Asset Protection Today

Building a Better Asset Protection Trust

Lee McCullough — Fri, 08 Oct 2010 01:10:59 +0000

I am an asset protection attorney, a tax attorney, and a law school professor. I recently wrote an article about a revolutionary technique for creating a better asset protection trust. I call this a "Special Power of Appointment Trust." Not only is a Special Power of Appointment Trust safer and more confidential than any other asset protection trust on the market, it is also more reliable because it is based on old laws that are battle tested and consistently upheld in all fifty states as well as the federal bankruptcy courts and with the IRS.

I have created hundreds of asset protection trusts using this technique. Almost always, the trust remains completely off the radar of potential creditors because the trust creator has no legal, equitable or beneficial ownership in the trust. Even if a creditor becomes aware of the trust's existence, they have no claim against the trust because the debtor has no interest in the trust.

The text of the entire article is found here: www.assetprotectionatty.com/articles/42-building-a-better-asset-protection-trust.

For those who prefer a short summary, the Special Power of Appointment Trust includes the following features:

1. Almost all other asset protection trusts are designed as a "self-settled trust," meaning that the creator is included as a potential beneficiary of the trust. The asset protection offered by a self-settled trust is under attack. New bankruptcy laws provide a ten-year look back period for fraudulent transfers to a self-settled trust. At least two bankrutpcy courts have found a self-settled offshore trust to be unenforcable because it is against public policy. A series of cases involving offshore trusts (all involving self-settled trusts) have resulted in clients being sent to jail for refusing to turn over the assets of the trust. Onshore self-settled asset protection trusts have never been tested in court and many attorneys question whether they will hold up. In contrast, the Special Power of Appointment Trust provides the same benefits as a self-settled trust without any of the risks mentioned above. Furthermore, the laws pertaining to a Special Power of Appointment Trust have been upheld consistently in all fifty states and in the federal bankruptcy courts for centuries.

2. Your Special Power of Appointment Trust may own an LLC with you as manager, so you are the only person with knowledge, access or control over the assets of the trust.

3. You can appoint one or more of your friends, siblings, children, or trusted advisors to fill the following offices:

a. The "trustee" will have signing power for the trust. The trustee will have discretion to distribute assets to the beneficiaries (but only with your consent), and only if you transfer assets from the LLC to the trust.

b. The "donee" will have a special power of appointment that allows them to appoint assets back to you or any other person (with your consent). This provides a way for assets to be transferred to you at any time and in any amount, even though you are not a beneficiary of the trust. This is the magic that makes this trust better than all other asset protection trusts.

c. The "trust protector" has power to replace the trustee and the power holder and to make sure they can't do anything without correct approvals. This ensures that the trust cannot be used in a way that you did not intend.

4. Unlike a self-settled trust, the protection from a Special Power of Appointment Trust is unassailable in any jurisdiction. This means that you can save a bundle in trustee fees and you can avoid the negative stigma that comes from having a trust in an exotic jurisdiction. Still, some jurisdictions are better for other purposes, and this should be carefully considered in the process of designing your trust.

5. If you are sued, divorced, bankrupt, or subject to scrutiny by government agencies, you may be asked to disclose all of your assets and any trust of which you are a beneficiary. Because you are not an owner or a beneficiary of your Special Power of Appointment Trust, the trust should not be included among your assets. Even if the trust existence is discovered, the trust and its assets are irrelevant because you have no legal, equitable, or beneficial interest in the trust.

6. If funded in advance, a Special Power of Appointment Trust will protect assets from creditors, divorce, bankruptcy, government agencies, or any other threat to you or the other beneficiaries for multiple generations. Even though the trust is irrevocable, the special power of appointment provides complete flexibility, allowing the donees (with your consent) to change the conditions, the timing, the amounts, and the identity of the potential beneficiaries of the trust.

An asset protection trust must be funded in advance of a problem or the transfer will be avoided as a fraudulent transfer. If an asset protection trust is used in an ethical and professional manner, it can provide tremendous security and peace of mind to you and your family.

This explains why my special power of appointment trust is safer and more confidential than all other asset protection trusts. Please call me at (801) 765-0279 or send me an email at lee@lsmlaw.net, and I will design a plan that is best for you.

