred to as “super creditors”, and have exemplary powers which enable them to seize assets that would otherwise be exempt, as further discussed in this outline.
  1. Divorce –           The dissolution of marriage rules work outside of the Bankruptcy Code, and alimony, property settlement and child support cannot be “bankrupted out.”  Bankruptcy may impact a divorce and be advantageous to some degree, but this is a completely different arena.
  1. Doctrine of Successor Liability                       –           State law which provides that the successor owner of a business or investment arrangement will be responsible for the liabilities of the previous owner if there is a commonality of related ownership, business identity, customers, and business assets.  A bankruptcy court approved sale can avoid imposition of the doctrine.
  1. Assignment for the Benefit of Creditors (ABC)     –           A statutory state law proceeding where the local court will oversee the sale or distribution of corporate assets and payment of expenses and liabilities so that creditors are fairly treated, and officers, directors and managers of the debtor entity can avoid liability for fiduciary duties owed to creditors if the ABC plan is approved and carried out.  An ABC plan does not discharge debtors in most states or avoid application of the Doctrine of Successor Liability.
  1. Executory Contract –           A contract between the debtor and third parties that may be binding upon the trustee in bankruptcy or debtor in possession, because there are contractual obligations on the part of both the debtor and the third party.  This can be very important in the following situations:

(1)   Where the debtor owns LLC member or limited partnership interests and wishes to limit the creditor to having charging order protection in a jurisdiction that provides for this to be the sole remedy. A Limited Partnership Agreement or Operating Agreement may be executory when each partner or member has an obligation to make capital contributions, provide significant services, guarantee indebtedness, or carry out other material responsibilities.

(2) A trustee in bankruptcy or debtor in possession may “reject” a non-executory contract, and thus not have legal responsibility, other than as to the damages that might be sued for by the other party.  For example, a trustee may choose not to pay a promissory note or to continue with an Operating Agreement where the payee or other party has no affirmative obligations.  On the other hand, an Operating Agreement where both the debtor and third parties have affirmative obligations to make capital calls, provide management services, and to guarantee obligations should be characterized as an executory contract, making charging order protection possible, if applicable under state law.


  1. Opting In or Outing-Out                 –           Debtors residing in states that allow the choice between having the state law or the federal law of creditor exempt assets may “opt-in” or “opt-out” of the federal exemptions.


  1. Tenancy by the Entireties                     –           A special status of property owned by a married couple which may be immune from the creditors of either spouse under state law.  It is possible that debtors living in a non-tenancy by the entireties state will be able to protect assets held as tenants by the entireties in a state where this is recognized.  This specifically includes real estate and has been held to include tangible personal assets by at least one Florida case.  Tenancy by the entireties may protect homestead property even where it would not otherwise be protected because of the homestead protection exceptions that were passed in 2005.
  1. U.S. Trustee’s Office –           A federal criminal enforcement agency officed in Bankruptcy Court buildings which provides investigative and prosecutorial services with respect to bankruptcy fraud, monitoring, and associated matters, as more thoroughly described in Footnote 1 below.[7]
  1. Contempt of Court –           An equitable remedy that may be applied by a bankruptcy judge to force a debtor to go to jail in order to induce conduct with respect to making assets available to the trustee in bankruptcy under circumstances where the debtor is believed to have control over the assets or a third party in possession of the assets, or has inappropriately created an impossibility with respect thereto.
  1. Homestead Protection Exceptions                  –           At present, a homestead exceeding $160,375 in value (or $320,750 for a married couple in bankruptcy if owned jointly), and otherwise exempted under state homestead creditor protection law, will be accessible to the trustee in bankruptcy to the extent of such excess net value if one of the following exceptions applies: (1) the home was acquired or its equity value was enhanced by one or more “fraudulent transfers” within ten years of a bankruptcy being filed, with the exception to apply to the extent of equity attributable to such fraudulent transfers; (2) the homestead was acquired less than 1,215 days before bankruptcy is filed; or (3) one of the “bad conduct” exceptions under Bankruptcy Code Section 550(a)(1).  See the case of Martinez v. Hutton (In re Harwell), 628 F.3d 1312, 1314 (11th Cir. 2010) discussed in the materials that follow.
  1. Stripdown –           Where a mortgage or other collateralized loan is reduced in a Chapter 11 or 13 bankruptcy to the value of the collateral.  The excess indebtedness becomes unsecured, and a payment plan must provide for satisfaction of the collateralized debt over time – commonly five years with interest based upon a 30 month amortization schedule.
  1. Cramdown –           Where a judge has required creditors to be owed less monies, or under different payment terms, notwithstanding the creditor’s objection thereto.
  1. Concealment –           The felony of misleading the bankruptcy court and creditors by having substantive ownerships and benefit from assets that are not reported as assets of the debtor on a bankruptcy schedule.
  1. Core Proceedings –           These are legal adversary proceedings where the Bankruptcy Court holds trials and makes determinations that would normally occur in state or federal court if the debtor were not in bankruptcy.[8]
  1. Non-Core Proceedings-          Litigation occurring outside of Bankruptcy Court that involves a debtor and may impact the outcome of a bankruptcy proceeding.
  1. Adversary Proceedings- Proceedings similar to separate litigation within the bankruptcy case that is adjudicated by the Bankruptcy Court as if this were separate litigation outside of bankruptcy.


