Asset Protection
Asset Protection

Asset Protection

In fact, the best asset protection structure is one that simply is never challenged because litigation is avoided altogether or contentious matters are settled prior to judgment. (Location 640)

We call this the psychology of settlement. (Location 648)

Can I prevail at trial? If I lose at trial, can I win on appeal? If I get a judgment, can I collect on it? Creating uncertainty in the answers to these questions is how asset protection planning works best. (Location 649)

Subtlety in planning is critically important so that a creditor cannot use the existence of the plan to his advantage in court. (Location 661)

Tactics that shift the creditor’s focus from what he may gain in pursuing a claim to what he may lose in pursuing a claim are important. (Location 680)

An asset protection plan should be structured so that liability and, more importantly, culpability is transferred to a third party such as an insurer (see Figure 4.2). (Location 684)

If it is to be effective for more than a few years, an asset protection plan must be flexible and adaptable to changes in circumstance. (Location 731)

For asset protection planning for oneself, the worst method of transfer is the irrevocable gift, because once it is made (and declared to the IRS), undoing that transfer is extremely difficult. (Location 733)

Redundancy means that no single act of a creditor would be effective at reaching any of the debtor’s significant assets (see Figure 4.4). Rather, a defense-in-depth strategy should be adopted and the strategy should be dynamic so that additional lines of defense are created even as a creditor attempts to penetrate the existing ones. (Location 738)

This is simply the maxim “don’t put all your eggs in one basket” applied to asset protection planning. There should be diversity of the types of entities, funding methods, jurisdictions, and as many other elements as is practical and cost efficient. (Location 744)

“what if that component doesn’t work?” After a couple of layers of protection, the answer usually will be that a variety of options exist based on the circumstances at that point, because in reality, the most effective planning cannot be done very far in advance because no one knows what the circumstances will require. (Location 748)

All of the offshore and domestic asset protection trusts, family limited partnerships, and other so-called asset protection entities should be formed in anticipation of one thing: that a creditor someday will put the entity’s governing documents before a hostile judge who has just signed a judgment. (Location 757)

Remarkably, the great majority of those claiming to be asset protection planners have a very poor understanding of what really happens in litigation. (Location 764)

Many of these planners are estate planners who figure that it likely will be a long time before any of their planning is tested, and by then the statute of limitations period for malpractice will have expired. (Location 768)

It must be presumed that in litigation everything comes out—all the dirty laundry and all the secrets. (Location 791)

These people are likely to know much more than is suspected, and even if they don’t know everything, they can give their attorneys enough hints so that assets can be tracked. (Location 795)

Creditors are not limited to asking questions or requesting documents from the debtor. They can also subpoena records, and the debtor can do little to stop these attempts. (Location 806)

For this reason, the better planners bill on a flat-fee basis, and their engagement letters reflect business or estate planning purposes but not asset protection. (Location 829)

However, the conscientious planner must provide immediate assistance to his client. If the planner will not handle the litigation himself, he must see that the client retains a competent litigator to handle the case. (Location 847)

Second, if the planner is an attorney, the client can file a complaint with the state bar and seek intervention by the bar. (Location 869)

Creditors also may attempt to pressure a planner by filing professional complaints against the planner. (Location 876)

Creditors are not bound by Marquis of Queensbury rules, and to sophisticated creditors it may mean nothing to financially harm the debtor so long as the debt exceeds the harm done. (Location 894)

Some creditors believe that having a judgment in their favor means that they can act without fear of retribution. (Location 905)

These planners are assuming that creditors will not begin thinking outside the box, to come up with innovative and underhanded ways to recover assets or to get revenge against the debtor. (Location 911)

A client who conveys a desire to settle to a creditor may never arrive at a good settlement, because the creditor will always want more. (Location 913)

If the transfer cannot be challenged as a fraudulent transfer or a preferential transfer, then it may be very difficult for the creditor to attack the structure. (Location 921)

The critical factors in a UFTA analysis are timing, solvency, value, and intent. (Location 949)

Thus, if more than four years have passed from the time a transfer was made, such a transfer usually will be safe. In that situation, timing is the sole determining factor. (Location 951)

Thus, gifts must be ruled out as a method of transfer if either the debtor is insolvent or the gift will cause the debtor to be insolvent. (Location 967)

The conservative route is to try to make all transfers for full fair market value. (Location 971)

