Official Government Website
Month: June 2024
Current Status of the Idaho Charitable Asset Protection Act by John S. McGown, Jr.
by John McGown, Jr.
Background
It has been four years since the Idaho Charitable Assets Protection Act (“ICAPA”) became effective on July 1, 2020. This article gives a brief summary of ICAPA and provides an update on its impact. For perspective, Idaho had over 4,500 charitable organizations holding over $8 billion in charitable assets in 2019.[i] Those figures have increased over the past few years, as Idaho charitable organizations held over $11.1 billion in charitable assets in 2022.[ii]
ICAPA and Its History
Persons regularly create charitable entities, many of which are tax-exempt under Section 501(c)(3) of the Internal Revenue Code. There are significant federal income tax and estate tax incentives to using such entities.
An aspect of human nature is to take advantage of incentives. For some individuals, there is a temptation to “overindulge.” The Idaho Attorney General’s Office had almost no authority to monitor such overindulgence as a result of the 1938 Idaho Supreme Court decision of Hedin v. Westdala Lutheran Church.[iii] That limitation was significantly changed by the Idaho Legislature in 1963, which gave the Idaho Attorney General authority over charitable trust assets in conformity with the common law.[iv] The Attorney General felt that the tools under the 1963 law were insufficient as they did not provide the necessary tools, such as subpoenas or investigative demands, to conduct examinations of charitable entities.[v] Thus, Brett T. DeLange and Stephanie Guyon worked over several years to develop ICAPA and it was passed by the Idaho Legislature in 2020, effective July 1, 2020.
In very general terms, ICAPA prohibits a charitable organization or an accountable person from knowingly misusing charitable assets. It also imposes an obligation for a charity to notify the Idaho Attorney General at least 30 days before dissolving, converting to a noncharitable organization, terminating, or otherwise disposing of all or substantially all of the charitable organization’s charitable assets.[vii] The details of these reporting obligations are found on the Idaho Attorney General’s website by searching FAQ on ICAPA.[viii] In addition, Stephanie Guyon’s excellent article titled “The Idaho Charitable Assets Protection Act: Better Protection of Idaho’s Charitable Assets and Donor Intent” is a great resource. It can be found in the October 2020 issue of The Advocate on pages 38-40.[ix]
ICAPA Track Record
What is ICAPA’s track record over the four years since its enactment?[x] Let’s start with the number of charitable organizations that have provided prior written notification to the Idaho Attorney General of their intent to dissolve, convert to a noncharitable organization, terminate, or otherwise dispose of all or substantially all their charitable assets.
Of those 22 notifications, all were accepted as filed, five resulted in follow up by the Idaho Attorney General, zero resulted in an active investigation by the Attorney General, and zero resulted in action by the Attorney General, such as by providing an assurance of voluntary compliance, a consent judgment, or a lawsuit.
In addition, there were no investigations by the Idaho Attorney General in cases where there were not any notifications. While subjective, the notification requirement has some deterrence effect.
Observations
Due to their very nature, charities tend to be trusted by the general public. Oversight is often limited to a charity’s Board of Directors and key staff. The Internal Revenue Service historically has lacked the staff to do anything more than minimal audit coverage. These factors illustrate a need for ICAPA.
"In very general terms, ICAPA prohibits a charitable organization or an accountable person from knowingly misusing charitable assets."
On the other hand, most Idaho charities are not large and lack the skill set to even be aware of ICAPA requirements. Rather, their focus is on keeping their doors open to provide charitable services. If those doors are forced to close, ICAPA compliance may be the furthest thing from the charity’s mind. Noncompliance is easy to envision – with no one harmed. While legal assistance may be advisable, there may not be funds available to pay for such advice. One can envision the situation of a charity on its last legs and trying to wind up its operations by selling its heavily mortgaged offices. Then a few days before closing it learns of the 30-day notice that must be given to the Idaho Attorney General. While this is hopefully a rare occurrence, it illustrates how a well-meaning law can have (hopefully rare) undesirable consequences.
Conclusion
ICAPA is a well-intended statute. Many attorneys with little or no expertise serve as volunteer members on the Board of Directors of charitable entities, often with little, if any, knowledge of ICAPA. Both Stephanie Guyon’s October 2020 article in The Advocate and the FAQ on ICAPA listed on the Idaho Attorney General’s website can greatly increase that knowledge.
As to ICAPA’s impact on charitable fraud, early results are unclear. While waiting on additional data from future years will help in measuring such impact, the deterrence factor will be present, but almost impossible to measure.
