Asset Protection Planning-Before and After the Lawsuit

Defendants' Assets Frozen-Can't Hire Attorneys

This title is taken from a recent Wall Street Journal article about a hedge-fund mogul who is facing civil charges brought by the SEC for defrauding investors of $300million. He has been reduced to representing himself because the judge in the case refused to free up money to allow him to hire a lawyer. There is always a conflict between prosecutors seeking to block the use of defendant's funds which they claim were illegally obtained and the defendant's use of the funds to hire counsel. However the US Supreme Court has ruled that funds in the possession of a defendant, frozen because they were illegally obtained and as a result defendant is prevented from hiring a lawyer of his choice, does not violate the Sixth Amendment's right to counsel. What does all of this have to do with asset protection planning? Had the defendant established a domestic asset protection trust in conformance with the law of Delaware, Alaska, Rhode Island or one of the other states that have adopted self-settled trust legislation, funds would be available to pay for lawyers as well as all living expenses. Now this article is not intended to suggest that criminals about to embark upon illegal activity should be afforded the opportunity to use  these types of trusts or that lawyers should assist them. Instead I am thinking about persons in high profile positions, CEO's, bank presidents, and other financial industry higher-ups, many of whom may face claims because of the current lynch mob mentality, but who acted in good faith and without any criminal intent. They too risk their assets being frozen by some zealous prosecutor and an unsympathetic judge. It is this group of people and other industry leaders that should be vigilant in protecting their personal assets and in providing a nest egg free from creditor claims so that if and when the climate changes for them and somehow, unexpectedly, they find themselves the victim they will not be left penniless and without resources to fight.

Rights of Creditors to Reach Joint Federal Income Tax Refund Claim

In this era of failed real estate projects, defaulting loans and creditors pursuing guaranties, a frequent inquiry is about the rights of creditors to reach a joint federal income tax refund due the debtor and his or her spouse. This is a very critical issue since so many debtors generated large net operating losses in 2008 which they can now carry back to prior years. Because these debtors paid substantial taxes in those prior years a refund, often substantial, is due the debtor and his spouse. The law will differ depending upon the debtor's state of residency but in Michigan once a joint federal income tax refund check is issued to husband and wife it will constitute an "evidence of indebtedness" and be protected from the creditors of just one spouse the same as entireties property. MCL557.151; Probert, 482 Mich. 858 (2008). But this is not the end of the story. What if the creditor garnishes the IRS prior to the IRS issuing the check--that is the garnishment is served after the return is filed and while it is being processed but prior to check issuance? In the case of Jahn v. Regan, 584 F. Supp. 399 (E.D.Mich. 1984), a tax overpayment that had not ripened into a refund check was not considered to fall within the ambit of MCL557.151 and therefore the debtor's interest in the overpayment was reachable by his separate creditors. Strategies exist to protect against this possibility but practitioners need to be aware of the issues and plan accordingly.

Howard B. Young-Asset Protecting Items In Your Home

    We read so much about sophisticated asset protection planning strategies....offshore trusts, domestic asset protection trusts, limited liability company charging orders and so forth. Just read my blog, I'm as guilty as the next about discussing these items. But sometimes the issue facing our client is very mundane and in your face--namely, how do I protect the items in my home. Here we are talking about household items, keepsakes, memorabilia, jewelry, art and the like. Few people know the rules. Still fewer advise their clients properly. Let's say you are at the stage where all planning to shift ownership has been completed and for whatever reason title to the tangible property in the home remains in the debtor. What do you tell your client when the collection man commeth? In Michigan us asset protection planners have a great answer. We  should be telling our clients not to let the Sheriff in. Even with a proper Writ of Execution, in Michigan according to our Supreme Court, an officer seeking a judgment debtor's property for purpose of making a levy has no right to force an entrance through the outer door to the debtor's home. However, once he is lawfully admitted to the home he can use reasonable force to get through the inner doors and take what property is subject to the levy. SO MAKE SURE YOUR DEBTOR CLIENT UNDERSTANDS--DO NOT VOLUNTARILY LET THE SHERIFF IN. IF HE FORCES HIS WAY IN IT WILL BE UNLAWFUL AND HE WILL NEED TO RETURN YOUR GOODS. 

