Asset Protection Library
As a convenience to prospective clients, we are pleased to offer our Asset Protection Library. This curated collection represents a sample from a wide range of articles published by our firm, with a focus on fostering a better understanding of complex asset protection techniques.
Introduction to Asset Protection
Asset protection is the art of indirect (or beneficial) ownership, and its goal is to enable you to achieve the following objectives lawfully and ethically:
- To place your assets beyond the reach of our legal system
- To place your assets beyond the reach of creditors
- To walk away from a catastrophic lawsuit with your assets intact
“Asset protection is the art of indirect, beneficial ownership.”
– Stephen Speiser
At its most basic, asset protection is a legal fortress behind whose battlements and layered defenses one can fully protect, defend, and shield their hard-earned wealth from the covetous eyes and predacious attacks of those who would seize it if given the opportunity: plaintiff’s attorneys, judgment creditors, government regulators, disgruntled business associates, future ex-spouses, reckless children and misguided heirs.
Simply put, courts and creditors can’t take from you that which you don’t own!
One useful way to visualize asset protection is to think of it as a “legal vault” into which one deposits their business and personal assets for safekeeping. It functions in much the same way as a bank vault. A bank vault protects one’s wealth (stocks, bonds, cash, deeds, jewelry, art, etc.) with layered defenses: a secure building, cameras, armed guards, sophisticated surveillance systems, alarms, massive bank vault doors, timed locks, etc.
Asset protection is the legal equivalent. It shields one’s wealth with layers of carefully constructed legal firewalls. Assets are placed in protective entities, that can be owned by protective holding companies, that can be owned by foreign entities, that can be owned by trusts. The more layers, the more entities used, the more shields deployed, the more difficult it will be for an adversary to get at your wealth and the more likely it is that they will give up and walk away empty handed.
Your intent at the time you engage in an asset protection plan can be highly relevant to a judge's perception of your activities as well as to the success of your plan. To be more precise, the presence of "bad intent" is a factor that creditors and courts can latch onto in determining whether your plan should be respected.
To be certain, a creditor does not need to prove ill intent in order to establish that a debtor has engaged in a fraudulent transfer or voidable transaction. Even in the absence of any bad intent, business transactions conducted with inadequate capitalization, or personal transactions that render you unable to pay your bills, may be categorized as fraudulent transfers.
Even if a debtor does not exhibit bad intent, a court may impute sinister motives based on external factors that may seem rather innocent. In one case, a California court found that a trust settlor had acted with actual intent to commit a fraudulent transfer by choosing to set up his trust under the domestic asset protection trust laws of another state.
Demonstrating good intent may be helpful in dispelling perceptions of bad intent. A court may look more favorably on a circumstance in which you and your family members are working with a lawyer to implement a comprehensive estate plan that offers incidental asset protection benefits, as opposed to a scheme in which there are no perceived benefits other than merely asset protection.
Intent is relevant to the conversation, and our planning techniques are mindful of the burden that clients must bear in litigation to demonstrate good faith. However, many of the techniques that we utilize in asset protection planning also shield our clients from the consequences of an adverse determination of intent.
The term "fraudulent transfer" is a civil law concept and not a crime. Nevertheless, some states have criminalized transactions that may fall within the definition of a "fraudulent transfer," treating such activity as a misdemeanor or a felony. These jurisdictions are:
- Alabama
- Alaska
- Arizona
- Arkansas
- California
- Kentucky
- Massachusetts
- Michigan
- Nevada
- North Dakota
- Ohio
- Oklahoma
- Rhode Island
- South Carolina
- South Dakota
- U.S. Virgin Islands
- Washington
- West Virginia
If you reside in one of these states, you should confer with qualified counsel before engaging in asset protection planning.
If you are considering asset protection planning for yourself or your family, it is important that you work with an experienced lawyer. There are several strategic advantages to working with a lawyer, including the following:
- Attorney-Client Privilege: Your communications with your lawyer for the purpose of obtaining legal advice are confidential and privileged. This enables you to have a candid discussion with your lawyer about your assets and liabilities, as well as any concerns you may have about potential claims or prospective creditor issues.