John McGown, Jr.
John McGown, Jr. is Of Counsel to the Boise offices of Hawley Troxell Ennis & Hawley LLP, where he has worked since 1982. He has twice taught a graduate tax course on tax-exempt organizations at Boise State University and has lectured numerous times on the subject. John and his daughter, Brenna, are two of a handful of individuals who have reached the summits of both Mt. Borah and McGown Peak.
[i] Stephanie N. Guyon, The Idaho Charitable Assets Protection Act: Better Protection of Idaho’s Charitable Assets and Donor Intent, Advocate, Vol. 63, Issue 10 (October 2020), pp. 38–40.
[ii] See https://www.irs.gov/charities-non-profits/exempt-organizations-business-master-file-extract-eo-bmf, which offers per-state data on exempt organizations, as tabulated by the IRS (last visited April 30, 2024).
[iii] 59 Idaho 241, 80 P.2d 741 (1938).
[iv] See 1963 Idaho Legislative Laws 475 and Idaho Code § 67-1401.
[v] There were existing tools. At the state level, Idaho had (and has) statutes making theft a criminal offense. The Internal Revenue has both civil and criminal penalties applicable to Section 501(c)(3) entities.
[vi] See Idaho Code § 48-1906.
[vii] See Idaho Code § 48-1901, et. seq.
[viii] The search terms “Idaho attorney general ICAPA” should lead to the Idaho Code § 48-1907(1) Notice Form as well as Frequently Asked Questions dated June 17, 2020. See https://www.ag.idaho.gov/idaho-code-%C2%A7-48-19071-notice/; see also https://www.ag.idaho.gov/content/uploads/2020/05/ICAPA-Frequently-Asked-Questions.pdf.
[ix] Stephanie N. Guyon, The Idaho Charitable Assets Protection Act: Better Protection of Idaho’s Charitable Assets and Donor Intent, Advocate, Vol. 63, Issue 10 (October 2020), pp. 38–40.
[x] Because of submission deadlines, the period covered is from July 1, 2020, through April 30, 2024.
Why Use an Asset Protection Trust by Stephen H. Telford
by Stephen H. Telford
Occasionally in my practice, I am asked, “Why should I consider creating an asset protection trust?” The person posing this question frequently proceeds to tell me why such an asset protection planning technique is not for them. However, many of the objections I hear are based on misconceptions.
An asset protection trust is a legal structure designed to safeguard assets from various risks, ensuring they are protected and preserved for the intended beneficiaries. In today’s world, business and individual assets are coming under greater threat as aggressive attorneys assert new and creative legal equitable theories. The unpredictable nature of judges and juries has prompted the pursuit of alternative asset protection methods that offer greater predictability. In this article, I will focus on offshore asset protection trusts, which move assets to jurisdictions where they benefit from the protections offered by different, perfectly legal, frameworks.
I have written several articles highlighting the benefits of using a trust established in a jurisdiction outside the United States to safeguard assets. Here, I will address common misconceptions and explain why they are unfounded.
“I Will Lose Control of the Protected Assets”
An offshore asset protection trust puts the assets in the control of a designated trustee, who manages them according to the terms outlined in the trust document, shielding them from potential creditors or legal claims and providing an additional layer of security and confidentiality.
For this reason, it may be true that you will lose control of the protected assets when a trust is under attack from unexpected creditors. Ironically, your lack of control will be a major factor in keeping the protected assets out of the “grabbing hands” of unwanted creditors. The loss of control serves as a protective barrier against unwanted creditor actions, ensuring that the assets remain beyond their reach.
When assets are placed into the trust, legal ownership is transferred to the trustee, effectively removing them from direct ownership by the individual. This separation makes it more difficult for creditors to access the assets, as they are no longer considered part of the individual’s personal estate. Additionally, the trustee, who now has control over the assets, is typically located in a jurisdiction with favorable trust laws, such as the Cook Islands. Such jurisdictions have stringent asset protection statutes that make it challenging for creditors to seize trust assets and often have shorter statutes of limitations for creditors to pursue claims.
While the “waters are calm,” most offshore asset protection structures allow you to exert a great deal of control over the protected assets through an Idaho family limited liability limited partnership or an Idaho limited liability company. These entities offer a flexible and efficient means for individuals to maintain influence and decision-making authority over their assets while still benefiting from the protective features offered by offshore jurisdictions. An individual can act as the managing member or general partner of these entities, allowing the individual to retain control over the management and operation of the entity. For example, using an Idaho family limited liability limited partnership, family members can contribute assets to the partnership while maintaining control over their management. The partnership agreement can outline specific rules and procedures for managing the assets, including distributions, investments, and succession planning. This allows individuals to tailor the structure to their specific preferences and needs, enabling them to enjoy the benefits of asset protection while retaining a substantial degree of influence and autonomy over their financial affairs.
