One question we often encounter is related to the topic of asset protection after lawsuit is filed. We’ve all heard and understand the adage of timing being everything, and this certainly applies to the matter of asset protection after lawsuit is filed. In some cases, asset protection can be managed even when a creditor has already filed against you, but then you have to watch out for issues related to fraudulent transfers.
Asset Protection after Lawsuit is Filed Can be a Success
The whole idea behind how to protect assets from lawsuits is based on establishing legal structures that make it difficult, if not impossible, for creditors, plaintiffs, gold diggers, and assorted opportunists to come after your assets. These uncompromising legal strategies don’t eliminate the risk of fraudulent transfers even when you seek asset protection after lawsuit is filed. These strategies become even more effective when in place for at least four years. If you feel that a lawsuit could be brewing because there is already friction and conflict with creditors, individuals, or business entities that could become plaintiffs, the time to act is now. Solid asset protection instruments need to be structured, written, executed, funded, and managed correctly in order to be effective.
In the highly litigious and adversarial American legal system, it is too easy for just about anyone to file a lawsuit to claw at your assets these days. You can say many things to highlight the shortcomings of the legal system in the United States, but you cannot accuse it of being unfriendly to prospective plaintiffs; this is why it is important to learn how to protect assets from lawsuits. As to whether it is possible to establish asset protection after lawsuit is filed, the answer is yes, but that is full of caveats.
The Problem With Asset Protection After Lawsuit is Filed: The Anderson Case
You may have heard about legal strategies that involve setting up trusts in offshore jurisdictions for the purpose of safeguarding assets. Law firms that offer these services often mention jurisdictional advantages such as privacy, flexibility, and a conservative judicial system that favors offshore trusts; all this is true, but it will not necessarily provide asset protection after lawsuit is filed. Let’s explain why. If you have been served with lawsuit papers and attempt to set up an offshore trust, you may be entering the treacherous territory of fraudulent transfers. You cannot just give away your assets without getting paid market value for them and expect to be protected – even if you give it to an offshore entity.
Attorneys whose advice to set up offshore trusts in a late-stage situation after a lawsuit has been filed are doing their clients a disservice by putting them at high risk if they don’t include a solution for fraudulent transfers. What these lawyers fail to mention is: beyond the fact that offshore trusts are expensive to create, you must rely on a trustee you will never meet in person, and are expensive to maintain (costs average $5-10,000 to maintain every year due to the new patriot act and subsequent banking acts requirements to help the IRS get those tax evaders), there are bigger problems with going offshore and most attorneys miss the big issues right here in the United States: Fraudulent Transfers.
For example, Federal Trade Commission v. Affordable Media, LLC 179 F.3d 1228 (9th Cir. 1999), which in legal circles is known as the Anderson case. Denyse and Michael Anderson were determined to be in contempt of civil court in a case whereby U.S. prosecutors sought to repatriate assets stashed in a trust in the Cook Islands that were given away without full payment (fraudulent conveyance). Due to these fraudulent transfers, Mr. and Mrs. Anderson were thrown in jail and were only released after they agreed to cooperate with the FTC for the purpose of unveiling the offshore trust. The FTC argued that the couple had engaged in fraudulent transfer practices, thus the court found them to be in contempt, resulting in jail time.
When formulating how to protect assets from lawsuits, the issue of fraudulent transfers cannot be ignored or glossed over; 80% of the time asset protection strategies get unwound due to the fraudulent transfers issue. Under certain conditions, fraudulent transfers can even make a civil lawsuit turn into a criminal investigation. Conveying your assets to an offshore trust is not an illegal action by itself per se; however, it does not do much in terms of absolving you from a potential determination that fraudulent transfers may have taken place as part of your asset protection efforts.
Let’s say you own California real estate that you want to pass onto an offshore trust. If a creditor files a lawsuit that mentions the California properties were transferred without proper consideration (i.e. payment at market value), the court will very likely consider this to be a textbook example of fraudulent transfers. A California judge will, in fact, have jurisdiction over the properties in California and if you didn’t get a fair price within 4 years of the lawsuit, will unwind the gift to the offshore trust.
Giving gifts to a Trust are fraudulent transfers
You have to admit that conveying a California home into a trust formed in the Cayman Islands makes no sense when you give it away for free and are facing legal action, and this is part of the complexity related to asset protection after lawsuit is filed. Don’t let the geographic location of the trust trick you into a false sense of security; while the trustee’s office may be in a tropical paradise, the property remains in California and the transaction can still get clawed back (unwound) by the court if you did not receive fair market value for the property and 4 years did not pass.
What the Law Says About Fraudulent Transfers: The Fink Bridge Trust Case
You may think that fraudulent transfers can only be detected when trying to achieve asset protection after lawsuit is filed, but this is not the case. When evaluating fraudulent transfers, American judges refer to the Uniform Fraudulent Transfer Act, which establishes what can be considered a fraudulent conveyance.