- Attorney Work Product Doctrine: When your lawyer communicates with certain third parties – such as your accountants, your bankers, and other advisers – in order to assist you with your asset protection plan, the contents of those communications may be confidential and not subject to discovery by your creditors.
- Legal Compliance: Eighteen states regard fraudulent transfers as a criminal act subject to prosecution. A qualified lawyer will advise you on the laws of your state and help ensure that do not engage in a fraudulent transfer.
- Advice Aligned with Your Interests: When you hire a lawyer, your lawyer must faithfully represent you and protect you free from any actual or potential conflict of interest. Non-lawyers may not have the same obligation to look out for your best interest. Additionally, a good asset protection planning lawyer will have experience working with professional trustee companies in a number of jurisdictions; the lawyer should be able to advise you on the merits of a particular jurisdiction or service provider.
Exempt property is property that creditors are not allowed to take to satisfy a judgment. Many of these laws date back to the Great Depression and were introduced to help those who were bankrupt to rebuild their lives.
The theory supporting this Depression-era legislation was that, if all that was left post-bankruptcy were the clothes on one’s back, it would be difficult to return to society as a productive member. At the same time, state legislatures had to balance this public policy goal against the legitimate right of creditors to be repaid. As a result, the type and value of property that is exempt varies greatly from state to state.
Today, most states will protect to some degree a person’s primary home, retirement plans, life insurance, annuities, college savings plans, wage accounts, and personal property. What follows below is a list of State and Federal Exempt Property Laws. The first step in asset protection planning is to review the property you own to see what exemptions may apply. Simply follow the links below to find the law in your state. Please note that Federal exemption law may apply in a bankruptcy or if you are domiciled in a U.S. possession or territory.
DISCLAIMER: Exemption laws often change by legislative amendment or court rulings. The links below may not reflect the most current law in your state. We make no representation about the accuracy of the information linked to for your state.
All code references are to 11 U.S.C. (Title 11 of the United States Code). If a dollar amount does not accompany a listed piece of property, the entire value of the property is exempt.
Homestead
§ 522(d)(1), (5) - Real property, including mobile homes and co-ops, or burial plots up to $25,150. The unused portion of the homestead exemption up to $12,575 can be used for other property.
Personal Property
§ 522(d)(2) - Motor vehicle up to $4,000.
§ 522(d)(3) - Animals, crops, clothing, appliances and furnishings, books, household goods, and musical instruments up to $625 per item, and up to $13,400 total.
§ 522(d)(4) - Jewelry up to $1,700.
§ 522(d)(9) - Health aids.
§ 522(d)(11)(B) - Wrongful death recovery for a person you depended upon.
§ 522(d)(11)(D) - Personal injury recovery up to $25,150 except for pain and suffering or for pecuniary loss.
§ 522(d)(11)(E) - Lost earnings payments.
Pensions
§ 522(b)(3)(C) - Tax exempt retirement accounts (including 401(k)s, 403(b)s, profit-sharing and money purchase plans, SEP and SIMPLE IRAs, and defined benefit plans).
§ 522(b)(3)(C)(n) - IRAS and Roth IRAs to $1,362,800.
Public Benefits
§ 522(d)(10)(A) - Public assistance, Social Security, Veteran's benefits, Unemployment Compensation.
§ 522(d)(11)(A) - Crime victim's compensation.
Tools of Trade
§ 522(d)(6) - Implements, books, and tools of the trade, up to $2,525.
Alimony and Child Support
§ 522(d)(10)(D) - Alimony and child support needed for support.
Insurance
§ 522(d)(7) - Unmatured life insurance policy except for credit insurance.
§ 522(d)(8) - Life insurance policy with loan value up to $13,400.
§ 522(d)(10)( C ) - Disability, unemployment or illness benefits.
§ 522(d)(11)( C ) - Life insurance payments for a person you depended on, which you need for support.
Wildcard
§ 522(d)(5) - $1,325 of any property, and the unused portion of homestead exemption up to $12,575.