An important reason to maintain insurance is that the face amounts of liability insurance policies are normally included as assets in a UFTA solvency analysis if the policy proceeds would be available to pay the creditor’s claim. (Location 974)

The more the ratio exceeds 1 to 1, the better. Even if a debtor is insolvent under the balance sheet test, a court may find him solvent if he passes the cashflow test. (Location 980)

Bankruptcy can be thought of as the “neutron bomb” of asset protection planning and creditor remedies. The assets are left standing and owned by someone, but a lot of mutual destruction usually occurs to force the resolution of the debt standoff. (Location 1018)

Unsecured creditors usually are left holding the bag once exempt assets and encumbered assets are removed from the pool of assets to be liquidated. As a result, unsecured debts generally are the ones that are discharged in bankruptcy. (Location 1040)

As long as such planning is not done to avoid a particular debt, however, prebankruptcy planning is usually accepted by the courts. (Location 1055)

In fact, offshore courts seem to take great satisfaction in repudiating the attempts of U.S. courts to indirectly assert their judgments in the offshore haven. (Location 1160)

This is so simply because most of the laws that can negate asset protection planning primarily attack the transfer, not the structure. (Location 1410)

The difference between the viewpoints of the debtor and the creditor makes equity stripping an effective technique for protecting property. (Location 1721)

Cash is easier to protect than real or tangible personal property for two reasons. First, cash can be converted into more easily protected assets, such as life insurance or retirement plan assets. (Location 1724)

Real property, on the other hand, is always subject to the jurisdiction of the court where the property is located and totally subject to local law and the orders of the local court. (Location 1726)

commercial, controlled, contingent, and cross-collateralization. They are not mutually exclusive. In fact, most equity-stripping plans use a combination of techniques. (Location 1736)

However, controlled equity stripping has some downsides. The first is that since the private lender has so much control over the situation, the private lender must be trusted. (Location 1773)

Of course, the creditor does not see that the payments are transferred to the private finance company (less the bank’s servicing fee). (Location 1790)

Accounts receivable are another form of property that can, and should be, equity-stripped. For a professional firm of physicians or attorneys, accounts receivable are often the firm’s most valuable asset—and its most available asset as well. (Location 1823)

In the right circumstances, a trust can allow a person to give assets away in a controlled manner, protecting those assets from the claims of her own creditors, because the assets simply are not owned by her anymore. (Location 1843)

A spendthrift trust is one in which the beneficiary cannot transfer his interest in the trust to a third party and where the beneficiary’s right to distributions can be cut off if the distribution would otherwise go to a creditor of the beneficiary. (Location 1916)

Contrary to the goal of diversifying assets as litigation progresses, these trust structures create a large, singular target for creditors to attack. (Location 1941)

However, the debtor is the one who bears the most risks since all of his wealth is in the trust, whereas the assets in the trust might be only a minis-cule fraction of the net worth of an institutional creditor. (Location 1943)

Widely marketed revocable living trusts provide absolutely no asset protection benefits. (Location 1949)

Despite these very solid protections, too many advisors allow their clients to make naked gifts and bequests to their heirs. This is probably the single biggest asset protection mistake made by estate planning advisors, and it can cost a client’s family millions of dollars. (Location 2021)

Often the best wealth-building tool in a dynasty trust is a large life insurance policy. (Location 2071)

Perhaps the best use of dynasty trust assets is to fund ventures that have the potential to build even greater wealth for the family inside the trust. (Location 2080)

Although spendthrift and similar provisions provide solid protection for trust assets from the claims of creditors of beneficiaries other than the settlor, these provisions provide absolutely no protection against claims of the settlor’s creditors that the assets were fraudulently transferred into the trust. (Location 2116)

Once assets are successfully placed into a trust with spendthrift provisions, it will be nearly impossible for creditors of beneficiaries other than the settlor to attack those assets. (Location 2122)

In 1997, Alaska became the first U.S. jurisdiction to adopt domestic asset protection trust (DAPT) legislation, which allowed self-settled spendthrift trusts. (Location 2139)

They allow a person to create a discretionary spendthrift trust for her own benefit, treating the assets of the trust as the property of the trustee and not as belonging to the creator of the trust. (Location 2143)