    My good friend and a great collection lawyer, Gary Nitzkin (Michigan Collection Lawyer Blawg), sometimes shares his secrets with me. He will send the Sheriff to the home of an unknowing debtor who will let the Sheriff in. Once inside the Sheriff begins gathering the debtor's prized personal possessions. Before long the Sheriff is on the phone to Gary explaining that the debtor is ready to pay. But this need not happen if you-DON'T LET THE SHERIFF IN!!

Asset Protection Planning For Personal Property

            Asset protection planners and their Michigan clients have just been given a new gift. For many years the Michigan law provided that certain types of designated personal property, for instance stocks and bonds (and now brokerage accounts per applicable case law), if held as tenants by the entireties, is subject to the protections afforded like ownership of real estate. Therefore, if a husband and wife owns IBM stock as entireties property the creditors of only the wife cannot reach her interest in the stock. Similar rules apply to real estate owned in the entireties in Michigan. The problem was how to make sure such personal property was titled in the entireties and not jointly. Most banks and brokerage houses make it difficult to open an account in the entireties...they would tell our clients that joint ownership means the same thing. Now the Supreme Court of Michigan in Zavradinos, 482 Mich. 858 (2008), has decided that there is a statutory presumption that certain specified personal property held as joint tenants by a husband and wife is deemed property held by the entireties and protected from the creditors of one spouse...even if the account is followed by the designation "JTWROS." 

Asset Protection Planning Involving the Home

        Anyone with modest knowledge about entireties property knows, and this should include all asset protection planners, that the creditors of only one of the spouses cannot reach their entireties property. There are exceptions of course. Fraudulently transferring property into the T/E format doesn't work and the IRS can reach the debtor's interest in T/E property. But for the most part the technique works. Divorce and death though can be hazardous in more ways than one.

       So here is today's news. We can now be comfortable that outside of bankrupty a debtor spouse can convey his or her interest in T/E property to the non-debtor spouse without such transfer constituting a fraudulent transfer. Estes v. Titus, 481 Mich. 573 (2008). What's odd is why this is even an issue. Common sense tells us if the debtor spouse's interest in T/E property is exempt from the reach of his creditors how could his transfer of that interest to his wife ever constitute a fraudulent transfer. Such conclusion is clearly the result of the "no harm-no foul" analysis.

       A different rule seems to apply in bankruptcy where the "no harm no foul" analysis has previously been rejected. In Matter of Wickstrom, 113 B.R. 339 (1990), the Court decided in what this author believes is a very strained analysis that a trustee is not prohibited from seeking to recover, as a preferential transfer or a fraudulent conveyance (now a fraudulent transfer), transfers of entireties property owned by a debtor and nondebtor married couple to a third party. Perhaps Wickstrom would be decided differently today in light of Estes if the Bankruptcy Court looks to State law as it is required to do.

SO HOW DO I GET STARTED AGAIN WHEN BESEIGED BY CREDITORS

Clients who have substantial debts, but where bankruptcy won't help, are always asking me how they can start a new business, generate income and try to rebuild wealth when all such efforts will inevitably inure to their creditors. No one wants to work for nothing and surely there is little incentive to commit to a new business venture only to know that the fruits of your labor will benefit your creditors rather than your family. Such clients inevitably suggest that their spouse or adult children will form a new entity and client will work for such entity at ridiculously low compensation levels. In this manner they figure, any income will be retained by the new entity which has no obligation to client's creditors. But nothing is this simple. Indeed, the creditors will claim that the entity is a sham and the mere alter ego, nominee or agent of the client. Their argument will be based upon the fact that the new entity was minimally capitalized, that the owner had little or no experience in the business, that client was really the sole motivating force in generating the income and that the lack of paying fair compensation to the client is indicative of the sham nature of the entire transaction. Indeed, I believe the creditors win this argument hands down every time. So what does one do to create a defensible structure given these concerns? Essentially they must do the opposite of what the example above describes. The entity should be adequately capitalized. It should not be a "one person show" with the sole worker being debtor client. Instead, there should be multiple employees and the enterprise must be run as a real business. Owner should be active to greatest extent possible. Courts will look to the background, expertise and experience of owner to see if the structure makes sense so owner should play to her strengths. Her role should be geared to her background and capabilities. Also, don't pay client menial wages--they have to be defensible and reasonable. With these guidelines client and his family will have a reasonable shot at building a business that will not be vulnerable to his creditors. Good Luck!!