Fraudulent Transfers aka Voidable Transactions
Fraudulent transfers are one of the most important and difficult legal issues that must be confronted by the client and their attorney in order to create a successful asset protection plan. A fraudulent transfer is defined as a transfer of property to a third party with the intent to “hinder, delay, or defraud” a present or future creditor. For example, transferring title to real estate, or stock, or cash, etc. to your spouse because you are about to be sued is a fraudulent transfer.
Another type of prohibited transfer of property is called a fraudulent conversion. This is where a person converts property that is subject to creditor seizure into a different type of property that is protected under State Exemption Laws. One example of a fraudulent conversion would be using available cash from your personal bank account to purchase of an annuity that is exempt from creditor seizure.
Types of Fraudulent Transfers
There are two different types of fraudulent transfers:
- Actual Fraud: These are instances in which the transferor acted with the specific intent of delaying, hindering, or defeating the creditor's efforts to reach the transferred asset.
- Constructive Fraud: A transfer that leaves the transferor unable to meet his obligations as they come due may constitute a fraudulent transfer, even if the transferor did not intend to hinder the creditor. In a business setting, constructive fraud may be found if the business is rendered inadequately capitalized by a transfer.
Consequences of Making a Fraudulent Transfer
Every state has laws that deal with fraudulent transfers. In Florida, the fraudulent transfer statute gives a creditor the right to go to court to unwind the transfer and recover the asset. If granted, the court will order the property to be put back.
It is important to note that the fraudulent transfer law is merely a creditor remedy to recover a specific asset. In Florida, a creditor cannot sue you for money damages. The judgment amount you may owe will not increase merely because you made a fraudulent transfer. Be aware, however, that fraudulent transfer law varies from state to state, and in other states you may be subject to additional civil penalties.
The Effect of Bankruptcy on Fraudulent Transfers
Judgment debtors are often tempted to transfer their assets and then file for bankruptcy so as to discharge the judgment. This wont work. As mentioned above, a fraudulent transfer can be easily reversed by the court. In addition, and more importantly, you forfeit your right to a bankruptcy discharge if you commit a fraudulent transfer or conversion within two years of filing for bankruptcy.
Statute of Limitations
There is generally a four year clawback period in which to reverse a fraudulent transfer. This clawback period is technically called a statute of limitations and, in Florida, it gives a creditor four years from the date of the transfer in which to file a lawsuit. However, if the creditor was unaware of the fraudulent transfer and more than 4 years has passed, the creditor can still recover the fraudulent transfer if it files a claim within one year from the date the creditor discovered, or reasonably could have discovered, the conveyance.
If the fraudulent transfer involves personal property, Florida law allows a fraudulent transfer action to be filed at any time during the life of the judgment.
If the federal government is the creditor, the statute of limitations is longer. Federal law gives the government six years to bring a fraudulent transfer action, and the IRS has ten years from the date of the tax assessment in which to do so.
Asset Protection Planning & Fraudulent Transfers
The mere fact that a transfer might ultimately be reversed as a fraudulent transfer does not mean you should not engage in asset protection planning. You have an absolute legal right to arrange your financial affairs in whatever way you deem appropriate. Do not be put off by a threat or possibility of legal action. Until such time as a judgment is entered against you, you have the right to do whatever planning you want to do. Even if a court later decides that the transfer was a fraudulent transfer, what have you lost? Your judgment will not increase, and you will not be exposed to any additional liability or money damages. All that will happen is that the creditor will be able to recover the assets transferred. At a minimum, the time, cost, and expense to a creditor to file a fraudulent transfer action and the uncertainty surrounding the legal outcome, will often offer you an opportunity to negotiate a favorable settlement.
Distinguishing "Fraud" from "Fraudulent Transfer"
The term “fraudulent transfer” has almost nothing to do with “fraud” in the criminal sense. The original law on fraudulent transfers arose in England at a time when debtors were jailed for unpaid debts. Back then, fraudulent transfers were deemed criminal acts, and a fraudulent transfer would have been a “fraud.”
In modern times, there are no debtors’ prisons , and the term “fraudulent transfer” is simply a term of art used in civil cases to award a remedy to a creditor under well-defined circumstances. Nevertheless, some judges do not always appreciate the important distinction between “fraudulent transfer” as a civil remedy and “fraud” as an act of moral depravity. This has resulted in a number of adverse decisions where the judge confused these two concepts and rendered decisions that were egregious to public policy.