So, if at some later time Congress decided to make a change to the federal bankruptcy laws to allow bankruptcy courts to ignore state laws relating to self-settled spendthrift trusts, that change would end the effectiveness of DAPTs. (Location 2174)

such a situation is what asset protection is designed for), at least with an offshore trust, a debtor can physically leave the United States entirely and enjoy trust assets totally free from U.S. jurisdiction—so long as she or he doesn’t return. (Location 2212)

The settlor of the trust is required to give up control to another person or institution located in the DAPT state. (Location 2219)

The most obvious alternative attack available to a creditor is an action for civil conspiracy. (Location 2232)

However, being so makes it difficult to unwind the structure other than when distributions need to be made; those distributions are then made available to creditors. (Location 2240)

(This is precisely the sort of result for which DAPT legislation, with little foresight, was enacted.) (Location 2246)

Generally, a DAPT should be considered only if the settlor resides in a DAPT state, and only if all the assets are held in the DAPT state, as it is unlikely that the courts of a state not having DAPT legislation will recognize the protections of the DAPT statute. (Location 2266)

A DAPT should be merely one layer of an asset protection plan for the assets it is holding. Ideally, a DAPT should hold nothing but illiquid assets, so that if a creditor is successful in breaking through the DAPT the creditor still must cut through other layers to reach liquid assets. (Location 2271)

These firms will help to create and administer the trust, and they can provide total management of the trust assets. These firms are typically well managed and have capable staffs. (Location 2586)

They are usually well capitalized, meaning the risk of their collapse or sudden disappearance is unlikely. (Location 2589)

Still, for all of the downsides, placing trust assets with a large institutional trustee is a better solution than placing the assets with small trust companies and then attempting to retain indirect control via a friendly advisor or asset manager. (Location 2600)

Share structures are entities, such as corporations, in which the owners hold shares in the entities; they may buy, sell, and trade the shares (unless they are restricted by company rules or by securities laws). (Location 2656)

Contrast these rights with a creditor’s rights with respect to a debtor’s interest in partnerships and limited liability companies. (Location 2677)

These provisions allow at least certain shareholders of the company to buy out hostile shareholders at a predetermined price. (Location 2687)

It is called the macaroni defense because when the danger of a takeover appears, the company issues a large number of bonds to friendly creditors, with the redemption price of the bonds expanding—like macaroni in a pot of boiling water—if the company becomes controlled by third parties. (Location 2695)

The key to using this technique successfully, as usual, is subtlety as well as the ability to articulate an economic purpose for the share structure. Such is the art of advanced corporate structure design. (Location 2704)

Rarely, if ever, does it make sense to conduct business personally or to own a liability-producing asset personally any time that a limited liability entity could be used for the same purpose. (Location 2714)

Company owners, officers, and directors are required to follow formalities established by company legislation. (Location 2718)

A company’s failure to follow corporate formalities can cause a court simply to disregard the company (known as piercing the corporate veil) and deem that it legally does not exist. (Location 2730)

The role of shareholders in a classic corporate structure essentially is to contribute capital, elect the directors, and collect dividend checks. (Location 2765)

As a result, particular attention should be paid to prevent the corporate veil from being pierced. (Location 2767)

One method that may alleviate all of these problems is to finance the company with debt rather than by contributing equity capital. (Location 2777)

The corporate debt held by the shareholder can be issued in a fashion such that it is convertible into company stock. Options and warrants can be used similarly. (Location 2785)

To the extent possible, persons with significant assets should not serve as officers or directors of corporations that are conducting active business, since this has the potential to create significant liability even if the corporate veil is respected. (Location 2787)

directors). A person known to be wealthy may be a lighting-rod for litigation against the company, as claimants will presume that the wealthy person ultimately will be responsible for judgments. (Location 2792)

Companies regularly borrow from individual investors by issuing bonds. These bonds may be secured by the company assets; thus, their holders will have a claim to priority over most other creditors of the company. (Location 2816)

The issuance of debt by a company strips equity from the company. If the company is forced into liquidation by an unsecured judgment creditor, bondholders will have priority claims to the company’s assets, before unsecured creditors (including the judgment creditor) and before shareholders. (Location 2819)

Options can also be a vehicle for wealth transfer to an asset-protected entity if they are never exercised. (Location 2843)

If the options holder does not exercise the option and the option expires, wealth has been transferred from the client to the company. (Location 2845)

