With so many asset protection schemes out there, how does one make heads or tails out of what works versus what doesn’t?
Well, the best that can be said is “that it’s hard to say”. Which is doublespeak for the nonsensical phrase “sometimes things work and sometimes they don’t”.
You see, sometimes the worst methods work. we have heard of cases where people have transferred assets to a best friend the night before they had a debtor’s examination or filed bankruptcy, and the creditor’s attorney or trustee was not sophisticated enough to figure it out.
On the other hand, we have read about an attorney’s elaborate asset protection plan explode against moderately sophisticated creditors such as that supposedly “foolproof” asset protection structure, the foreign asset protection trust.
It is possible to say that some asset protection methods are certain to fail, some asset protection methods are likely to succeed, and some asset protection methods aren’t a sure thing but have a fighting chance.
It is the determining which-is-which that is the nightmare for persons who are not asset protection gurus. And made all the more difficult because there is so much conflicting marketing information available for reading out there. So, for those of you who don’t breathe, eat, and sleep asset protection we’ve come up with the following scale which puts the various asset protection methods into perspective.
Scales for Achieving Proper Outcome
The following scale is created to illustrate the range of available asset protection strategies, from the statement, “I don’t own it” method, through the Collateralization and Transformation methods which change the character of assets to make them difficult for creditors to get at, up to the highest levels of asset protection planning, being the Monetization and Replication methods which have the potential to make assets “disappear” from one’s ownership, and “reappear” in some structure or entity which is not subject to creditor challenge.
At the lowest level, that being the “I don’t own it” method, the law is well-developed and allows creditors to brush aside this method of protection. Conversely, at the highest level, the Monetization method and the Replication method there is little, if any, law on these methods. Meaning that a creditor will have a very difficult time getting at assets which have been protected by these methods.
So, from the worse to the best, here is a short description of the asset protection methods mentioned herein.
“I Don’t Own It” Method
“It’s not mine, I don’t own it!” This is the fundamental theme behind what is also termed the Dissociation Theory. Basically, you’ve given up your rights to an asset to somebody else. Unfortunately, people have been trying to do this for centuries, and the law has always responded to prevent this sort of conduct. The law of Fraudulent Conveyances, now embodied in the Uniform Fraudulent Transfers Act (UFTA), is vaguely worded so as to give courts the broadest possible powers to eliminate any type Dissociative method.
The use of any Dissociative methods is “junk planning” at its finest. Yet, at the top-end of the Dissociative method is the Foreign Asset Protection Trust, which is possibly still the hottest-marketed asset protection tool in the history of American asset protection. Other attributes are doubtful, however, as many courts have considered an offshore trust have basically ignored the entity and required the return of the assets under penalty of contempt, and a few cases have ended with criminal indictments for obstruction of justice, and bankruptcy fraud.
One set of methods of protecting property involves having some “friendly” person or entity put a lien on your property, so that if a creditor attempts to sheriff-sale the property to get any equity out of it, there is none, thus deterring the creditor from trying to get at the property in the first place.
These methods often work, but sophisticated creditors have learned to spot the more obvious tactics and cut through them. Now the problem is that the property still exists and may be available for the creditor to take at their discretion.
This is a technique involving the use of controlled corporations. Essentially it works this way: Assume you own Corporation A and Corporation B, and both corporations own property. You cause Corporation A to take a loan from Corporation B, which loan is secured by Corporation A’s property. You then use the loan proceeds to give a loan back to Corporation B, which gives Corporation A a lien on Corporation B’s property. Thus, without any money going outside the economic family, the property of both Corporation A and Corporation B have been liened and are protected from creditors, at least to the extent that the creditors can’t figure this out or come up with a claim that the transactions were without economic meaning and were fraudulent transfers.
Thus, if Corporation A has a creditor, and the creditor has not figured our that Corporation B is part of the same economic family, then Corporation A’s property is sold, and the proceeds transferred to Corporation B in satisfaction of the loan, thus leaving the creditor holding an unenforceable judgment.