Additionally, a local or foreign protector can act as a “watchdog” for you and your family as beneficiaries of the trust. A local or foreign protector is an individual designated within a trust instrument to oversee or monitor the actions of the trustee and ensure that the trust is administered according to the settlor’s wishes. Such a protector can have significant veto powers over most of the key decisions made by the offshore trustee. Ultimately, the protector acts as a check against potential mismanagement, conflicts of interest, or any other adverse action that could impact the trust’s beneficiaries. While a local trustee can also be appointed to make decisions in conjunction with the offshore trustee, the existence of a local trustee could expose the trust assets to local creditors. It is critical to be able to timely remove the local trustee when any trust assets come under assault. Consequently, you may want to refrain from using this form of control.
“I Will Be Unable to Benefit from the Protected Assets”
While it may be true in most places in the United States that you cannot be the beneficiary of a trust that you create, it is not true in several other countries. For example, the Cook Islands in the South Pacific and Nevis in the Caribbean allow the trust creator to be a primary discretionary beneficiary of a trust.
Stateside, Alaska, Delaware, and Nevada have enacted legislation appearing to allow “rainy day” discretionary asset protection planning through the creation of domestic asset protection trusts (“DAPT”). However, the Full Faith and Credit Clause of the United States Constitution greatly restricts the actual asset protection they can provide unless you happen to be a resident of one of those states. The Full Faith and Credit Clause requires each state to recognize the public acts, records, and judicial proceedings of every other state.[1] Recent developments, including a ruling by the Alaska Supreme Court, have shown that DAPTs are no longer reliable options.[2] Essentially, even though Alaska, Delaware, and Nevada have enacted legislation allowing for the creation of DAPTs, residents of states that do not recognize DAPTs may not receive the intended protection. Courts in non-DAPT states can and will apply their own laws regarding fraudulent transfers, regardless of whether the assets are held in a DAPT-friendly state. In practical terms, this means that individuals relying solely on DAPTs for asset protection may not receive the level of protection they expect, particularly if they reside in states that do not recognize or enforce DAPTs.
There is no substitute for the type of protection offered in places like the Cook Islands or Nevis. By establishing trusts in these jurisdictions, individuals can benefit from stronger legal frameworks and a greater level of certainty in asset protection strategies.
“I Cannot Protect My Real Estate”
Obviously, your real estate, which is comprised of dirt and any improvements sitting on or in the dirt, cannot be “moved” offshore when a creditor is searching for assets to seize. However, your equity in such assets can be protected through strategic financial arrangements. One such method involves establishing a standing equity loan line of credit secured by a mortgage, deed of trust, or other similar debt instruments. This allows the loan proceeds to be transferred to the offshore trustee. If the protected real estate assets come under an attack and the loan proceeds must be sent to the offshore trustee for protection, the offshore trustee will make any debt payments coming due during the attack. The key to making this technique effective is to have the planning in place before an unwanted creditor appears on your doorstep with a claim to ensure the trust assets cannot be accessed.
"To ensure the integrity and effectiveness of a trust, it is crucial to strike the right balance between retaining some control for flexibility and allowing the trustee to exercise fiduciary responsibility."
“I Cannot Protect My Real Estate”
Obviously, your real estate, which is comprised of dirt and any improvements sitting on or in the dirt, cannot be “moved” offshore when a creditor is searching for assets to seize. However, your equity in such assets can be protected through strategic financial arrangements. One such method involves establishing a standing equity loan line of credit secured by a mortgage, deed of trust, or other similar debt instruments. This allows the loan proceeds to be transferred to the offshore trustee. If the protected real estate assets come under an attack and the loan proceeds must be sent to the offshore trustee for protection, the offshore trustee will make any debt payments coming due during the attack. The key to making this technique effective is to have the planning in place before an unwanted creditor appears on your doorstep with a claim to ensure the trust assets cannot be accessed.
“I Will Get in Trouble for Creating Such a Trust”
This statement holds true in situations where a trust is established to evade taxes that one is legally required to pay.
It may also apply when a trust is created after the emergence of a creditor’s claim and the assets transferred to the offshore trust leave the individual without enough local assets to fulfill their debts as they arise.
