Asset Protection Planning

The Asset Protection Book

By agreement with McGraw-Hill & Co., the materials contained in Asset Protection: Concept and Strategies, cannot be reproduced elsewhere. It is suggested that this book be used as a primary resource for exploring the topic, and that the following materials be used in a supplementary fashion only.

The Main Objective of Asset Protection Planning

It should be noted that the objective of asset protection planning is not to stiff legitimate creditors. To the contrary, good asset protection planning assumes to a significant degree that the target of the litigation (generically referred to as the “debtor” even if the claim has not yet been litigated or reduced to judgment) will pay all just debts and not attempt to use the fact of the asset protection planning to unfair advantage.

Rather, a main purpose of asset protection planning is to segregate and insulate liabilities away from valuable assets to the greatest extent allowed by applicable law, so as to reduce the debtor’s profile and amenability to lawsuit, as well as to conduct a lawful “asset freeze” by shifting valuable assets to other family members (in trust or otherwise) at a time when the debtor has no existing or foreseeable claims. Asset protection planning is also, to a significant degree, pre-litigation and pre-bankruptcy planning that seeks to maximize the use of exemptions allowed by the state and federal legislatures, and other forms of protecting assets as recognized by established or anticipated law.

But, again, asset protection planning is not meant to cheat legitimate creditors, ex-spouses, business partners, investors, etc., and in court one who attempts to use asset protection for such behavior should expect very liberal pro-creditor rulings.

• Morality of Asset Protection Planning – Considers the moral implications of asset protection planning, and gives some scenarios which illustrate the moral dilemmas often encountered in asset protection planning.

• Asset Protection Goes Mainstream -- From our Spring 2006 Newsletter

Privacy and Asset Protection

Lowering the asset profile of individuals has long been a goal of asset protection planning. While in the past this was done primarily to discourage frivolous lawsuits, it has become much more important today. With identity theft, phishing, pharming, and similar criminal schemes being rampant, it makes sense to keep valuable assets out one’s personal name or from being reported under one’s social security number of other identifier.

By transferring assets into trust or to business entities, the assets are no longer held or reported in an individual person’s name and thus it is much more difficult for criminals to find or access either the account information or the assets themselves. Thus, even if the individual’s identity is compromised and accounts accessed, the assets held in entities should be unaffected and thus available for transfer to the individual’s new accounts to pay bills, etc., while the identify theft matter is being resolved.

Indeed, one of the firm’s partners was the victim of identity theft earlier in the year, and it took nearly a month before a major bank was able to investigate the claim and refund the stolen dollars back into the partner’s account. Fortunately, the partner held most significant assets in the names of other entities that he owned, and was not overly inconvenienced by the event.

Thus, asset protection can sometimes be a planning necessity even when it is not done in contemplation of possible creditors.

Planning Efficacy

It is sometimes difficult to figure out “what works” and “what doesn’t”, and this certainly is not made any easier by the numerous promoters out there who are pitching their “100% bulletproof” pet strategy. According to them, their pet strategy always works and all other promoters’ strategies always fail.

Of course, they can’t all be right, and in truth probably none of them are right. The reason is that there is so much variation in circumstances of debtors, quality of creditors’ attorneys, experience of judges, prejudices of juries, etc. For the layperson who has come to believe that they need asset protection but are confused by the conflicting claims of success by the promoters, it is difficult to get a handle on what to explore and what to avoid.

One of the most sensible ways to evaluate asset protection planning techniques is by the considering whether the technique has been tested in the courts or whether the technique has been identified by creditors as an asset protection planning.

The term “asset protection planning” is a relatively new characterization dating to the early 1990s. In fact, asset protection planning has been conducted literally for centuries as debtor-creditor law. There is thus a large body of law that deals with certain types of planning techniques, such as the use of spendthrift trusts to protect assets from the creditors of beneficiaries, or corporations to shield investors from the claims against the entity.

One would think that planners would research the techniques that work, and those that fail, and avoid the latter. Unfortunately, a recurring theme in asset protection planning is that bad techniques are perpetually recycled and sold as “bulletproof” to the masses. Also, certain techniques that have repeatedly failed in the courts continue to be advanced by planners who have staked their reputation on them in the hopes that by the sheer unwillingness to try something different their pet theory might someday win one and they will be vindicated.

At any rate, dividing techniques into those that have proven to work in the courts and those that have failed in the courts is quite sensible and should be done. However, some asset protection planners are bright “think outside the box” types, and they are always coming up with new and innovative strategies to try to stay ahead of the creditors’ strategies for piercing asset protection plans. Judging the effectiveness of these untested techniques is much more difficult – and sometimes impossible because there isn’t enough law in a given area for anybody to have anything like a solid idea as to how the courts might finally rule on something.