            Alan Gassman’s 2017 outline on What Estate Planners (And Others) Need to Know About Bankruptcy and a transcript of his two hour talk at the Forty-Third Notre Dame Tax and Estate Planning Institute can be received by emailing



Richard Connolly’s World

Insurance advisor Richard Connolly of Ward & Connolly in Columbus, Ohio often shares pertinent articles found in well-known publications such as The Wall Street Journal, Barron’s, and The New York Times. Each issue, we feature some of Richard’s recommendations with links to the articles.

The attached article from Investment News reports:

A series of civil actions filed against the sponsors of 403(b) plans last summer named as defendants several large universities, including the Massachusetts Institute of Technology, Yale, New York University, Duke, etc.

These actions were brought by the law firm Schlichter Bogard & Denton, the same firm that on Sep. 11, 2006, filed lawsuits against Exelon Corp., Northrop Gruman Corp., General Dynamics, Lockheed Martin, International Paper and Caterpillar.

While sponsors of mega plans continue to be targets, there is evidence that substantially smaller plans are in the crosshairs of excessive-fee suits, too. The case of Bernaola v. Checksmart Financial, brought in 2016, involved a plan with $25 million in assets; in Damberg v. Lamettry‘s Collision Inc. (also a 2016 case, which was ultimately voluntarily dismissed) the plan assets were slightly in excess of $9 million. Earlier this year, in Schmitt v. Nationwide Life Insurance Co., the plan had 27 participants and plan assets were $1.1 million.

See the article’s list of best practices a retirement plan adviser can follow to minimize the risk of fiduciary liability?To View the Full Article Click Here




Why Collaboration of Your Advisers is Vital


by Martin Shenkman


Collaboration of your advisers is vital. Collaboration is when your advisers play together like an orchestra, so you can enjoy the music of planning success. Legal, tax, estate and other facets of planning are each so volatile and complex that no adviser can optimally help you without coordinating with your other advisers. So, if collaboration is the hot fudge on the top of your low-cal frozen yogurt sundae why don’t more advisers get it?

■ Why collaboration is so vital: If your estate planning attorney crafts irrevocable trusts to protect assets and save taxes (estate, state income, etc.) the determination of which assets are held in those trusts will have a significant impact on the net of tax overall results.

►If these assets are largely marketable securities that is a decision that needs to be made primarily (never entirely) by your wealth adviser. No matter how good looking your estate planning attorney is, he or she is unlikely to have the in-vestment expertise to make those decisions. Your wealth manager must be involved for your estate plan to shine.

