What They’re Saying About Asset Protection Trusts

Earlier this week there was a fairly in-depth colloquy between Oregon trust and estate attorneys that was broadcasted on the Oregon Bar Association’s listserv.  Below is a selection of the various comments – unattributed.

First, the question from John Doe attorney:

Greetings:  I have been asked to consult with Client on setting up a trust to “protect assets.” Client says the intention is to put client owned real property into an irrevocable trust prior to starting a new business to “avoid scrutiny.”  I’m not sure what the client’s real hot button concern is at the moment.

My opinion of such trusts is generally that, in order to get the asset far enough out of grantor’s control to make it effective, grantor has to endure too many negative consequences to make it worthwhile.  Do any of the assembled masses have particular thoughts or experience you are willing to share on the topic?

If there is a particular reference that anyone would suggest, I would be grateful to be pointed in that direction too.

And here are the responses:

1. There are ways in which an irrevocable trust can offer protection, and there are DEFINITELY tradeoffs, as you correctly note.  As a starting point, I would read this article from Forbes on the Mastro bankruptcy (up here in Washington State), and consider how his asset protection plans did not work out so well.

2. Interesting case. There are a number of similar examples across the country where people on the cusp of financial oblivion take desperate measures to stash enough to preserve the good life. That said, asset protection planning is a hot topic and is becoming a big practice area all across the country. People read about it and it appeals to them in concept, although they don’t know very much about the execution. [John Doe’s] client seems to be concerned about protecting personal assets from claims of potential future business creditors. Much of that can be accomplished with careful entity structuring for the new business. Maybe that’s all that is needed here. Continue reading

Can They Take My Retirement? Basic Asset Protection Explained

Over  time we accumulate assets. We borrow money to buy a home and repay it.  The home usually appreciates in value (except for recently). Some of  us buy CDs or stocks, bonds, and life insurance. Or we contribute to an  individual retirement account (IRA) or a 401k.

These assets can be protected from creditors to some extent.    Continue reading

Hooray for Prenuptial Agreements!

Most people think of prenuptial agreements as something rich men use to keep their assets from falling prey to their new, less wealthy (and usually younger) wives — the gold-diggers.

Others see it as a sign of mistrust. If you need a
prenuptial agreement, you must not trust your future spouse.

I see it differently.

When I married my wife, neither of us had assets to protect, so our agreement was not about protecting assets. Rather, it was about what in our relationship we would value and how we would value it. We committed it to writing because memories fade over time and because we are both lawyers.

Click here to read more.

Does Washington State have Debtor’s Prison?

Debtor's PrisonYes.  No. Sort of.
Here’s what most creditors (or debtors) don’t realize.  Once a creditor has reduced his claim to a judgment, he now has rights to convert his judgment (what they call in the biz, “levy upon execution”) to cash.  This is done by garnishing wages, garnishing financial accounts, foreclosing real property liens, if any, or getting the county sheriff to take and sell the debtor’s personal property.

The question is this: how do you know where the financial accounts are so that you can garnish them?   The answer is you ask the court for an Order for Supplemental Proceedings, which is a court order, requiring the debtor to appear in court, and truthfuly testify about his assets and their whereabouts.  A creditor can ask to see the debtor’s tax returns, bank statements, certificates of title and deeds (and anything else reasonably calculated to learn where the debtor’s assets are located).

What happens if a debtor just doesn’t show up to testify?  This is where things can get nasty.  The creditor then asks the judge to sign a bench warrant for the creditor’s arrest.  The warrant gets filed with the county sheriff, and while the police will not actively look for the debtor, if he is ever pulled over, the warrant will show up, he’ll be arrested, and will spend a few hours in jail before he posts bail.  So technically, that isn’t debtor’s prison, because the offense is not being a debtor, but ignoring a court order to appear and testify.  But if you’re the debtor, it’s still time in jail, however characterized.

Why Do I Record my Judgment?