If a technique is known to creditors, presumably they will be creating their own strategies for defeating the technique. Thus, strategies that are known to creditors are inherently more dangerous than strategies that are not. Conversely, if a strategy is not known to creditors, it means that each creditor that addresses an unknown technique will not have the benefit of other creditors’ experience and may not even recognize it as an asset protection technique. Thus, strategies that are not known to creditors should be favored over those that are known.

Obviously, the most dangerous strategies are those that have been shown to fail in court. The next most dangerous strategies are those that creditors are aware of, but have not yet been tested in the courts. There are two reasons for this: First, if creditors know about a strategy then you can bet that their very bright attorneys are devising ways to defeat it. Second, if a court ruling goes against one debtor’s strategy, the creditors will use that to leverage the other courts to unwind the strategy.

The safest strategies are those that have been tested in court and are known to succeed. The next safest strategies are those on the so-called “innovative frontier”, being strategies so novel that creditors have not yet identified them as an asset protection strategy. These strategies give a debtor the significant edge of the creditor having to try to figure out the strategy while in litigation.

A summary of these concepts is shown by the following graphic:

Planning Structures & Techniques

Exemptions – Exemption planning considers the use of statutory exemptions from collections as set forth by either Congress or the state legislatures. The goal of such planning is to maximize the debtor’s use of the available exemptions. The debtor’s fullest use of exemption planning may be significantly restricted by the 2005 changes to the Bankruptcy Code, unless the planning is done well in advance.

• Homestead Exemptions
  http://www.assetprotectionbook.com/homestead_exemptions.htm
  State-by-state links to each state’s homestead statutes and to key opinions interpreting the homestead exemptions in each state.

• Life Insurance and Annuity Exemptions
  http:/www.assetprotectionbook.com/life_insurance_exemptions.htm
  State-by-state links to each state’s statutes discussing exemptions for life insurance and annuities and to key opinions interpreting the exemptions in each state.

• ERISA’s Anti-Alienation Provisions
  http://www.assetprotectionbook.com/erisa_anti-alienation_provisions.htm
  Includes the text of 29 U.S.C. § 1056(d)(1) and select opinions interpreting that provision as it relates to debtor-creditor issues.

• Bankruptcy
  http://www.assetprotectionbook.com/bankruptcy.htm

Transactions – Transaction planning considers the use of various types of transfers to take non-exempt assets off the debtor’s balance sheet and thus render those assets unavailable to creditors. A goal of transaction planning is to avoid the application of the fraudulent transfer laws, which typically requires that the planning be done well in advance of any financial troubles suffered by the debtor.

• Equity Stripping
  http://www.assetprotectionbook.com/equity_stripping.htm
  Equity Stripping is the process of selling equity or encumbering equity with debt so that if a creditor attaches an asset there is effectively little or nothing for the creditor to receive upon the creditor’s sale of the asset.

• Fraudulent Transfers
  http://www.assetprotectionbook.com/fraudulenttransfers.php
  Includes the text of the Uniform Fraudulent Transfers Act (UFTA), drafters’ comments, our analysis, and state-by-state links to major opinions interpreting UFTA and similar fraudulent transfer laws.

• Premium Financing Facilities
  http://www.assetprotectionbook.com/premium_financing.htm
  Describes methods of financing the premiums for typically large life insurance policies, thus facilitating moving the insurance policy outside the estate, equity stripping the value of real property and other assets from creditors, and other unique planning benefits.

• Accounts Receivable Leveraging
  http://www.assetprotectionbook.com/accounts_receivables_leveraging.htm
  Discusses the leveraging of the accounts receivables of a business for asset protection and other purposes.

• Annuitization
  http://www.assetprotectionbook.com/private_annuities.htm
  Use of annuities for creditor-protected wealth transfers.

  • A Private Annuity Primer, contributed by tax attorney Joseph Petrucelli, LLM, discusses the basic tax treatment of private annuities.

  • Stupid Private Annuity Tricks -- A list of common mistakes made in private annuity planning, by Joseph Petrucelli, JD, LLM

Business Entities – The state legislatures have long recognized the advantages of allowing business entities to offer limited liability to their investors. Thus, a staple of asset protection planning is the use of corporations, partnerships, and hybrid entities such as limited liability companies.

Corporations – The corporate entity is one of the oldest asset protection forms, and has been created by the legislatures for the very purpose of asset protection: To insulate the liabilities of the entity away from its investors.

• Alter Ego
  http://www.assetprotectionbook.com/alter-ego.php
  Discussion of the alter ego argument as utilized by creditors to break through the liability containment of business entities, including a list of the major opinions involving alter ego arguments in the debtor-creditor context.

• Reverse Alter Ego
  http://www.assetprotectionbook.com/reverse_alter-ego.htm
  Discussion of the development of the new legal theory that allows the creditor of a shareholder of a corporation invade the corporation’s assets to satisfy the shareholder’s judgment.