►The decision should “not entirely” be made by your wealth manager either. Your wealth adviser must under-stand the nuances of the trusts to optimize planning.  The mere fact that your wealth manager’s firm has expensive wood paneling in their conference rooms doesn’t assure they have the expertise to understand sophisticated estate planning (if there is a rich green carpet with the paneling it might). Some do, some don’t.

►Some wealth managers have legions of estate planning attorneys that rival many major law firms. Others might have a so-so attorney on staff that can be a helpful part of your planning team, but who does not have the expertise to understand sophisticated planning. Best generic advice is protect yourself by having both your attorney and wealth manager collaborate.

►Your CPA needs to be involved to address state income tax planning, coordinating grantor trust gain/loss harvesting with your personal tax status, etc.  You should also have your CPA vet the financial modeling that should precede the investment and planning decisions.

►If your estate is quite large, and/or your planning complex, you need a team not a hot-shot, lone wolf, non-collaborator. High end estate planning is as risky, uncertain and exotic as a beer at The Mos Eisley cantina (if you don’t know this Star War’s watering hole Go directly to Jail. Do not pass Go. Do not collect $200).

►When you’re out there on the edge of the estate planning galaxy you want collaboration because, despite what many planning gurus assure you, there are no guarantees. How much risk does a note sale transaction entail? What type of receptacle should catch excess value under a defined value clause? Some like a zeroed out GRAT, others swear an incomplete gift trust is the cat’s meow. If you’re the client you want the brainiacs from your law firm, CPA firm and wealth manager putting their heads together on these issues.

►Sophisticated planning often is a multi-disciplinary effort. Which state should a trust be taxed in? Which assets should be held in which trust? What powers should a trustee or trust protector be given? These and other questions are often best answered with the combined insight of the attorney, trust officer, wealth manager and so forth.

►Many clients share different information with various advisers. There may be a comfort level or “personality fit” with one adviser so the client opens up more. Some might feel more comfortable chatting with a wealth manager who does not bill for her time, then having a fuzzy conversation with an adviser who has a clock ticking. Advisers, no matter how objective, interpret client comments through their own lens. Collaboration enhances the quality of information every adviser has.

■ Who’s the Team: While an estate planning attorney, CPA and wealth manager are vital components to most teams, the composition of your team will vary over time as your needs and circumstances change.

►If you have business/real estate interests you must have corporate/real estate counsel on the team.  You shouldn’t transfer valuable LLC or S corporation interests to a trust without their input.

►A common trust structure is a spousal lifetime access trust. Husband sets up a trust for wife and descendants, and vice versa. This gives the couple access to all assets that are transferred out of their estates (and out of the reach of creditors). But inherent in this plan is mortality risk. If wife thereafter dies, husband won’t indirectly have benefit to the assets in his trust since wife, who was a beneficiary, has passed. Insurance can answer this mortality risk (and financial forecast can quantify that need – wealth manager involvement). In this and many other plans your insurance consultant is vital.

►As you age or as health issues worsen involving a care manager to create a care plan, quantify the costs of that plan, etc. may be a critical player.

►Many donors prefer to be actively involved in their giving to accomplish specific social or charitable goals. A charitable giving professional, e.g. gifts officer from a charity you wish to benefit, should be part of the team when appropriate.

►Your team should reflect your needs.

■ Not Tom Brady:

►Ask any member of your team who the quarter-back of the team is and they will likely tell you they are.

►The mantle of quarterback should pass to various advisers as your planning evolves.

►Your estate planning attorney may have to captain the planning ship while she is creating the structure.

►Your wealth manager may assume the quarterback mantle when she creates forecasts to drive the planning, and guides asset allocation and location decisions, etc.

►At some point insurance may be the focal point and the insurance consultant dons the jersey with the number 12.

►If an adviser is particularly weak he or she may never don the quarter-back mantle.

►While your investment manager may focus on beta, effective collaboration requires team play, not one adviser being so alpha that she dominates the pack.

■ Why Some Advisers Don’t Play Nicely in the Collaboration Sandbox:

►Ego, control, money.