TEP gets this question at least once a month, so we’re posting it, along with an answer.  The question is this:  When and why do I need to record a judgment?

The answer is this:  “A judgment against the owner of a homestead shall become a lien on the value of the homestead property in excess of the homestead exemption from the time the judgment creditor records the judgment.”  See RCW 6.13.090  (Currently, the homestead exemption is $125,000.)  If the judgment is not recorded, then it is not a lien on the homestead.  If you’re not dealing with homestead property, then mere entry of the judgment on the court’s docket is sufficient for it to be a lien on the real property.  See RCW 4.56.190, .200.  Remember, a judgment in one county is not a lien on real property in another county until the judgment is “transferred” to the other county.

Which brings us to the next point:  What if the judgment is in one county, but
the real property is in another county?
  You must abstract the judgment to the new county.  An “abstract” is a piece of paper you obtain from the court clerk, and file it in the court to which you are transferring the judgment.  Once transferred to the new court, the judgment gets a new case number, and is a lien on the judgment-debtor’s non-homestead real property in that new county.  Any efforts to collect on the judgment in the transferee county must be done under the new cause number.  And again, if the homestead is in the transferee county, you must also record the judgment with the Auditor/Recorder in the new county.

Attached here is a fabulously written appellate brief by our former colleagues at Graham & Dunn that dissects the judgment lien statutes.  The case is Fisher Broadcasting v. Squirrels Nest II, LLC.  In this case, Fisher Broadcasting won judgment against a contractor, who sold his rental condo to third-party buyers.  The judgment was entered on the court’s docket just two days before the sale closed – meaning the title company, Old Republic, missed the judgment.  The sale closed with Fisher’s lien on title.  Old Republic tried to avoid the lien for the insured-buyers, arguing they took free of the lien because they had no way of knowing about it before the sale.  The court agreed with Fisher Broadcasting and upheld the lien.  The unpublished opinion (affirming Fisher’s summary judgment) is here.

Probate: What if the Real Estate is Worth Less than the Mortgage?

These days, estates are often walking away from real property rather than paying the mortage.  They do this because lenders usually foreclose on real property nonjudically.  No deficiency is allowed to a lender after a nonjudicial foreclosure.  See RCW 61.24.100.  (On a semi-related note, this can leave “forgiveness of debt,” which is taxed as income to the estate).  In other words, the estate walks away from the property and the debt.  This is a great outcome for the estate, but not a guaranteed outcome because a savvy lender can file a creditor’s claim and simply enforce its rights under the promissory note (that is, assuming the lender knows about the estate – notice anyone?).

Here are the rules: There are known (or “reasonably ascertainable”) creditors and unknown creditors.  RCW 11.40.040.  A mortgage lender is most certainly a “known” creditor.  If an Executor fails to notify a known creditor – the creditor will have 2 years from the date of death to sue the decedent’s estate (or rather, the Executor/Personal Representative).  See RCW 11.40.051(1)(c).  If you notify a known creditor, he has the later of four months or thirty days from when notice was published.  (If the notice to creditors is published, unknown creditors have four months.)

So, a PR can: 1. pay the debt; or 2. not pay the debt; and A. send notice to the lender; or B. not send notice to the lender.  If notice is sent, the statute of limitations for a creditor’s claim is the later of four months from publication or thirty days from sending the notice. RCW 11.40.051.  If not, it is two years.

If the PR stops paying, the lender will issue a notice of default, and eventually start a foreclosure (it could take months, even a year or more depending on the lender).  If the lender is on the ball (or if you send notice to the lender and he reads it and responds), he will likely file a creditor’s claim.  Since lenders have the option of suing on the note or foreclosing, the savvy lender will rest on his creditor’s claim rather than foreclose, knowing he can get paid in full that way.

The conclusion is this:  If you’re the lender and your borrower stops paying, search the Washington Courts Case Name Search index to see if there’s an open estate.  If so, file a creditor’s claim.  If you’re the Executor/Personal Representative, stop paying the mortgage, and see what happens.