• Nevada Corporations
  http://www.assetprotectionbook.com/nevada_corporations.htm
  Secrecy statutes, bearer shares, and Nevada's non-cooperation with the IRS has made this entity a marketer's dream. But is there any real substance behind the hoopla?

• Employee Stock Ownership Plans (ESOPs)
  http://www.assetprotectionbook.com/
  employee_stock_ownership_plans.htm
  Employee Stock Ownership Plans (ESOPs) are qualified retirement plans that corporate employers may establish to provide benefits in the form of ownership in the corporation for which the employee works and any of its related companies.

Partnerships and LLCs – Although general partnerships should be avoided, limited partnerships and limited liability companies offer very similar protection to investors for the liabilities of the entities as do corporations, but with the added benefit of protecting the assets of the entity from the creditors of a partner or member in some circumstances.

• Charging Orders
  http://www.assetprotectionbook.com/
  charging_orders_intro.htm
  Discussion of charging order protection for partnership and LLC entities in the asset protection context, including a list of the major opinions involving charging order protection.

• Family Limited Partnerships
  http://www.assetprotectionbook.com/
  family_limited_partnerships.htm
  One on the most hottest marketed asset protection structures since the early 1990s, the FLP can offer tremendous asset protection benefits when properly formed, drafted, structured, funded and managed – but they almost never are.

• Single Member LLCs
  http://www.assetprotectionbook.com/singlememberllc.htm
  Considers the special situation of LLCs with only one member. In a nutshell, no charging order protection but otherwise treat similarly to a sole shareholder corporation.

• Series LLCs
  http://www.assetprotectionbook.com/series_llc.htm

• Uniform Limited Liability Company Act
  http://www.assetprotectionbook.com/
  uniform_limited_liability_company_act.htm

• Uniform Limited Partnership Act
  http://www.assetprotectionbook.com
  /uniform_limited_partnership_act.htm

Trusts – One of the traditional techniques for protecting assets, going back literally hundreds years of Anglo-American jurisprudence, trusts offer tremendous benefits when used appropriate circumstances and often are underutilized for planning. Caution, however, that certain transfers to trusts and types of trusts have been voided by the state legislatures or by Congress in the bankruptcy code.

• Foreign Asset Protection Trusts (a/k/a “Offshore Trusts”)
  http://www.assetprotectionbook.com/fapt.htm
  Includes a synopsis of each significant case involving offshore trusts, a copy of the opinion where available, and other interesting documents relating to the case. Also includes the texts of the Cook Islands and Nevis trust statutes, and commentary about the efficacy of FAPTs in planning.

• Domestic Asset Protection Trusts
  http://www.assetprotectionbook.com/domestic_asset_protection_trusts.htm
  Includes a discussion of theoretical weaknesses in DAPTs, and links to the major DAPT statutes.

• Spendthrift Trust Provisions
  http://www.assetprotectionbook.com/spendthrift_trusts.htm
  A collection of landmark opinions from each state interpreting spendthrift trust provisions in the debtor-creditor context.

• Uniform Trust Code
  http://www.assetprotectionbook.com/uniformtrustcode.htm

International -- The use of foreign jurisdiction for asset protection planning offers certain advantages and disadvantages. Unfortunately, the marketing hype of offshore planning has seemingly drown out any rational discussion of whether such planning is necessary or worth the reporting hassles in most cases.

• Offshore Planning – An overview of offshore bank accounts, offshore trusts, and other offshore structures that are sometimes used in asset protection planning.

• Reinvoicing / Transfer Pricing -- Establishing an intermediary company offshore to divert profits. The IRS has some of its strongest powers to fight these structures.

Professional Practice Concerns

• Ethical Issues – [Coming Soon]
  A collection of major attorney ethical opinions dealing with debtor-creditor planning issues.

• Planner Liability
  http://www.assetprotectionbook.com/planner_liability.htm
  A collection of opinions regarding the liability of debtors’ planners to creditors for aggressive, egregious and sometimes fraudulent planning.

• Asset Protection Against the IRS?
  http://www.assetprotectionbook.com/irs_and_tax_liability.htm
  Discussion and collection of opinions relating to planning designed to thwart the IRS's collection of tax debts, and why it may be considered to be criminal in nature.

Asset Protection Lexicon

Getting a grasp on what asset protection planning is all about can be a daunting task for those unfamiliar with the area. Our Lexicon of asset protection terms may help.

Specific Industry Concerns

• Asset Protection for Physicians
  http://www.assetprotectionbook.com/physicians_asset_protection.php
  Discussion of available strategies that physicians should consider to better manage their liability risks.

• The 2005 Bankruptcy Reform Act
  http://www.assetprotectionbook.com/directors_officers_liability.htm
  Salt Into the Wound of Sarbanes-Oxley

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