Asset Protection

Creditors do not want to play the waiting game, and would prefer to settle for a sum certain today, than wait for a possible distribution from an LLC or a limited partnership. Engaging in after-the-fact asset protection planning may be deemed to be a fraudulent transfer allowing the creditor to set aside the planning. Over the years, this new field of law enjoyed a marginal reputation, but started going mainstream in the mid-1990s. Practitioners should keep in mind not only the underlying substantive law, but the obstacles presented to the creditor by the practical implications of asset protection planning. In some cases a creditor will obtain a charging order and try to out wait the debtor. A creditor's sole remedy would be to bring a fraudulent transfer action against the trustee of the foreign trust, and attempt to show that the settlement of the trust by the debtor constituted a fraudulent transfer.

The protection afforded by LLCs and limited partnerships is derived from the concept of the charging order limitation. Planning is done within a statutory framework, but it is the practical implications of the planning that shape the exact nature of the structures and techniques. Asset protection began to develop as a stand-alone area of the law in the late 1970s. No asset is more important to shield from creditor claims than a personal residence. The QPRT is a great example of the practical efficacy of asset protection. When a creditor has the legal ability to challenge the protection of a foreign trust, the costs and difficulties of the challenge are usually insurmountable.

Asset protection sets as its goal the concept of removing assets from a debtor's legal ownership, while retaining control and beneficial ownership. Liquid assets may be protected through many techniques, including LLCs, limited partnerships and irrevocable trusts. It is important to know the client's asset protection objectives and concerns and the extent the client is willing to go to protect his assets. Did you know that a $1 million loan bearing a 7% interest rate, costs $70,000 per year. The three most important factors are: (i) the identity of the creditor pursuing the client, (ii) the nature of the assets that will be pursued by the creditor, and (iii) the extent to which the debtor is willing to go to protect his assets. If the debtor owns assets through a corporation, the shares of stock of the corporation can be seized by the debtor's creditor.

If you are someone who wants real protection, a better option may be an irrevocable trust or an outright sale of the residence. There are different structures used in protection rental real estate, a personal residence, a bank account, a retirement plan, etc. Another way to strip out the equity (frequently advocated by clients), is to encumber the residence by recording a deed of trust in favor of a friend. A creditor may petition the court for a turnover order, which would direct the debtor to withdraw the money from the foreign account and pay it over to the creditor. Given that the more favorable asset protection jurisdictions have a very short statute of limitation for bringing a fraudulent transfer action, require proof of intent beyond a reasonable doubt and require proof of debtor's insolvency, the creditor faces a daunting task. Some debtors may be willing to do nothing more than shuffle paper agreements, whereas others may be willing to go through a divorce, move assets offshore or sell their home.

by Peter Nutter