In an effort to reign in judicial confusion over the distinction between fraud and fraudulent transfers, the Uniform Law Committee took the unusual step of actually renaming the Uniform Fraudulent Transfer Act. Now known as the “Uniform Voidable Transactions Act,” this new law – a modest revision to the UFTA – makes clear that transfers deemed to prejudice a creditor are not inherently “fraud” in the moral or criminal sense.
Every state has laws that deal with fraudulent transfers. In Florida, the fraudulent transfer statute gives a creditor the right to go to court to unwind the transfer and recover the asset. If granted, the court will order the property to be put back.
It is important to note that the fraudulent transfer law is merely a creditor remedy to recover a specific asset. In Florida, a creditor cannot sue you for money damages. The judgment amount you may owe will not increase merely because you made a fraudulent transfer. Be aware, however, that fraudulent transfer law varies from state to state, and in other states you may be subject to additional civil penalties.
Asset Protection Trusts
Trusts owe their origin to inheritance tax laws in ancient Rome and in medieval England. At death, inheritance tax could be a significant imposition to landholding families. The solution to this tax was the “trust”: The settlor would give his property to someone else (the “trustee”) to hold in that person’s name, but under a promise to return the property at a future time. Under the terms of this “trust agreement,” if the settlor died, the trustee would administer the trust assets and transfer the remainder of the settlor's estate to his descendants.
With time, lawyers and clients began to realize that the trust planning device could also be used for asset protection planning. When you transfer property in trust, you transfer legal ownership of that property to the trustee. You no longer own that property; your trustee owns the property. While your creditor may have a claim against you, your creditor does not have a claim against the trustee unless the law explicitly grants your creditor a remedy against the trustee.
The Spendthrift Trust
As more and more families began to use trusts for essential estate planning, many parents worried that the money they saved in trust for their children might be squandered or lost to their children’s creditors, or to bankruptcy or divorce. Lawyers responded to these concerns by drafting a type of provision in the trust agreement known as a “spendthrift clause.”
A spendthrift clause generally prohibits a beneficiary from being able to assign his or her rights in the trust to a creditor. With a properly drafted spendthrift clause in place, a beneficiary's creditor cannot reach the assets of the trust. Instead, the creditor must wait for the trustee to make a distribution to the beneficiary. However, a trustee aware of a beneficiary's creditor issues may not ever make a distribution outright to the beneficiary. Instead, the trustee might use trust assets to help the beneficiary indirectly, such as paying for the beneficiary's housing expense or utility bills.
The "Self-Settled" Spendthrift Trust, aka The Asset Protection Trust
Over time, attorneys engaged in asset protection planning attempted to take the spendthrift trust one step further, creating what is commonly referred to as the “self-settled spendthrift trust.” With this type of trust, the settlor is included as a beneficiary of the trust or, in an extreme case, may be the sole beneficiary of the trust. Because of its complete asset protectiveness (if enforceable), the term “self-settled spendthrift trust” has become synonymous with “asset protection trust.”
At common law, the self-settled spendthrift trust is not recognized and enforced, and is instead considered too much of a good thing. The reason for this owes to public policy concerns: Courts are reluctant to permit settlors to place assets beyond the reach of their own creditors. This presumption against enforceability, however, has been countered by legislation in a number of jurisdictions, first beginning offshore and then spreading to the United States.
Rise of the Foreign Asset Protection Trust
The Isle of Man became the center of the asset protection planning universe when the Manx courts began issuing debtor-friendly fraudulent transfer rulings in the mid-19th Century. In one landmark case, the Manx court upheld a trust that had been funded by a settlor at a time when he was solvent. Corlett v. Radcliffe, 14 Moo PCC 121, 15 ER 251 (1859). The court refused to permit creditors – who were unanticipated at the time of trust funding – to reach the assets of the trust. Almost one hundred years later, the Manx court had the opportunity to evaluate a similar set of facts and again refused to permit future creditors to reach the assets of a trust settled while the settlor had been solvent. Re the Petition of Christopher Jollian Heginbotham, 2 ITELR 95 (1999).
