ASSET PROTECTION 101

F. Hale Stewart, JD, LLM, CAM, CWM, CTEP

For the Law Office of Hale Stewart832-330-4101

Imagine the following scenario:

Individual X is a professional athlete. He is known in a community because of sports coverage. He is also physically larger than most people, making him a target for belligerent people. One night, individual X is in an altercation in which he breaks someone’s nose.

Individual X holds all of his assets in cash at a single financial entity

The Problems With the Preceding Facts

By only using one financial institution, Individual X’s personal assets are not 100% covered by FDIC of SIPC insurance

By owning all of his assets in his name, his assets are easily discoverable and can all be attached and turned over to a victorious plaintiff

Fraudulent transfer law now makes planning impossible.

Instead, Imagine the following

Individual X had engaged in proactive asset protection planning. He had formed a family limited partnership which owned all of his assets, and had continued to maintain the appropriate corporate records to ensure the legal viability of that company. He has also purchased and maintained appropriate insurance, and used statutory exemption planning. Finally, he had also placed his financial assets with a variety of financial institutions.

Instead of Being Easy Pickings for the Plaintiffs Bar …

A trial lawyer looking at the preceding example would be far more likely to settle the case out of court. He knows that breaking the structure will be difficult and a positive judgment is much harder to obtain.

Hence:

The time to engage in asset protection planning is BEFORE THINGS GO WRONG

Fraudulent Transfer Law

When an asset plan is put into effect is very important. Fraudulent Transfer Law allows a creditor to rescind a transaction if it is apparent the debtor engaged in the transaction to “hider or delay” collection. In addition, a debtor cannot transfer assets if he knows or should know he is about to be sued, the transaction essentially leaves him bankrupt, or the transaction is for less than adequate consideration.

Statutory Exemption Planning

Statutes cover certain assets, making them exempt from paying claims Homestead exemption ERISA covered retirement plans Certain other financial products

Offshore

The primary problem with offshore planning is this: while the assets are offshore, the owner is usually within the US. Therefore, if a judge wants to attach the individuals assets, he simply holds the individual in contempt of court, sending the person to jail until they repatriate the assets.

In addition, bank secrecy rules are being successfully assaulted from a variety of players in the international tax field.

Finally, offshore simply has a negative connotation and may invite unwanted scrutiny.

As a result, offshore planning is usually not the best option.

Trusts

Self-settled trusts – trusts where the person creating the trust is also a beneficiary – are not favored by courts. In fact, these structures can be fairly easily broken.

However, setting up a spendthrift trust for a beneficiary can be an appropriate way of dealing with certain legal obligations.

C-Corp

The standard corporation Benefits

Freely transferable shares Long case history Understood by most people

Drawbacks Very stringent statutory structure Double taxation

Limited Liability Company, or LLC

Corporate structure with partnership taxation.

Benefits Partnership taxation Contract rather than statutory based making

them easier to run Drawbacks

Single member LLC ‘s have been successfully challenged by creditors in several states, making the single members personally liable for debts

Limited Liability Partnership

Two ownership interests The general partner runs the day to day

operations Limited partners are “passive investors” and

are only liable for their person money put into the partnership.

Limited Partnerships

Benefits Long case history “Compression” of assets Estate planning benefits Partnership taxation

Drawbacks Must hold annual meetings Must maintain proper documentation

What is the Best Option?

In most situations, a limited partnership is the best option, largely because of the charging order remedy. While individual shares can be seized by the court – making a corporation a less than attractive option -- a partnership interest cannot be. Instead, the court allows an creditor to “step into the debtors shoes,” and allow him to get income from the partnership. However, this allows the general partner to make allocations that cause an increase in taxation rather than a distribution. Hence, the reason why most plaintiffs attorneys settle cases where a limited partnership is involved.