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Asset Protection Using an Offshore Trust

Lee McCullough — Tue, 24 Aug 2010 11:15:46 +0000

Previous case studies on this site were favorable towards the use of an offshore trust for asset protection in the right circumstances. Due to an overwhelming amount of recent case law to the contrary, the author has revised this case study to illustrate the more common result from the use of an offshore trust.

Richard sold his business and came away with after-tax proceeds of more than $10,000,000. Richard wanted to set aside a substantial sum in a place where no creditor could find it under any circumstances. He created a Cook Island Trust for the benefit of himself and his immediate family. He then transferred most of his money to an offshore bank account owned by the Cook Islands Trust.

A short time later, Richard was sued and forced into involuntry bankruptcy. Richard failed to disclose the offshore trust or bank accounts on his bankruptcy questionnaire. However, in a review of his income tax returns, the Bankruptcy Court discovered the offshore trust and the offshore accounts. The Bankruptcy Court ordered Richard to turn over the assets of the Cook Islands Trust or suffer the following consequences: (1) Richard would be fined $5,000 per day for thirty days, followed by a fine of $10,000 per day after thirty days, followed by incarceration after 45 days, (2) Richard could be subject to criminal penalties for fraud for failing to report the assets on his bankruptcy questionnaire, and (3) Richard would never receive a discharge in bankruptcy and the creditors could continue collection efforts indefinitely. Faced with those consequences, Richard turned over the money and sued the promoters of the offshore trust for selling him a false sense of security.

The promoters of offshore trusts and accounts often tout confidentiality as one of the benefits of going offshore. Nothing could be further from the truth. If you create an offshore trust or offshore account (including insurance products, annuities or gold), the IRS requires you to disclose this on your personal tax return, as well as filing a return for the trust, the trustee, and the accounts themselves. Any creditor can easily discover the exact amount of money you hold offshore through a review of your tax returns.

The following cases indicate that US Courts are willing and able to compel you to turn over the assets of an offshore trust:

In re Colburn, 145 B.R. 851 (Bkrpt E.D. Va. 1992). (Debtor denied discharge and accused of fraud)

Brown v. Higashi, (Bkrpt Ak. 1995). (Assets included in bankruptcy estate)

In re Portnoy, 201 B.R. 685 (S.D.N.Y. Bkrpt 1996) (Discharge denied and accused of fraud)

FTC v. Fortuna Alliance (1997) (Debtors were arrested and funds were repatriated)

Riechers v. Riechers, 679 N.Y.S. 2d 333 (1998) (Trust assets included in marital estate for divorce purposes)

Westrate v. Westrate (1998) (Husband accused of fraud and threatened with criminal penalties. Assets included in marital estate)

In re Brooks, 217 B.R. 98 (D.Conn. Bkrpt. 1998) (Offshore trust disregarded and assets seized by US court)

FTC v. Affordable Media, LLC, 179 F.3d 1228 (9th Cir. 1999). (Debtor jailed for refusing to repatriate assets).

SEC v. Brennan, 230 F. 3d 65 (2nd Cir. 2000) (Debtor convicted of bankruptcy fraud)

SEC v. Bilzerian, 131 F. Supp. 2d 10 (D.C. 2001). (Debtor jailed for refusing to repatriate assets).

In re Lawrence, 279 F.3d 1294 (11th Cir. 2002). (Debtor jailed for over six years for refusing to repatriate assets).

BankFirst v. Legendre (Debtor jailed for contempt of court until assets were turned over)

Breitenstine v. Breitenstine, 2003 WY 16, 62 P.3d 587 (Wyo. 2003) (Trust assets included in property division)

Eulich v. U.S., (N.D.Tex. Case No. 99-CV-01842, August 18, 2004) (Debtor found in contempt, threatened with fines and jail time until assets repatriated)

U.S. v. AmeriDebt, Inc., 373 F. Supp. 2d 558 (D Md. 2005) (Debtor found in contempt and threatened with jail time until assets repatriated)

Morris v. Morris, Case Nos. 4D04-3812, 4D04-4621, 4D04-4763, aff'd Appeal No. SC05-1166 (Fla.S.Ct. April 13, 2006); Morris v. Wroble, Case No. CIV-O6-80479 (S.D. Fla.) aff'd Appeal No. 06-80452-CV-DTKH (11th Cir. Nov. 16, 2006). (Debtor jailed for contempt of court for refusing to repatriate assets.)

