Risk Management Terms
Often, stringent risk management techniques are some of the most useful asset protection strategies. Setting up a domestic asset protection trust, or qualified spendthrift trust is important, but so are the basics such as buying insurance and other forms of risk management you will read about below. This is meant as a short glossary for informational purposes.
Internal Fraud Prevention & Deterrence – Internal fraud is fraud or embezzlement by your advisors or other persons close to you. We assist you with oversight services, including periodic review of portfolio and financial records, etc. These services are designed not only to catch fraud that has already occurred, but also to prevent and deter future fraud by making it known that the review will occur.
Oversight services are not meant to interfere with the activities of any existing advisors or employees, but instead quietly review their activities to identity and deter possible fraud. Services should enhance your relationship with your agents and advisors by eliminating questions of trust.
External Fraud Prevention & Deterrence – External fraud is fraud that outside third parties attempt to perpetrate on you. The best example of this is investment fraud, i.e., inducing you to invest in bogus business opportunities. To prevent external fraud, we provide investigation and due diligence services to discern the background of the promoters of investments, and then we also will assist in reviewing the proposed investment to determine the level of risk involved and whether the investment has a reasonable chance of achieving the promised returns.
Tax Risk Management
Excessive taxation poses a serious risk to the business and its owners, who will typically lose more to taxation than to any other risk the business faces. This is due in part to the fact that taxes are a threat that has already materialized — the business and its owners know they will be paying some amount of taxes each year.
Tax Risk Management primarily seeks to reduce the risks that a business or its owners will conduct business in a tax-inefficient fashion, as well as mitigate the tax consequences of specific transactions.
Solutions include: Restructuring of “C” corporations and “S” corporations into more tax efficient business entities. Use of tax efficient forms of corporate ownership and wealth transfer to children. More efficient treatment of intangible assets, such as copyrights, trademarks, patent rights and royalties. Utilization of Closely Held Insurance Companies. Specific, targeted tax planning for significant business transactions.
The primary tax risk a business and its owners face is that of income taxation.
Since income tax is paid at least annually, if not more frequently via estimated taxes or withholding, not only is this money lost, but also is the opportunity to generate investment income on this money.
Additionally, there is a disparity between federal income tax rates and capital gains tax rates that should be maximized whenever possible. Where it is possible to defer the payment of income tax within a structure until the structure is sold or liquidated, the net result will have been to convert ordinary income that is taxable up to 36% into capitalgains taxable as low as 18%.
Highly Appreciated Assets
There are a variety of strategies available that legally defer — sometimes perpetually — the gains on highly appreciated assets, such as stock or real estate.
Private Annuity transactions are a recognized form of tax and succession planning. Some have enhanced the Private Annuity structure to make it even more tax efficient, and to add some benefits not found in traditional Private Annuity planning.
VUL policies are a respected and popular means of growing assets within a tax-free environment and providing cash for heirs. An additional feature is that the owner of the policy may borrow against the policy “tax free”, and in many states both the VUL policy and its cash value are protected from creditors.