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.
3. Certainly careful entity planning is key. But there is also the “hands on the wheel” problem. Ie. Trucking company, Inc. with one truck, one driver who also happens to be the shareholder, board, president, mechanic, etc. In an accident, well, you can fill in the rest . . .
4. That said, it is worth noting what would subject the assets in some kind of asset protection trust to the claims of creditors (aside from the UTC) as fraudulent transfers:
[ORS] 95.230 Transfers fraudulent as to present and future creditors. …(A) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or (B) Intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they become due.
Obviously a corporation or LLC can shield non-business assets from business creditor claims, but that only works if creditors do not demand personal guaranties.
5. Thank you to [name omitted] for that statute. As a quick reading will reveal, a fraudulent transfer can occur even as to claims that arise later. It even says in the title, “present and future creditors.” An attorney who assists in “asset protection” is just an alleged co-conspirator to commit fraud. Set up normal business entities, and then get lots of insurance. From my preachy, moral, high-tone soapbox, you owe it to future injured parties to provide a way for them to get compensated (and for me to get fees when I sue the tortfeasors).
6. There are 19 jurisdictions that have asset protection trusts on the books, and frankly, if they are set up properly, they work quite well. Admittedly, most of the self-settled trusts I have set up in a jurisdiction that offers asset protection trusts are for making completed gifts for tax purposes (rather than for asset protection purposes).
7. Nice try, [name omitted], but I don’t think that the law requires that people all hang on to enough of their assets so that your future attorney fees can always be paid! It’s a complex area, with every determination based upon the context at the time, and all usually evaluated with 20-20 hindsight. While it is best to stay out of it unless you are comfortable with the considerable subtleties, it is true that a lot of effective planning can often be done. Since you mentioned morals, why would this be more morally offensive than, say, creating a special needs trust?
8. Staying away from the moral or ethical arguments for proactive asset protection for now, having recently prepared and presented a 3 hour seminar on Asset Protection for Physicians (how else to get doctors to sit still for that long?), my take on asset protection planning boils down to setting up enough barriers, walls and roadblocks to make it difficult and expensive for creditors to attack the client’s assets. One can start with the easiest (separate assets into separate living trusts, add LOTS of liability insurance, move “good” assets from the high risk spouse to the lower risk spouse, keep debt high, and stir) and add on more complex, higher barricades and castles (domestic asset protection trusts, offshore trusts, series LLCs, etc) as the client’s protection needs (and pocketbook) increase. We’ve worked closely with attorneys in Nevada, and have even done some offshore planning in the past, but really, the main goal as I understand it is to put up enough barriers to a creditor/plaintiff that they will settle the case for cents on the dollar rather than trying to break down the walls to get to the golden goose.
Our colleagues [name omitted] and [name omitted] both have good materials out there if you want to do some internet searching.
There’s no secret sauce. There’s just an understanding of the various barrier strategies and how and when to use them. That said, don’t forget the basics that may apply to most every client: separate spousal assets into two living trusts, put the protected assets in the high risk spouse’s trust (ie, his retirement plan) and the “good” assets in the low risk spouse’s trust (ie, the home and investment accounts), recharacterize community property to separate property, maximize personal liability umbrella insurance (minimum $5m these days), and gift the 18 year old children the old family car so that the car is in the child’s name and not in client’s name. That’s the low hanging fruit and is inexpensive to put in place yet provides a fair amount of protection for the average client.
Other folks already discussed fraudulent transfer rules and such. This type of planning has to be proactive to be effective, and when done right, can work very well.
9. In the last five years, I was involved in setting aside an asset protection trust from my client who was a legitimate creditor. An argument was made about whether my client was a creditor at the time the trust was established. Setting the trust aside was surprisingly easy. My client got all of her attorney fees. Those fees were significant after we jumped through all of the hurdles. If the debtor had simply paid what was owed at the outset versus creating the appearance of separate and special entities, the debtor would have ended up with more money. It true that not all asset protection plans get be set aside, but many can.