Securities and Exchange Commission vs. Jamie Solow, 2010 WL 303959 (S.D. FL., Jan 22, 2010). (Debtor jailed for contempt of court for refusing to repatriate assets.)

Offshore asset protection planning continues to be promoted heavily by internet sites who charge substantial fees for cookie-cutter solutions. Most of these are not attorneys and it is illegal for them to offer legal services or advice. More importantly, they have no ability to support the structures that they create. Most reputable law firms are now recommending against offshore asset protection planning.

For a better asset protection strategy, see www.assetprotection-attorney.net.

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You Don’t Have To Move Your Money Offshore To Get Asset Protection

Lee McCullough — Thu, 19 Aug 2010 19:09:15 +0000

If you're aiming to stiff creditors, litigants or an ex-spouse, should you hide your money in Nevis or Nevada?

From the article:

Forget about hiding money offshore from the Internal Revenue Service--unless you want to risk the penalties, back tax bills and threat of prosecution that thousands of American clients of ubs now face. But what about protecting your cash from vexatious litigants, a grasping ex-spouse or pesky creditors? Then offshore trusts are still an option, but a far less attractive one now that legal reporting requirements for offshore holdings have become more onerous and some U.S. judges have taken to jailing folks who won't (or can't) turn over offshore assets.

Full Article Here

My comments on the article:

Asset protection planning is never used to “stiff” creditors. All fifty states have laws that support legitimate asset protection planning that is done in advance of a problem. It is commonly acceptable behavior to create legal entities to protect personal assets from business liabilities or to set aside assets for the security of your family. Future creditors have every right to ask for your financial statements, obtain appropriate security, and decide whether to deal with you based on your personal financial condition whether or not you have done asset protection planning.
It is true that US courts have jailed some folks for refusing to repatriate assets, but only in situations involving criminal activities and fraudulent transfers. Offshore entities may still be viable options if done in advance and for ethically appropriate purposes as described above.
I agree that Nevada is the best state in which to create a domestic asset protection trust, followed closely by Alaska, Delaware and South Dakota.
The article makes it sound like domestic asset protection trusts are always self-settled trusts. It is possible to design a domestic asset protection trust that is not self-settled and eliminate most of the risk!
The article makes it sound like these trusts are not effective for a period of time. That is not true. These trusts are effective immediately if there is no fraudulent transfer. The time limits discussed in the article only apply if the transfer to the trust was a fraudulent transfer.
The article quotes Steve Oshins in saying that these have been tested and have worked well in obtaining favorable settlements. I have also had several of these tested and they have held up very well. If the trust is designed so it is not a self-settled trust, there are numerous court cases that support the asset protection provided by a discretionary trust.
The article names twelve states that have passed laws upholding self-settled domestic asset protection trusts. Hawaii should be added to that list as well. This trend indicates that it is less likely that another state will refuse to recognize the laws of one of these states because it is against public policy.
The article indicates that annual maintenance costs average between $5,000 and $7,000. In my experience, this can be done for as little as $2,000.

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Asset Protection Using Irrevocable Trusts

Lee McCullough — Thu, 22 Jul 2010 18:57:49 +0000

In 2002, Client commenced operations in a risky business with heavy government regulation and a potential for significant fines and penalties. In 2003, Client transferred a home and cash in the amount of $2,800,000 to an irrevocable self-settled Nevada trust. In 2007, Client was fined $4,000,000 by a government agency. In a deposition, the client disclosed the existence of the trust and its assets to the government agency. Client offered to settle the case for $100,000 and a promise to cease and desist the activities that resulted in the fine. The government agency accepted the settlement and informally acknowledged that the chances of recovering assets from a pre-existing irrevocable trust were remote, and that this was a significant factor in their decision to accept the settlement offer.