►”Of course I’m the smartest pencil in the box, all those other advisers should follow my lead.” You want knowledgeable advisers, so self-confidence is inevitable. But the adviser’s job is to do what is best for you, the client, even if that means not being the big cheese.

► “If I involve those other advisers I will lose control.” Yep, and you should. Any adviser who does their job right should make control a team matter.  If your planning team (CPA, wealth manager, insurance consultant) understand your estate plan and have access to all documents, etc. it should be even easier to replace your estate planning attorney. Some advisers don’t want the rest of the team to have that level of involvement for fear of being replaced. But that is exactly a function the team should serve. Advisers retire or die, firms dissolve, stuff happens. Having the team knowledgeable of the entire plan gives you better results. It assures smoother transitions. It should be about benefiting you, not assuring control in one adviser’s hands. Some wealth managers like to handle everything they can with in-house staff. They might do this under the guise of saving the client money because they don’t bill for their time, but is that benefiting the client or about that adviser wanting to maximize control under some theory that control will keep them business.

► “If that bank gets involved they’ll do all the planning and I won’t have anything to bill for.” Well the bank should not do all the planning, the team should. And the team should, even if a lawyer or CPA gets less billable hours had the bank not been involved.

►Collaboration should be about maximizing your wealth, not the wealth of your advisers.

■ Making Collaboration Happen:

►While a united team is the only way to fly, if everyone doesn’t make a concerted effort to make it happen, it won’t.

►Clients should authorize and direct advisers to collaborate. Stop whining that it will cost more. Better planning, and administration of that plan, will cost less than a disjointed plan.

►For advisers that just won’t do it — replace ‘em.

►There are simple steps that foster collaboration.

►Advisers could circulate a summary memo following any meeting or phone conference in draft form to the team before sending it to the client. That gives everyone a chance for input and keeps all advisers in the loop.

►Invite other advisers to meetings you organize. Even participation by phone reinforces the message to the client and other advisers that there is a team.

►Have an annual adviser web conference with-out the client. These can be quick but get everyone on the team up to speed inexpensively.


     1   Not related to Rhode Island.

[1] 11 U.S.C. § 522(b)(3)(A).

[2] See In re Smith, 8:15-BK-01469-KRM, 2016 WL 675806 at *1 (Bankr. M.D. Fla. Feb 18, 2016) (citing 11 U.S.C. § 522(b)(3)(B); see also In re Schwartz, 362 B.R. 352 (ruling that the real property held in tenancy by the entireties is exempt from creditors in bankruptcy under Florida common law, even where the debtor was not domiciled in the state for 730 days prior to the filing of the bankruptcy); In re Robedee, 367 B.R. 901 (finding that personal property held in tenancy by the entireties was exempt from creditors under Florida common law, even where the debtor was not domiciled in the state for 730 days prior to the filing of the bankruptcy).

[3] Id.

[4] In re Cauley, 374 B.R. 311 (Bankr. M.D. Fla. 2007) (extending tenancy by the entireties protection to Florida property in a Delaware bankruptcy, even though the debtors were not Florida residents).

[5] Fraud consists of some deceitful practice or willful device, resorted to with intent to deprive another of his right, or in some manner to do him an injury.  As distinguished from negligence, it is always positive, intentional. Maher v. Hibernia Ins. Co.,67 N. Y. 292; Alexander v. Church, 53 Conn. 501, 4 Atl. 103; Studer v. Bleistein. 115 N.Y. 31G, 22 X. E. 243, 7 L. R. A. 702; Moore v. Crawford, 130 U. S. 122, 9 Sup. Ct. 447,32 L. Ed. 878; Fechheimer v. Baum (C. C.) 37 Fed. 167; U. S. v. Beach (D. C.) 71 Fed.160; Gardner v. Ileartt, 3 Denio (N. Y.) 232; Monroe Mercantile Co. v. Arnold, 108 Ga. 449, 34 S. E. 176.Fraud, as applied to contracts, is the cause of an error bearing on a material part of the contract, created or continued by artifice, with design to obtain some unjust advantage to the one party, or to cause an inconvenience or loss to the other. Civil Code La. art. 1S47.Fraud, In the sense of a court of equity, properly Includes all acts, omissions, and concealments which involve a breach of legal or equitable duty, trust, or confidence justly reposed, and are injurious to another, or by which an undue and unconscientious advantage is taken of another. 1 Story, Eq. Jur. (Black’s Law Dictionary Free Online Legal Dictionary 2nd Ed. and The Law Dictionary.)