In 1989, the Cook Islands decided to borrow the common law principles handed down by the Manx courts and explicitly codify them, writing them into statutes to create the world’s first asset protection trust legislation. This important legal development gave rise to a cottage industry of trust service providers in the Cook Islands and other offshore jurisdictions, including Belize, Nevis, the Bahamas, the Cayman Islands, and other countries, all of whom followed the Cook Islands by enacting asset protection trust legislation.
Jurisdictions now compete to offer the best possible protection for trusts established within their borders. For example, while the Cook Islands offers a shortened statute of limitations on fraudulent transfer claims, Belize law does not recognize fraudulent transfer claims at all. Nevis permits fraudulent transfer claims against trusts, but the creditor must bring a claim within one year and must post a substantial bond in order to have the creditor’s claim entered in the Nevis court. Even if the creditor gains access to the Nevis court, the creditor must establish the fraudulent transfer “beyond a reasonable doubt.”
Cook Islands International Trusts Act 1984
Cook Islands International Trusts Amendment Act 1985
Cook Islands International Trusts Amendment Act 1989
Cook Islands International Trusts Amendment Act 1991
Cook Islands International Trusts Amendment Act 1995-96
Cook Islands International Trusts Amendment Act 1999
Using Business Entities for Asset Protection
Business entities are often used in asset protection planning. Two of the most effective types of business entities for asset protection are:
- limited liability companies and
- limited partnerships.
Why are business entities used in asset protection planning? There are a host of reasons:
- Business Requirements: If you have an operating business, then it is important to maintain that business in the form of a limited liability enterprises such as a corporation, limited partnership, or LLC. As discussed further herein, LLCs and limited partnerships tend to be superior to corporations when it comes to asset protection due to the charging order protection offered under many states' business laws.
- Separation of Ownership: Maintaining the ownership of business property inside a business entity is essential to shielding that property from the claims of the business owner's personal creditors. Creditors can reach whatever property is owned personally by the debtor, but property owned by a business entity is not the same as property owned personally by the debtor. While the creditor may be able to proceed against the debtor's ownership interest in a business entity, that is not the same as being able to reach the assets of the business directly.
- Charging Order Protection: Many jurisdictions limit the ability of creditors to interfere with a debtor-owned business, preventing creditors from reaching business assets or meddling in the business decision-making process. Notably, many states limit creditors to a charging order as the exclusive remedy as against a debtor's ownership interest in a limited liability company or limited partnership. If a charging order limitation applies, then the creditor cannot foreclose on the debtor's ownership interest, and the creditor cannot compel the business to make a cash distribution to satisfy the debt. Instead, the creditor must wait until the business voluntarily makes a distribution to the debtor, an event which is unlikely to occur amidst a collection battle between the creditor and debtor.
- Shared Control: If a business has multiple owners, then it is often difficult -- if not impossible -- for a debtor-owner to unilaterally compel the business to make distributions to satisfy the debtor-owner's creditors. The business owners may have agreements in place that make it difficult to transfer one's equity stake to a creditor, or that call for a debtor-member to be bought out at a substantial discount in exigent circumstances. Even in states that do not offer charging order protection, the presence of multiple owners may present formidable challenges for a creditor looking to foreclose on a debtor-owner's interest in the business.
- The Distinction of Ownership from Control: Ownership and control are two discrete concepts. Just because someone owns a business does not necessarily mean that the owner has control of his business. Likewise, just because someone is in control of a business does not mean that the manager owns the business. This distinction offers profound benefits for asset protection planning. For example, a family-owned business may be better off by having ownership vested in an asset protection trust, while reserving managerial control to designated family members.
The limited liability company is a relatively new form of business entity that combines the limited liability benefits of a corporation with the ease of operation of a partnership. It’s only been around since the 1970’s, so case law is still evolving. The LLC is referred to as a “Company.” The owners are called “Members” and the LLC is run by a “Manager” who directs its business affairs.” The Manager can be a Member or a non-Member.