Finally, this statement may hold true if you retain too much control over the management of the trust. To ensure the integrity and effectiveness of a trust, it is crucial to strike the right balance between retaining some control for flexibility and allowing the trustee to exercise fiduciary responsibility. Properly structured trusts, with clear delineation of roles and responsibilities, can provide the desired level of protection and benefit for both the grantor and beneficiaries.
However, if you establish an offshore trust with your “nest egg” assets during stable financial times when you’re solvent, the United States Supreme Court has acknowledged your legal right to protect those assets.[3] Therefore, offshore asset protection planning is most effective when implemented proactively, before any unexpected claims or contingencies arise.
“I Do Not Want to Hide Assets”
Effective offshore asset protection planning hinges on transparency. This means being completely open with the IRS by filing the necessary tax forms each year. It also means providing truthful answers to any questions on financial documents or during legal proceedings, whether they’re civil, criminal, or bankruptcy related.
Contrary to popular belief, successful asset protection planning is not about hiding things; it is about choosing legally sound strategies in favorable jurisdictions. This approach has been common practice across the United States for years. For instance, some people opt to establish corporations in states like Delaware or Nevada to benefit from specific tort law limitations. Some individuals set up trusts to take advantage of asset protection laws in states such as Alaska and Nevada (even though the efficacy of such planning is highly suspect for the reasons discussed previously). And some people establish a homestead in Florida or Texas where the asset protection for such an asset is unlimited. In these states, individuals can establish a homestead – a primary residence – where the equity in the homestead is largely shielded from seizure or forced sale.
"Therefore, offshore asset protection planning is most effective when implemented proactively, before any unexpected claims or contingencies arise."
“My Existing Family Limited Partnership or Limited Liability Company Provides Adequate Protection”
This is probably the most dangerous misconception I hear. While it is true that such partnerships and limited liability companies can be a source of limited asset protection in Idaho when properly implemented and updated, decisions are appearing across the U.S. where these types of legal entities have come under attack.
It is prudent in Idaho to convert any existing family limited partnership to a limited liability limited partnership. Limited liability limited partnerships provide an additional layer of protection compared to traditional partnerships. By combining the benefits of limited liability for all partners with the flexibility and tax advantages of a partnership, limited liability limited partnerships offer greater assurance that individual partners will not be held personally liable for the debts or obligations of the partnership. This process is fairly simple to implement and is a proactive measure to mitigate risks and protect assets against potential creditor claims or litigation.
It may also be prudent to migrate any existing Idaho limited liability company to another jurisdiction where the charging order is the exclusive remedy for creditors trying to attack the structure from the outside. A charging order is a court-issued order that grants a creditor the right to receive distributions from the debtor’s interest in the limited liability company. It does not grant the creditor any control over the limited liability company or its operations. This limitation helps protect the company’s assets from direct seizure or liquidation by creditors.
There is no question in my mind that the strongest asset protection strategy will take advantage of such partnerships and limited liability companies in conjunction with an offshore trust. In fact, a limited liability company can be formed offshore in favorable jurisdictions where the charging order is the exclusive remedy for an outside attack, such as the Cook Islands and Nevis.
In today’s interconnected and rapidly evolving global landscape, individuals and businesses face a multitude of risks that threaten their financial security. From fraud and legal battles to market downturns and cyber threats, the importance of solid asset protection strategies cannot be overstated. Incorporating an offshore trust into your asset protection strategy can help alleviate these risks and offer a buffer against unexpected hurdles.
Considering incorporating an offshore trust into your asset protection strategy? If you possess assets you’d like to shield from potential creditors, it’s wise to seek guidance from a qualified and experienced advisor. In matters of asset protection, acting sooner rather than later is key to safeguarding your wealth.
Steve Telford
Stephen (Steve) H. Telford is an experienced attorney specializing in estate planning and asset protection in Nampa, Idaho. As the founder of Telford Law & AP Consultants, Steve is renowned for crafting tailored estate plans and asset protection structures. His approach prioritizes strength, security, and simplicity, ensuring his clients' peace of mind. Steve is also affiliated with the Offshore Institute.
[1] U.S. Const., art. IV, § 1.
[2] Jay Adkisson, Alaska Supreme Court Hammers Last Nail in DAPT Coffin For Use in Non-DAPT States In Toni 1 Trust, Forbes (Mar. 5, 2018), https://www.forbes.com/sites/jayadkisson/2018/03/05/alaska-supreme-court-hammers-last-nail-in-dapt-coffin-for-use-in-non-dapt-states-in-toni-1-trust/?sh=d4747d662a77.