Historically, the most commonly used entities for asset protection in the United States have been corporations formed under the laws of one of the States—that is, domestic corporations. (Location 2848)

Corporate law in the United States is well developed and over time has proven largely successful in insulating shareholders from corporate liabilities. (Location 2854)

Under state law, having a registered agent in the state of incorporation creates nexus sufficient to allow the corporation to be sued in that state. This fact alone may affect the decision where to incorporate. (Location 2878)

Therefore, if a note of the corporation received in a transaction structured well in advance of a bankruptcy filing was secured by the corporation’s assets, the party holding that note will be in a superior position to any subsequent creditors and effectively can guide the course of the bankruptcy. (Location 2902)

substantially financed by debt and the financing should be secured by the corporation’s valuable assets. (Location 2906)

The biggest disadvantage to domestic corporations is that issues relating to shares of the corporation are within the jurisdiction of at least the state wherein the corporation is formed. (Location 2932)

A better strategy may be to blend in with the crowd that uses Delaware corporations. (Location 3005)

Whereas corporation laws are generally written to accommodate the needs of businesses with large numbers of passive stockholders, the LLC acts are generally written with small businesses in mind. Thus, the LLC tends to be a more flexible and more easily understood business entity. (Location 3145)

LLCs were classified as corporations or partnerships for tax purposes based on the individual characteristics of each LLC. (Location 3169)

vulnerable to claims of the shareholder’s judgment creditors. In many small businesses, this vulnerability could allow the creditors to take control of the business or even liquidate its assets to satisfy their judgments. (Location 3240)

However, the economic rights to distributions are all that the creditor gets. The creditor does not get the management and voting rights that may go along with the LLC membership interest. (Location 3247)

Indeed, an LLC operating agreement might be drafted in such a way to cause a creditor with a charging order to be taxable. (Location 3252)

The single-member LLC is something of an anomaly, because LLC law is largely based on the law of partnerships and, of course, there have never been single-member partnerships. (Location 3269)

An additional member often can be added without changing the tax treatment of the LLC—for example, by using a grantor trust or another LLC or IBC. (Location 3274)

The court also stated that the charging order limitation serves no purpose in a single-member LLC, because there are no other parties’ interests affected. (Location 3283)

Many asset protection commentators spend a great deal of time worrying about the possibility that a creditor with a charging order can foreclose on the charged LLC interest if the charging order is not quickly moving the creditor toward satisfaction of the judgment. (Location 3301)

A creditor to whom an LLC interest has been transferred in a foreclosure sale is still merely an economic assignee and does not succeed to the management and voting rights of the debtor-assignor. (Location 3310)

But very careful badges-of-fraud and solvency analyses must be undertaken first. (Location 3329)

Transfers of property in exchange for pro rata LLC interests will be extremely difficult to challenge as fraudulent in those jurisdictions that require a showing that the transfer be without “equivalent value,” regardless of the transferor’s intent. (Location 3331)

The right to expel might include the requirement that it can only be exercised if the bankruptcy court concluded that the trustee had the power to exercise or transfer the management rights of the owner. (Location 3344)

The law of most jurisdictions prevents a creditor of a member of an LLC or a partner in a partnership from assuming rights of a debtor-member or debtor-partner other than mere economic rights to distributions. (Location 3353)

Most importantly, the Delaware LLC Act provides that debts, liabilities, and obligations incurred, contracted for, or otherwise existing with respect to a particular series are enforceable against that series only. They are not enforceable against the assets of the (Location 3376)

Or the creditor can pursue the charging order with two risks: (1) The creditor will have little or no recourse to force the IBC, as manager, to make distributions, and (2) he may be taxable on the debtor member’s share of LLC income. (Location 3514)

In evaluating costs, keep in mind that the protection offered by an offshore LLC structure is dependent, not on the mere existence of the component entities, but rather on the careful drafting of the associated documents. (Location 3526)

The most difficult issues in asset protection planning involve control, or more precisely, how to have effective absolute control over an asset without having to legally own it and thus expose it to creditors. But even indirect control can lead to implications of ownership. (Location 3630)

The art comes in navigating around the general rules of law relating to when control becomes de facto ownership and the liability of managers. (Location 3638)

Not all clients can be transitioned to purely passive investors. Many clients will have active businesses and will need or desire some form of direct management control over the business. (Location 3656)