In general, neither the Manager nor the Members are liable for the debts of the Company. The Member’s sole risk is their capital investment in the Company. If the Company makes money, they make money. If it loses money, the most they can lose is the capital investment they made in the Company. Profits and losses are usually incurred in proportion to the Member’s ownership interest in the LLC.
Charging Orders are an important legal issue that must be navigated by the client and their attorney in order to create a successful asset protection plan. Technically, a charging order is a creditor remedy. It is a court order that allows a creditor to intercept any distributions of income or profits that are paid out by an LLC or a Limited Partnership to a member who owes money to a judgment creditor (hyperlink to online dictionary). All states allow for charging orders. But the law on charging orders is not uniform throughout the country. The laws of some states say that charging orders are merely one remedy available to a creditor to collect on a judgment, and allow the creditor to foreclose the ownership interest of the judgment debtor (hyperlink to online dictionary) in the LLC or Limited Partnership if it appears that a charging order will not satisfy the judgment “in a reasonable period of time.” In other states, the law makes charging orders the sole and exclusive remedy of a creditor and denies that creditor the right to foreclose. This is a key difference in the law, and allows the creative asset protection attorney, through careful planning, to protect a client’s ownership interest an LLC or Limited Partnership.
In most states, creditors holding a charging order will not be allowed to interfere with the management of the company. This limitation in the law of certain states is another important legal strategy that can be used to protect a client from a charging order when creating an asset protection plan. If the asset protection plan is structured correctly, it is up to the management of the LLC or LP (i.e., you) to decide if, and when, a distribution will be paid to the members. This is a key concept.
If you know that a distribution will be going to your creditor and not you, then why authorize payment of distribution, right? Instead, you can reinvest these monies in the company, or pay distributions only to those members who do not have charging orders issued against them (this requires a carefully crafted operating agreement) or use a multilayered asset protection plan to make distributions into new companies and other investments. The bottom line is, so long as the distribution does not get paid to YOU, your creditor can’t seize it.
Again, it bears repeating, if the governing documents of the business entity are properly structured, a creditor cannot order the LLC or LP to make a distribution that would be subject to its charging order. Frequently, creditors who obtain charging orders often end up with nothing because they can’t force the LLC to make any distributions.
The fact that a charging order may not result in a payment to a judgment creditor does not, however, mean that it is not going to be a problem for the debtor and his company. The existence of a charging order can make it difficult for the debtor/member and the other partners to take money out of the company and/or to obtain bank financing. It certainly complicates things.
Accordingly, the goal of your asset protection structure should be to facilitate a favorable settlement. If the creditor knows that you will never authorize a distribution that will wind up in their pocket, you can often settle the matter for pennies on the dollar.
In Florida, a creditor’s collection rights against a multimember LLC or an LP are limited to obtaining a charging order (single member LLCs are treated differently). Therefore, effecting a favorable settlement is realistic goal.
If you own assets outside of Florida, however, things become more complicated. As mentioned above, many states do not limit creditors to a charging order. They also allow a creditor to foreclose a debtor’s ownership interest in an LLC or LP if a charging order will not result in the payment of the judgment within a reasonable period of time. The same is also true here in Florida if your LLC is a single-member LLC (i.e., your interest can be foreclosed).
This means that creditors in states that permit foreclosure also have the right to take you ownership interest in your LLC, LP, corporation, etc. to pay their claim. So, as you can see, the level of your asset protection will depend upon the type of business entity you’ve chosen and where it is located.
Should You Form Your LLC Outside Your Home State?
If your home state does not provide all the creditor protection you want, you can form your LLC in a more debtor-friendly state. You do not have to form your business entity in your home state, even if that is where you live or do business. Which state’s law will apply, however, can become quite complicated should litigation arise. There is no guarantee that the courts in your home state or the courts in the state where you formed your entity will apply the law you want. This is a complex legal area so, the use of foreign jurisdictions for asset protection purposes should not be undertaken without competent legal counsel.
The difference between an ordinary LLC and a domestic asset protection LLC ("DAPLLC") lies in the governing documents drafted and the choice of law selected by the asset protection attorney. There are many different types of LLCs, and their legal structure will reflect the purpose for which it is formed. Most LLCs are formed to operate a business, with no consideration or provisions made for asset protection. The DAPLLC, however, is a highly specialized entity that is formed for one primary reason –asset protection.