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Asset Protection Using Separate Property Ownership

Lee McCullough — Thu, 22 Jul 2010 18:53:32 +0000

Wife was worried about the debt incurred by husband and by the financial risks involved in husband’s business. Husband and wife entered into a post-nuptial agreement in 1991. At the same time, clients created separate revocable trusts and divided their assets between the trusts in accordance with the post-nuptial agreement. Wife was a full-time homemaker with no income. Husband paid the mortgage and expenses on the home owned by the wife’s trust. Husband continually added to the savings account owned by the wife’s trust. In 2001, husband encountered financial difficulties that resulted in a personal bankruptcy and a non-dischargeable debt to the IRS. The assets owned by the wife’s trust were not included or jeopardized by the husband’s bankruptcy, by the IRS, or by the creditors of the husband.

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Asset Protection Using Charging Order Protection

Lee McCullough — Wed, 21 Jul 2010 18:55:20 +0000

Client entered into a partnership with two partners who agreed to perform management services. Client was a passive investor who contributed money, but was not involved in day-to-day operations. The partners embezzled funds and mismanaged the partnership resulting in significant liabilities. The partners had no assets, and the creditors pursued the client for the entire amount of the losses. After the mismanagement became apparent to the client, but before any claims arose from third parties, the client sought advice for protecting his own assets. The client invested his assets into a real estate partnership that was unrelated to the first partnership. The real estate partnership had a legitimate business purpose, legitimate business activities, and legitimate unrelated partners. The real estate partnership was filed as a Delaware LLC, where a charging order is the exclusive remedy for a creditor of a member. In addition, Delaware law prohibits any equitable remedies such as an order for an accounting or for managerial participation or control. The creditors realized that the client had no liquidity and that the likelihood of collecting from the client was remote. The creditors settled for a nominal amount which the client was able to borrow from the Delaware LLC.

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Asset Protection Using Liens and Leases

Lee McCullough — Tue, 20 Jul 2010 18:56:20 +0000

Client was in a high profile position and wanted to protect his home and his cash from frivolous lawsuits. Client could not transfer the home to another entity without losing tax benefits, triggering a due on sale clause, or triggering a property tax re-valuation. Client invested his cash in a Delaware LLC. Client signed a promissory note promising to pay additional funds in exchange for additional ownership in the Delaware LLC. The promissory note was secured by a trust deed on the client’s home. Client’s balance sheet now included a home with no equity, an obligation to make payments on a promissory note, and a minority percentage in a Delaware LLC. As client earned future income, client paid the income to the Delaware LLC as a payment on the promissory note. Client was sued for $20,000,000 on a frivolous claim. Client scheduled a settlement conference with the plaintiff’s attorneys and convinced them that there was no hope for collection even if they won the case. The plaintiff’s attorneys refused to proceed on a contingency fee basis because of the remote chance of a recovery. Plaintiff refused to pay his own attorneys on an hourly basis, and the case was dropped.

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In re Baldwin, 593 F.3d 1155 (10th Cir Ct. App. 2010)

Lee McCullough — Mon, 19 Jul 2010 17:30:38 +0000

In this case, a father created a limited partnership under Oklahoma law in 1994. The father deeded 200 acres and a house to the limited partnership. As the trustee of a trust, the father retained the one percent general partnership interest and he gave the 99% limited partnership interest to his daughter. The daughter and her husband lived in the house and paid the expenses as if it were owned by them personally. The daughter and her husband filed for bankruptcy in 2004. The debtors argued that the only remedy available to the trustee under Oklahoma law was a charging order, but this argument failed because bankruptcy laws allow the bankruptcy trustee to “step into the shoes of the debtor” and exercise “whatever rights the limited partner had under the partnership agreement.” The bankruptcy trustee cited In re Ehmann 2005 WL 78921 (Bankr.D.Ariz 01/13/2005) which allowed a bankruptcy trustee to avoid restrictions imposed by state law charging order statutes if a partnership agreement is not an executory contract. Because the partnership agreement included a “Texas style buyout provision,” the bankruptcy trustee was able to force the general partner to buy or sell at a fixed price and the bankruptcy trustee was able to liquidate the partnership for the benefit of the creditors. From this case, we learn the following: (1) Partnership agreements and LLC operating agreements should be carefully designed to ensure that they constitute executory contracts and that there are no provisions which would allow for a forced liquidation, (2) Personal use assets should not be held by business entities (except for valid lease arrangements), (3) Entities should be structured for valid business purposes, (4) If possible, entities should include legitimate partners other than the debtors (and unrelated to the debtors if possible).

