Section 6: Risk Management and Asset Protection

Question 1

Spendthrift Trust

Answer 1

Refers to a trust that restrains Voluntary and involuntary alienation of all or any beneficiaries interest- been may not be able to access or pledge assets w/out consent of trustee- can add language to “avoid” distributions to bene is subject to creditor’s claims

Question 2

Badges of Fraud

Answer 2

1.Transfer to family or insider
2. Debtor remains in control or possession of assets
3. Transfer was concealed
4. Before transfer debtor was sued or threatened
5. Transfer was almost all assets
6.Debtor moved or concealed assets
7. Debtor was or became insolvent after transfer
8. Transfer occurred shortly after or before debt was incurred

Question 3

Perpetual Dynasty Trust

Answer 3

Distributions are entirely up to trustee, no ascertainable standard, a discretionary spendthrift provision can add significant amount of creditor protection

Takes advantage of the lifetime gifting $11M+ and GST exemption

Established as a long as jurisdiction allows

Question 4

DAPT

Answer 4

Domestic Asset Protection Trusts

-Trust can be pierced under certain circumstances
-Irrevocable and self settled
-Spendthrift is extended to grantor-beneficiary of discretionary trust- grantor can receive distributions based on discretion of trustee
-Assets are often put into LLC before transferred to DAPT which is a separate tax entity
-If right to income/revoke/amend is kept by grantor must be included in estate

Question 5

Uniform Trust Code

Answer 5

Most states adopted this code in 2000- standardizes trust laws

Question 6

Offshore Trusts

Answer 6

Superior protection- creditor would have to go to the entity/country for claim- built on common law- protection doesn’t end when settlor and beneficiary are the same

Question 7

Methods to quantify risk

Answer 7

1. Loss range analysis
2. Loss triangles
3. Projected expected losses

-help determine which risks to retain and which to transfer

Question 8

Parts of Automobile Insurance Policy

Answer 8

A. Liability
B. Medical Payments
C. Uninsured/underinsured motorist
D. Damage to insured’s vehicle

Question 9

Homeowner’s Policy Basic Approaches

Answer 9

Normal Perils- Perils not listed are not covered

Open Perils- only perils specifically excluded are not covered

Question 10

Comparative Negligence

Answer 10

A balance between Strict negligence and contributory negligence- usually results in partial recovery to plaintiff

Question 11

Replacement cost vs. actual cash value

Answer 11

actual cash value is the depreciated value

replacement cost is the higher value which provides the value needed to replace/make whole

Question 12

Three levels of risk management

Answer 12

Severe- potential to cause demise of business or severe financial damage (transfer this risk)

Important- Could cause serious hardship but not total loss

Optional- exposures have negligible consequences (retain this risk)

Question 13

Risk Management Techniques

Answer 13

1. Risk Avoidance
2. Risk control/reduction/prevention
3. Risk retention
4. Risk transfer (non-insurance: indemnity, hold harmless agreement, require contractors to retain risk)
5. Risk sharing (combo of 3 &4)
6. Insurance

Question 14

Four general categories or risk exposures

Answer 14

1. Physical
   2.Financial- liability due to intentional act or negligence
2. Contractual- loss due to contract or association of others
3. Human- value of human life

Question 15

Steps in risk management process

Answer 15

1. ID- analayze and measure all loss exposures
2. Select the technique or combo of techniques
3. Implement design
4. Monitor and adjust

Question 16

Pure risk vs. speculative risk

Answer 16

Pure- only results in loss
Speculative- can result in gain or loss

Question 17

livery conveyance

Answer 17

Rule that allows personal auto policy to cover commercial work- available at a higher premium - vehicle can not be held out for public hire

Question 18

Basic examples of “personal and advertising injury”

Answer 18

false arrest, wrongful entry into a dwelling, slander, libel, copyright/patent infringement, slogan, etc

This is not generally covered in CGL

Question 19

Two types of CGL coverage

Answer 19

Occurrence type- occurrence policy has lifetime coverage for the incidents that occur during a policy period, regardless of when the claim is reported.

Claims-made type: A claims-made policy only covers incidents that happen and are reported within the policy’s timeframe, unless a “tail” is purchased.