The difference between a business LLC and a well-crafted DAPLLC is profound. For example, a butterknife and a surgeon’s scalpel are both “knives.” However, no doctor would ever consider using a butterknife to operate on a patient, and no normal person would use a scalpel to butter toast.
The level of asset protection provided by the DAPLLC will depend on its governing document, called an "operating agreement." Does the operating agreement contain all the anti-creditor provisions and all the asset protection provisions that are available under the law? Has the correct jurisdiction been selected? Has the operating agreement been customized to meet the specific asset protection needs of the client? Ultimately, the quality and effectiveness of the DAPLLC will turn on the creativity, competency, and attention to detail of the attorney creating the agreement.
The foundation is a type of legal entity often used in the United States to conduct charitable activities because it does not have ownership denominated in shares of stock. Rather, the directors of the foundation normally control its destiny, and the beneficiaries of the foundation may have no legal ties to the organization whatsoever. While most states do not recognize non-charitable foundations, many international jurisdictions permit the formation of non-charitable foundations to conserve and foster family wealth.
A trust, in comparison to a foundation, is a type of legal entity recognized at common law. However, many common law legal concepts -- including trusts -- are not recognized or enforceable in civil law jurisdictions such as continental Europe. For this reason, families in these jurisdictions sometimes prefer to form a foundation rather than a trust for asset protection planning purposes.
In the United States, foundations are treated as corporations which may be subject to tax if not properly qualified as a charitable organization. As a consequence, American families tend to prefer the use of a trust over a foundation for asset protection planning.
Corporations are a form of business entity that first became popular during the Industrial Revolution in England. Originally, business entities were organized as companies "limited by guarantee," in which the owners of the company would agree to be personally liable for the unpaid debts of the company. The company limited by guarantee is most similar to today's general partnership.
Over time, another type of business entity came to dominate: the company "limited by shares." In this arrangement, the owners of the company acquired shares of stock denominating their ownership interest, designating them "shareholders." Further, company law protected these shareholders from personal liability, limiting their financial exposure to any amounts invested in the business entity. Today, the American analog of the company limited by shares is the "corporation."
Corporations are structurally similar to foundations aside from the fact that corporations have shareholders, whereas foundations do not. As with foundations, U.S. Federal tax law imposes income tax on corporations that is separate and apart from the taxation of the corporation's shareholders. For this reason, Americans find it typically less tax efficient to conduct asset protection planning with a corporation than with a trust or other entity.
Further, corporations do not offer the charging order protection found with LLCs and limited partnerships in many states. Creditors can seize and foreclose upon shares of stock in a corporation. As a consequence, LLCs and limited partnerships are usually preferred over corporations for asset protection planning.
There are two types of partnerships, and the differences between the two are fundamental to asset protection planning:
•General Partnerships and
•Limited Partnerships
General Partnerships
A general partnership is a product of both state statutes and common law. It can be formed by private agreement and may exist even in circumstances which are unbeknownst to one of the participants in the enterprise.
The partners in a general partnership have unlimited personal liability for the unpaid debts of the partnership. This may result in one partner bearing substantially all the risk of loss if the other partners engage through the partnership in conduct that results in a significant liability. For this reason, the limited partnership is usually favored over the general partnership.
Limited Partnerships
A limited partnership exists only under state law, and compliance with the state statutes is essential to the establishment of the limited partnership. While filing paperwork to form the limited partnership is an administrative burden, the key benefit is that the limited partners enjoy limited liability protection under state law.
Under limited partnership law, there is normally at least one "general partner," whose liability exposure is identical to that of a partner in a general partnership. Oftentimes, to limit personal liability exposure, the parties in a limited partnership will form a corporate enterprise to serve as the general partner.
In many jurisdictions, limited partners enjoy charging order protection. This means that, under applicable limited partnership law, the creditor of a debtor-partner cannot interfere in the management of the limited partnership or compel a distribution to satisfy the creditor's claim. Rather, the creditor must wait for the debtor-partner to receive a distribution, the timing of which is generally within the control of the debtor-partner and his or her partners.