The client is, after all, merely the manager and not the owner of the asset. The owner of the management company is the trust, not the client. (Location 3663)

Third, the management company structure allows the client to take money out of assets that she doesn’t own, by way of management fees. (Location 3670)

The cash value of certain types of tax-qualified life insurance policies known as modified endowment contracts (MECs) cannot be withdrawn or borrowed without taxation to the policyowner if there has been investment growth in the policy. (Location 3811)

OPPVULI policies offer an added advantage of stealth. The only information readily visible to a creditor is the investment in the policy and not the underlying assets. (Location 3898)

As with exemptions for life insurance, state law exemptions for annuities, both the cash value and the right to annuity payments, vary widely. Florida, Texas, and Michigan, for example, exempt the entire value and proceeds of annuity contracts. (Location 3923)

A lump sum of cash or other valuable assets otherwise unprotected might be transferred to a trust settled by a related party in exchange for an annuity from the trust. (Location 3931)

A valuable asset is sold (usually to a family member or to a trust or entity controlled by or for the benefit of family members) in exchange for the buyer’s promise to pay the seller a fixed amount of money on a periodic basis (usually annually) for the seller’s lifetime or for a fixed term. (Location 3938)

First, an income-producing asset is transferred to an offshore entity (which has elected passthrough tax treatment) owned by a trust established for the benefit of the seller’s children in exchange for a private annuity. (Location 3971)

Then, the investment manager of the insurance policy’s investment account purchases the ownership interest in the offshore entity from the children’s trust for notional value. (Location 3975)

What creditors do not want is an illiquid asset, or an asset that requires repetitive work to get at the cash. (Location 3993)

For all of these reasons, creditors typically view annuity payments as nearly uncollectible assets. (Location 4005)

If asset protection is a primary consideration, installment sales and private annuities can be structured with poison pills. (Location 4008)

He may have a variety of insurance needs for which he cannot find an insurance company to accept the risk for a reasonable premium, or he may own a sufficient number of related business that he can spread his risk among them. At (Location 4038)

Nearly all large corporations have captive insurance companies that underwrite substantial parts of their insurance needs. (Location 4045)

An insurance company operates much like a bank. The insurance company’s policyholders effectively loan the insurance company money through premium payments. (Location 4053)

The insurance company will also attempt to generate profits from underwriting activity. But the insurance company can be profitable even if its underwriting results in a loss. (Location 4056)

Keep in mind that although the insurance company is formed offshore, there is no requirement that assets be moved offshore or placed in control of an offshore person. (Location 4107)

Another example is that when the stock market fizzles, rates are likely to go up for reasons totally unrelated to how well risks have been managed and claims avoided. (Location 4124)

When a business is large enough, or a person is wealthy enough (a good rule of thumb is at least $3 million in net assets), that business or person should consider owning their own insurance company to manage their own legal risks. (Location 4131)

Equally as important, the policies can be tailored for the specific needs of the business instead of the business being forced to accept a generic form filed with the state insurance commissioner, which a third-party insurance company may not desire to alter. (Location 4139)

In contrast, what we term a closely held insurance company (CHIC) is a captive insurance company meant for use only with privately held businesses. (Location 4186)

Because of the nature of their business, real estate developers are subject to construction-defect liabilities, which last a decade or longer in some states. (Location 4377)

Because of lenders’ requirements, developers often cannot encumber themselves with personal debt or they risk being denied access to the borrowed capital they need. (Location 4383)

Note that the real estate developer can still be a purely passive investor in his own name by extending credit to the entities in which the projects are developed. (Location 4393)

First, they have substantial economic risk in that the business may fail, resulting in an immediate loss of income, and the probable loss of assets to lenders to which the business owner has provided personal guarantees. Second, an infinite number of potential liabilities arise from business operations. (Location 4414)

Key management personnel should be segregated into one or more management companies. (Location 4423)

perhaps best by acting as a consultant to the management company. (Location 4424)

Part of the business owner’s compensation arrangement as a consultant might include a deferred compensation plan that allows the owner to put away business profits in a subtle, protected manner. (Location 4428)

Again, private annuities and private placement life insurance arrangements are ideal. (Location 4437)

A planner who does not deal with the potential loss of principal, which is every bit as real as money lost to the mythical predator plaintiff, is doing the client no favors. (Location 4510)