The above example is pretty transparent and would probably be deemed a fraudulent transfer if a creditor figured it out. It illustrates, however, how cross-collateralization techniques can operate.
Assume, in the above example, that there were three or four corporations, some of which are offshore, and several trusts and private foundations to hold the property, and that the transactions had some real economic substance within the client’s business. In such case, it might be very, very difficult for a creditor to get the complete picture, or to go further and prove that the transactions were without substance and amounted to a fraudulent conveyance.
For very sophisticated individuals and businesses, however, these cross-collateralization techniques can effectively protect an unlimited amount of property.
A good example of Collateralization Method is called Equity Stripping.
If you take something that is easy for creditors to get at, say money in your checking account, and put it into something that may be very difficult for creditors to get at, say, dumping the cash into a personal residence in Texas or Florida, then you have utilized the Transformation Method.
Transformation methods are the bread-and-butter of the most asset protection planners, and these methods have a good chance of success, so long as the method used is fact-specific to the client.
If you convert assets into a Limited Partner’s interest in a limited partnership, or a Non-Managing Member’s interest in a Limited Liability Company that is difficult for creditor to get at, because of so-called “charging order protection”, see Family Limited Partnerships.
Insurance and Annuities
Remarkably, life insurance policies and some annuity policies may be exempt from creditors in certain circumstances under the laws of some states. This may give you the option of converting your cash or hard-to-protect assets into exempt assets.
A Cutting-Edge Method
Beyond Collateralization and Transformation methods there are a few other cutting-edge asset protection techniques out there and people are coming up with new methods all of the time. But probably right now there are a few methods that are at the forefront of asset protection theory and is described below.
This method takes advantage of sophisticated forward contracts and complex installment sales to remove an asset now, for in the future (and if that last phrase doesn’t make sense to you, then you’re going to have to study “forwards” before you will understand).
This method uses complex derivative strategies to make assets “disappear” from the client’s balance sheet, and then almost-miraculously “reappear” in some entity which is not subject to lawsuit. These theories have developed as the modern derivatives industry has matured. Fun stuff if you are an asset protection planner, but almost impossible to understand unless you have a background in derivatives trading.
Equity Holding Trust Method
At last, a legitimate and easily understood vehicle for passive Seller-Carry’s with minimal risk of attachment to the property later by the other party’s creditor judgment, tax lien, bankruptcy or marital dispute. In other words… all the benefits of Options, Wraps, Contracts for Deed, or even Equity Sharing without their inherent dangers of attachment. Also, known as a Illinois Land Trust. For more on Equity Holding Trusts click here>>>
Does This Cover Everything?
Of course not, there are many other methods of protecting assets, including the traditional method like purchasing liability insurance. These methods have been omitted for brevity.
Now Comes The Issue of The Morality of Asset Protection
Considerations include whether asset protection planning should even exist, and if so in what circumstances is asset protection planning appropriate.
In modern society, morality is something that is intensely personal and should be left to the individual, except in cases where others may be harmed. An example is alcohol. As an adult, you are free to drink alcohol. However, drunk driving is harmful to others; therefore, you are not allowed to drink and drive.
Questions arise in asset protection planning as to whether the planning “harms” someone else; namely, creditors. Questions also arise as to timing, i.e., if you engage in asset protection planning when you don’t have any claims against you, are you at that time harming yet-unknown future creditors?
Various bodies of law, including those codified in the Uniform Fraudulent Transfers Act, attempt to define when asset protection is proper and when it is not.
Yet, as with almost every area of law, the boundaries between proper and impermissible are rarely clear.
WARNING: TAX EVASION IS A SERIOUS CRIME! You should also be aware that any attempt to defeat the collection of certain U.S. government and U.S. government-backed obligations can amount to a crime. Enough said. Go protect before it’s too late.