Noteworthy Asset Protection Cases
This landmark Isle of Man case gave birth to the modern asset protection trust. The Privy Council compared the Manx 1736 fraudulent transfer act to the Statute of Elizabeth in an effort to define “fraudulent transfer” under Manx law. The court concluded that Manx law on fraudulent transfers is fact specific and depends on the circumstances of each case.
To view a copy of the court's ruling, please click here.
This is the case that gave rise to the namesake form of injunction which creditors can obtain in British Commonwealth jurisdictions. A "Mareva ruling" is an order which a creditor may obtain ex parte to prevent the debtor from relocating assets to another jurisdiction.
We are pleased to offer our consolidation of the Mareva case. To download a copy, please click here.
Another British Commonwealth case outlines the "Anton Piller order" which creditors may request ex parte and before a judgment has been obtained. This type of order is used by creditors to secretly gain entry to businesses, private residences, or other confidential areas to secure evidence that is at risk of loss or destruction. Oftentimes the creditor will request a Mareva ruling and an Anton Piller order simultaneously.
For a copy of the originally published opinion, please click here.
British Commonwealth jurisdictions allow a creditor to obtain a "Mareva" preliminary injunction ex parte. By comparison, the U.S. Federal courts have declined to grant creditors this type of relief.
In Grupo Mexicano de Desarollo, the United States Supreme Court was asked whether, in an action for monetary damages, a lower court could issue a preliminary injunction freezing the defendant’s assets, even though no judgment lien had attached to the assets. An unsecured creditor had argued that the debtor was insolvent and would likely prefer its Mexican creditors, transferring assets beyond the reach of the U.S. courts. The Supreme Court ruled that a preliminary injunction interfering with the debtor’s assets exceeded the district court's equitable powers.
Please click here for the official text of this case from the United States Supreme Court.
Dahl v. Dahl is a landmark domestic asset protection trust case handed down by the Supreme Court for the State of Utah. A doctor going through divorce funded a Nevada asset protection trust. The Utah Supreme Court ruled that it would ignore Nevada law and treat the irrevocable Nevada trust as a revocable Utah trust. This was a complete victory for the spouse-creditor and a disaster for domestic asset protection trust planning.
Please click here for a copy of the court's opinion.
England and Wales and the British Virgin Islands have enacted legislation permitting "Black Swan" orders, in which a court may grant an injunction against a third party even though no substantive claim for relief has been brought in the jurisdiction. This is an extension of principles set forth in Mareva granting pre-judgment injunctions against debtors, and Anton Piller allowing injunctions against third parties in relation to creditor actions.
In Convoy Collateral, a narrowly-divided Privy Council ruled that the courts of the British Virgin Islands may issue "Black Swan" orders even if no substantive claim for relief is ever likely to be filed in the BVI courts, so long as the claimant can point to any jurisdiction in the world where the claimant is reasonably likely to file a claim. This ruling not only makes the BVIs a terrible destination for asset protection planning, but it is likely to foster the more widespread use by creditors of pre-judgment injunctions in parts of the British Commonwealth.
For our analysis of the ruling and a copy of the ruling, please click here.
The Alaska Supreme Court, following U.S. Supreme Court precedent on the Full Faith and Credit Clause of the U.S. Constitution, concluded that Alaska's domestic asset protection trust law cannot preclude enforcement of an out-of-state fraudulent transfer judgment.
For a complete copy of the case, click here.
The Delaware Chancery Court concluded that its domestic asset protection trust law, which contains an "exclusive jurisdiction" clause, only pertains to the Delaware Chancery Court and not to out-of-state courts. The effect of the ruling, which follows U.S. Supreme Court precedent on the Full Faith and Credit Clause of the U.S. Constitution, is to render Delaware asset protection trusts vulnerable to out-of-state judgments.
For a complete copy of the case, click here.
Florida's 11th Circuit Court recognized and enforced in Florida an ex parte Mareva ruling issued by a court in Cyprus. The case is of questionable authority and would not likely be granted today.
For a complete copy of the case, click here.