CAVEAT-THE FOREGOING IS A DISCUSSION OF ISSUES ONLY AND NOT INTENDED AS LEGAL ADVICE. NO ONE SHOULD RELY ON THE FOREGOING WITHOUT SEEKING LEGAL ADVICE FROM A LICENSED ATTORNEY.

Asset Protection Planners Miss the Boat

Asset protection planning literature and seminars deal overwhelmingly with discussions about fraudulent transfers, offshore trusts, charging orders and the like but fail to identify some of the easiest but most effective tools within the asset protection planner's workshop. I am always amazed how the most simple, obvious and effective approaches are ignored. For instance, if we have a debtor client who is hopelessly in debt but for which bankruptcy, for one reason or another, is not a solution, we know there will be judgments outstanding for many years. So what should we be telling our clients? How about having wealthy parents change their estate plans so that upon their death, assets don't go to debtor child but instead are held in a discretionary spendthrift trust for debtor child. How about making sure the beneficiary of the life insurance policy on life of debtor's wife is changed from husband to her trust which has discretionary spendthrift language for husband. How about making sure that the buy sell life insurance policies on the lives of debtor and his partner are reviewed to insure that the amount of death benefit currently provided for still makes sense given the general demise of the business. More importantly, since we don't want unexpected death of partner to result in debtor partner receiving insurance proceeds which will be grabbed by creditors, why not have just a portion of the proceeds used to buy out decedent's interest and balance paid to an irrevocable trust with debtor partner as discretionary beneficiary. I often discuss these ideas with colleague Gary Nitzken, a highly esteemed Michigan collection attorney - www.michigancollectionlawblog.com - and he just wishes I would go away. He points out to me that in addition to aggressively pursuing all opportunities to collect, he also knows how to wait in the wings until an event such as a death results in assets coming into the hands of debtors. My strategies simply undercut his opportunities.

CRIMINAL ACTS CAUSE LOSS OF INSURANCE COVERAGE

Most of my asset protection planning clients are not criminals...but some are. They have been convicted of health care fraud, tax evasion, Builder's Trust Fund Act violations, insurance fraud and so forth...and, interestingly, we can usually help these people. But what is the impact when someone pleads guilty to a criminal act in order to achieve a quick and acceptable settlement but the act was actually an accident and unintentional. According to Jason Byrne in his article in the December 2007 Michigan Bar Journal, "How a Criminal Plea Can Result in the Loss of Insurance Coverage" be very careful or you can lose your insurance coverage. Jason points out how in several cases where the defendant claimed the act was an accident the prosecutor claimed it was intentional and to settle the case the defendant pled to a minor crime avoiding incarceration. However, when the victim later sues civilly to recover damages and the "criminal" looks to his insurance carrier for defense and coverage, the insurer denies coverage on the basis that it will not pay for any loss "arising out of a criminal act or omission." There are different types of exclusions that insurers use, as pointed out in the article, but one thing is clear, the criminal lawyer looking for a "best deal" may be far better off having the client enter a plea of nolo contendere rather than an affirmative plea of guilty.

Loophole in Fraudulent Conveyance Law

Thanks to Professor Adam J. Hirsch's article entitled "The Uniform Acts' Loophole in Fraudulent Conveyance Law in the December 2007 edition of Estate Planning Journal, we in the asset protection community now have a new strategy that can be invoked. It's weird and maudlin but could work under some circumstances...particularly when we are faced with overwhelming claims and the UFTA is blocking us every place we turn. Here's the Cliff Notes rendition. The law is split on whether disclaimers are transfers and therefore subject to fraudulent transfer law. However, Professor Hirsch claims a disclaimer is not a transfer, a key prerequisite for UFTA coverage. This leaves open the following planning scenario: Debtor establishes a joint account with terminally ill accomplice (doesn't sound good but that's what he is) who lives in a state that has adopted the Uniform Disclaimer of Property Interests Act (UDPIA). Debtor puts in all the assets. Accomplice dies and under the UDPIA Debtor can disclaim up to 50% of the account. Accomplice's will provides for the property in the joint account to pass to Debtor's suggested heirs. Result: 50% of assets deposited into the joint account avoid being reached by Debtor's creditors. While there are only 14 jurisdictions that have adopted UDPIA, Michigan not being one of them, if you find a willing partner in one of the available jurisdictions the scheme may work.