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Shaun Olmstead vs. Federal Trade Commission, No. SC08-1009, June 24, 2010

Lee McCullough — Wed, 14 Jul 2010 17:27:36 +0000

In this case, several individuals perpetrated a credit card scam through several corporate entities. In response to this crime, the FTC sued them and the corporate entities for unfair and deceptive trade practices. The assets of the defendants were frozen and placed into receivership. Among the assets placed in receivership were several single-member Florida LLCs. The FTC obtained an order compelling the defendants to endorse and surrender all of their right, title and interest in the LLCs. The court’s reasoning was that because the Florida LLC charging order statute does not expressly provide that a charging order is the exclusive remedy (whereas the Florida general and limited partnership statutes do provide that a charging order is the exclusive remedy), the LLC charging order is not the exclusive remedy and a creditor may levy on the LLC interest. Some states allow foreclosure of an LLC interest, others provide that a charging order is the exclusive remedy of a creditor, and others (like Florida) are silent on the issue. This case is making waves throughout the country because all those states which are silent on the issue may end up with a similar interpretation. To make matters worse, the court seemed to indicate that the holding in this case may also apply to multi-member LLCs in addition to single-member LLCs. From this case we learn the following: (1) Some states provide much better asset protection than others for LLCs and limited partnerships. In those states which mention a charging order as one remedy but remain silent as to whether it is the sole remedy, it is possible that a creditor will be able to foreclose or levy on the interest. (2) As we have learned from previous cases, including In re Albright, 291 B.R. 538, 540 (D. Colo. 2003), you cannot rely on a single member LLC to provide charging order protection. This does NOT mean that a single member LLC cannot provide asset protection to the members against the inside liabilities of the LLC, it only means that it cannot be relied on to protect the assets of an LLC from the outside liabilities of a member.

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Miller v. Kresser, 2010 Fla. App Lexis 6152 (Fla. 4th DCA 2010)

Lee McCullough — Tue, 13 Jul 2010 17:23:41 +0000

In April of 2004, a mother created a spendthrift trust for the benefit of her son and transferred several valuable properties to the trust. She named another son as the trustee of the trust and gave him discretion to distribute the entire corpus to the beneficiary at any time. On June 21, 2007, a plaintiff obtained a judgment against the beneficiary for over $1,000,000. The plaintiff was unable to collect anything from the beneficiary, so he sued the brother who was the trustee of the trust claiming that the trust was invalid because the beneficiary had exerted significant control over the trust and substantial influence over his brother the trustee. The trial court found that the beneficiary had transferred over $168,000 from the trust to his own law practice. The beneficiary had treated these as loans and but the trustee was unaware that they were loans and had no copy of the promissory notes. The trial court found that the beneficiary seemed to exercise all authority over the important decisions relating to the trust, including investment decisions, and the beneficiary kept possession and control of the trust checkbook. When the beneficiary requested that his brother form an LLC and execute a note and mortgage for $1,400,000, the brother did so without any investigation or independent analysis. The trial court found that the trustee had limited knowledge of the trust assets and was merely a puppet of the beneficiary who “rubber-stamped” the decisions of the beneficiary. Although the trial court determined that the spendthrift provision was valid when created, they found that the spendthrift provision and discretionary aspects of the trust were invalid because of the degree of control that the beneficiary exercised over the trust and his brother the trustee. For these reasons, the trial court held that the trust could be pierced to satisfy the plaintiff’s judgment. The Florida 4^th District Court of Appeals overturned the ruling of the trial court and upheld the creditor protection provided by this discretionary spendthrift trust. The appellate court found that even though “the facts in this case are perhaps the most egregious example of a trustee abdicating his responsibilities . . . the law requires that the focus must be on the terms of the trust . . . and the trust did not give [the beneficiary] any authority whatsoever to manage or distribute trust property.” This case shows that the good old-fashioned asset protection provided by a spendthrift trust continues to be upheld by the courts, even in many cases where the trust is grossly mismanaged. The asset protection provided by a trust can be strengthened by appointing an independent trustee and by ensuring that the trustee understands and fulfills the responsibilities of the trustee. Spendthrift protection is even greater when the trust is designed as a discretionary trust, and when the trust is supported by a state statute that provides that a beneficial interest is not a property right and that the discretion of a trustee is "absolute."

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