Question 20

Representations Clause

Answer 20

by accepting insured agrees all statements made by him in the declarations page are accurate and complete- if not insurer can void contract

Question 21

CGL Supplementary payments

Answer 21

Amount insurer promises to pay above policy limits

e.g. costs to defend, bail bonds, bonds attached to property, reasonable expenses including wages lost up to $250/day, court costs, etc

Question 22

CGL Policy Structure

Answer 22

Coverage A: bodily injury and property damage

Coverage B: personal advertising injury

Coverage C: Medical payments- no regard to fault- must be reported w/in one year, submit to exam for insurer

Question 23

Four major limits to liability insurance

Answer 23

1. each occurrence limit
2. personal and advertising limit
3. General aggregate limit
4. Products/completed operations aggregate limit
   *can be sublimits which can be increased w/ additional premium

Question 24

Theories of bodily injury

Answer 24

exposure- focuses on when exposed

manifestation- date of diagnosis

injurious process- aka triple trigger continuing process- any cgl policy in force at any point could be liable

Injury-in-fact - only when injury actually happens requires accurate medical records

Question 25

Co-insurance requirements

Answer 25

Home value has significant growth above insurance limits- payouts can be significantly reduced

Question 26

Flat or Straight dollar deductible

Answer 26

Per Claim- e.g. food poisoning, pay deductible for each person per occurrence- pay one deductible no matter the number of people *important distinction for risk manager

Question 27

Contract of adhesion

Answer 27

insurer drafts contract- insured must adhere to it- insured has say over language- in court any benefit of doubt will go to the insured due to this

Question 28

Surplus lines broker

Answer 28

Insurers are not subject to state regulations- insured not protected by state guarentee Broker has relationships with “non-admitted” insurers This is used for unique risks

Question 29

Where to get benchmarking information for the cost of risk?

Answer 29

RIMS- Risk and insurance management sociciety Industry and trade associations

Question 30

Loss Development Factor

Answer 30

e.g. workers comp based on development of similar cases that settled or closed in similar time period- used to calculate loss triangle

Question 31

Five main loss categories

Answer 31

1. Premisses liability- conditions of premisis- invitees, licensees, trespassers, etc 2. Liability for operations (off premisis) 3. Products liability 4. Professional liability 5. Liabilities for employees

Question 32

Intangible assets of ability

Answer 32

Good will- reputation can be converted into dollar amount when company is sold or merged-when damaged it can evaporate Other intangibles include relationships with venders and suppliers

Question 33

Hazard

Answer 33

a specific situation that will increase the probability of the occurrence of loss arising from a peril

Question 34

Levels of Asset protection

Answer 34

Level 1. Statutory protection- retirement plans, 529s, ira up to $1M, homestead, life ins, etc Level 2- Trusts Level 3- Protective trusts and entities *Fill buckets starting at level 1- when balance sheet is protected- creditor will likely settle for something more reasonable

Question 35

Asset protection using 529

Answer 35

-contribution limits vary by state - can be used of education of child or family member including client -cost is virtually zero can take out w/ 10% penalty plus OI Consider using when max out retirement plan Use of distant fam member works well

Question 36

Issues with creditor charging order

Answer 36

Compounding the problem for the creditor is the possibility (but, by no means, the certainty) that the creditor’s share of the LP or LLC may be charged with income based on the creditor’s “rights” pursuant to the charging order. If this occurs, the creditor may have “phantom income,” which obviously would not be to the creditor’s advantage. They may claim that the entity is a sham without business purpose or a device to hold the personal assets of family members.

Question 37

DAPT Overview

Answer 37

The DAPT is an irrevocable self-settled trust in which the grantor is designated as a permissible beneficiary and allowed access to the funds in the trust account. The grantor should not retain any control over the transferred assets. The trust should have an independent trustee (not the grantor). The independent trustee is given discretion to distribute trust income and principal to a pre-defined class of beneficiaries that includes the grantor. Properly structured, the goal of the DAPT is to assure that creditors of the grantor will not be able to reach the trust assets. When located in a state without an income tax, the DAPT provides both asset protection and state income tax savings. The following states have adopted varia- tions on the DAPT provisions: Alaska, Connecticut, Delaware, Hawaii, Indiana, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming. Connecticut and Indiana were added to this list in 2019.