[3] Grupo Mexicano de Desarrollo S.A. v. All. Bond Fund, Inc., 527 U.S. 308, 323 n.6 (1999) (quoting Adler v. Fenton, 24 How. 407, 411-12, 16 L.Ed. 696 (1861)).
The Low-Income Tax Law Clinic by John B. Hinton
by John B. Hinton
I have the good fortune of directing the Low-Income Tax Law Clinic at the University of Idaho College of Law. The Tax Clinic is one of the College of Law’s clinical programs, where law students build practical skills while helping clients who cannot afford to hire a lawyer.
Students in the Tax Clinic help low-income clients with their tax problems. At first blush, the words “low-income” and “tax problems” may appear to be an unlikely combination – since some people might think “tax problems” affect mainly higher income taxpayers. However, many lower income individuals also have tax problems even if they do not ordinarily pay income tax.
The Clients
What types of clients does the Tax Clinic represent? Since the inception of the Tax Clinic in 2023, we have encountered clients with a diverse range of tax issues. Some of our clients are crime victims. For example, the taxpayer may have been a victim of fraud where the fraudster tricked the taxpayer into removing money from a retirement account, so the taxpayer not only loses money because of the fraud but is also taxed on the withdrawal. We have also had cases involving identity theft where someone else has reported income under the taxpayer’s social security number. The Internal Revenue Service (“IRS”) then mistakenly asserts a tax liability against the victim.
The IRS also audits many low-income taxpayers even though these folks do not pay taxes. Why? The IRS may doubt the validity of taxpayers’ claims for refunds. In some audits, the IRS may question whether the taxpayer improperly claimed a tax credit, such as the child tax credit or earned income credit. Taxpayers working as independent contractors are also frequently targets for audit, with the IRS questioning both the amount of income and deductions. In 2023, the IRS recommended $39.6 billion of tax adjustments due to audit examinations.[i] Taxpayers with annual income between $1 and $25,000 accounted for $18,589,000 of adjustments.[ii] Federal income tax audits often result in parallel adjustments for state income tax liabilities. The Tax Clinic can assist with state income tax issues which are ancillary to a federal tax issue.
Other clients simply struggle to pay an outstanding tax liability from a prior tax year and want to work out a settlement or installment payment arrangement. In some cases, the person has so little income that the IRS has agreed to forego collection.
The Students
Students who work in the Tax Clinic are third year students at the College of Law who are granted a limited license to practice under the supervision of a licensed attorney.[iii] The Tax Clinic gives them a chance to learn practical legal skills. Clinic students learn how to interview clients, draft engagement letters, consider ethical issues, research substantive legal issues, consider federal tax procedure and administrative rules, and come up with a solution. Sometimes this involves representation in the United States Tax Court or through the administrative processes of the IRS.
In addition to handling real legal issues presented by the clients themselves, students also study practical legal skills through class lectures. The Tax Clinic always welcomes other lawyers interested in sharing practical advice to students through guest lectures.
Finally, students learn legal practice and management skills and tips on how to succeed as a law firm associate, including tracking mock “billable hours” for all their client work.
How the Clinic Works
Clients who come to the clinic are assigned to work with one or more students. Once assigned, the students typically set up a meeting with the client and their supervising attorney. After meeting with the client, the students prepare an engagement letter to be signed by the client, and then commence performing the legal services needed.
All the clinic students get together in a weekly meeting to discuss the matters they are working on with each other and their supervising professor. The students thus learn from each other and are exposed to legal issues presented by matters other than their own. In this way the clinic operates much like a law firm or practice group that has collaborative meetings among colleagues.
The relationship between the students and their supervising professor is also similar to that of a law firm associate and a partner in the firm. All work is reviewed by the supervising professor before presenting it to the client. However, students in the clinic generally have more direct contact with clients than do many law firm associates.
Students who participate in the clinic benefit from the experiential learning approach. They leave the clinic much better prepared to be an associate in a law firm or enter a governmental law practice. Although these students have already developed the skills of reading cases and understanding the law at an intellectual level, the Tax Clinic, and the other clinics at the U of I give students a chance to apply this knowledge to provide practical solutions to help their clients. The clinical experience thus completes a well-rounded legal education.
John B. Hinton
John B. Hinton is the Director of the Low-Income Tax Law Clinic at the University of Idaho College of Law, where he has also taught Federal Income Taxation and Nonprofit Law.