[6] The term “insider” includes (A) if the debtor is an individual – (i) relative of the debtor or of a general partner of the debtor; (ii) partnership in which the debtor is a general partner; (iii) general partner of the debtor; or (iv) corporation of which the debtor is a director, officer, or person in control; (B) if the debtor is a corporation – (i) director of the debtor; (ii) officer of the debtor; (iii) person in control of the debtor; (iv) partnership in which the debtor is a general partner; (v) general partner of the debtor; or (vi) relative of a general partner, director, officer, or person in control of the debtor; (C) if the debtor is a partnership – (i) general partner in the debtor; (ii) relative of a general partner in, general partner of, or person in control of the debtor; (iii) partnership in which the debtor is a general partner; (iv) general partner of the debtor; or (v) person in control of the debtor; (D) if the debtor is a municipality, elected official of the debtor or relative of an elected official of the debtor; (E) affiliate, or insider of an affiliate as if such affiliate were the debtor; and (F) managing agent of the debtor.

[7] The following information was provided by bankruptcy lawyer, Michael Markham – The Office of the United States Trustee is a branch of the Department of Justice based in Washington, D.C. that has a United States Trustee located in each region, meaning there is one in Atlanta that governs the 11th Circuit.  That person is the boss of that office, kind of like the U.S. Attorney, but then in each local office there are, for example, I think in Tampa that there are five lawyers that represent regularly every day of their life the Office of the United States Trustee, and then a similar number of what they call bankruptcy analysts, who are usually accounting-type people that dig through the paperwork.  It is their office’s job to monitor bankruptcy cases, and they monitor individual cases and they monitor corporate cases, Chapter 11 cases.  They are the ones that get involved in disputes over the means test, in individual cases.  They are the ones that file motions to dismiss individual cases as bad faith filings under Section 707.  They are the ones that investigate, and if they think crimes have occurred, they are the ones that generally would be the ones that would make the referral to the U.S. Attorney’s Office.  They are going to be there and they are going to be present in every bankruptcy case, and how closely they look at your case as opposed to another case is just kind of a crap shoot in a way.  Obviously they do not have time to pay attention to the hundreds, if not thousands, of cases that get filed, so they do what they can and they keep an eye on the cases.


[8] (2)Core proceedings include, but are not limited to—

(A) matters concerning the administration of the estate;

(B) allowance or disallowance of claims against the estate or exemptions from property of the estate, and estimation of claims or interests for the purposes of confirming a plan under chapter 1112, or 13 of title 11but not the liquidation or estimation of contingent or unliquidated personal injury tort or wrongful death claims against the estate for purposes of distribution in a case under title 11;

(C) counterclaims by the estate against persons filing claims against the estate;

(D) orders in respect to obtaining credit;

(E) orders to turn over property of the estate;

(F) proceedings to determine, avoid, or recover preferences;

(G) motions to terminate, annul, or modify the automatic stay;

(H) proceedings to determine, avoid, or recover fraudulent conveyances;

(I) determinations as to the dischargeability of particular debts;

(J) objections to discharges;

(K) determinations of the validity, extent, or priority of liens;

(L) confirmations of plans;

(M) orders approving the use or lease of property, including the use of cash collateral;

(N) orders approving the sale of property other than property resulting from claims brought by the estate against persons who have not filed claims against the estate;

(O) other proceedings affecting the liquidation of the assets of the estate or the adjustment of the debtor-creditor or the equity security holder relationship, except personal injury tort or wrongful death claims; and

(P) recognition of foreign proceedings and other matters under chapter 15 of title 11.