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

Washington Court of Appeals Clarifies the Pro Se exception for LLC’s

Every litigator has debated this question with his/her partners:  My opponent is acting pro se, and is not an attorney.  Can he represent his LLC against my client?  The arguments went both ways.  In a single member LLC, which in some ways is like a partnership, the member is essentially representing himself.  This is the same as representing oneself in court, which is allowed.  But if a corporate entity is treated as a separate person from its members/shareholders, isn’t that practicing law on behalf of another?

For years, trial judges have gone both ways on this issue, until now.  The Washington Court of Appeals, in Cottinger v. Employment Security Department, 162 Wn. App. 782 (2011), held that a single member LLC needs an attorney; its sole member cannot represent it under Washington State’s pro se exception to the unauthorized practice of law (the pro se exception is what allows non-lawyers to represent themselves in court).   The appellate court reasoned that if one enjoys the benefits of the corporate form, he must also bear the burden, including the requirement of having an attorney in court.  Id. at 790 (“Kirby chose to incorporate and enjoy the benefits of the corporate form.   He must also, however, bear the burdens of that choice.”)

A bright line rule.  We like it.