Fraudulent transfers can happen before or after creditors take legal action. If the court determines intent to defraud, delay, hinder, a potential judgment, you could be facing more than just civil liability. As previously mentioned, there is even a risk of having to deal with criminal liability because some fraudulent transfers may qualify as misdemeanor or felony offenses.
Some law firms have attempted to get creative with so-called “bridge trusts” that begin with establishing a domestic trust in American jurisdiction followed by a transfer of assets to an offshore trust. Such was the case in Indiana Investors v. Victor Fink, No. 12-CH-02253, where the domestic trust was formed in Illinois and its offshore counterpart was in the Cook Islands, the same jurisdiction in the Anderson case. In this particular case, the plaintiffs prevailed to the point of freezing Fink’s bank accounts, and they even convinced the court to block asset transfers to the offshore entity because such an action would be tantamount to fraud.
When you attempt to establish asset protection after lawsuit is filed, you will typically find a hard time trying to retain a law firm to represent you. Attorneys who are familiar with how to protect assets from lawsuits will rarely take on clients whose cases look like they are headed towards negative outcomes such as judgments. We are talking about scrupulous attorneys who think about raising defenses against fraudulent conveyance claims; they know that courts look at the “badges of fraud” legal doctrine, which is comprised of the circumstances surrounding suspicious transactions.
Even though jail time was not ordered in the Fink case, it stands as a solid defeat of the bridge or passage trust mostly due to fraudulent transfers. You can find offshore trust defeats by the dozen in U.S. case law; some examples involve high-profile respondent such as corporate raider Paul Bilzerian, whose life reads like the script of the 1987 film “Wall Street” directed by Oliver Stone. In SEC v. Bilzerian, 131 F. Supp. 2d 10 (D.C. 2001), the debtor refused to cooperate with the government’s motion to repatriate assets held in a trust also formed in the Cook Islands. Bilzerian’s status changed from civil case respondent to criminal defendant, and he was ultimately ordered to spend 48 months in a federal prison.
Once again, if you walk into the offices of a law firm that promises asset protection after lawsuit is filed, there is a good chance that they will try to steer you towards offshore trusts. As previously explained, this does little to avoid falling into fraudulent transfers problems. Such law firms may just bill you for their lectures about offshore trusts and will draw the line at actually handling the process for you because they do not want to break the law with the actual transfers.
How to protect assets from lawsuits doesn’t mean electronically transferring to the Cook Islands
Filing for bankruptcy may appear to grant some level of asset protection after lawsuit is filed, but not too much; the only advantage is that bankruptcies are perfectly legal court proceedings that unfold in the public eye, and they do not fall into the badges of fraud category. While bankruptcies are one option to consider when asset protection after lawsuit is filed, they are also harsh remedies; they are not a good example of how to protect assets from lawsuits, and they are subject to court approval. You also have to be careful with bankruptcy proceedings as lawsuit remedies. In SEC v. Brennan, 230 F.3d 65, 2000, a case involving an offshore trust in Gibraltar, the debtor was ultimately convicted of bankruptcy fraud.
Offshore trusts are not looking good for other reasons. In recent years, the Panama Papers and Paradise Papers document leaks have cast a negative shadow on the use of tax havens for asset protection. There is also the fact the Trump administration has effectively pressured American technology giants such as Apple and Google to stop using offshore jurisdictions in order to reduce taxation.
Before we get into discussing how to protect assets from lawsuits, let’s get some perspective from a couple of high-profile civil cases currently unfolding in court:
Phil Collins v. Orianne Cevey
Pop music superstar Phil Collins is known for his numerous Billboard hits as well as for his drumming prowess with the legendary British rock band Genesis. Fans of Collins also know about his tumultuous relationship with Orianne Cevey, to whom he ended up ceding nearly $47 million as part of an acrimonious divorce finalized in 2008. In recent years Cevey and Collins after she divorced a Miami-based investment banker, and they moved into Collins’ opulent South Florida mansion.
In the midst of the coronavirus pandemic of 2020, Collins was busy arranging a Genesis reunion concert tour when he started going through serious relationship problems with Cevey. Things got really ugly when she told Collins that she was going on an August business trip to Las Vegas, when in reality she left to marry another man. It is not clear whether Cevey actually spent her honeymoon at Collins’ mansion; what has been reported, however, is that he ordered her to get out.
Instead of leaving, Cevey entrenched herself in the mansion and changed the security codes to lock Collins out. She threatened to leak salacious information about Collins to the tabloids, but the cherry on top was that she warned him a lawsuit was forthcoming. As of late October, Collins was going through the motions of an eviction complaint against Cevey.
While the above is certainly an unpleasantly scandalous ordeal for Collins, he does not have to worry about Cevey going after financial assets destined to his two children because they are the beneficiaries of an irrevocable trust dating back to the 1980s. Through this trust, Collins enjoys asset protection after lawsuit is filed, thus Cevey cannot touch any of the funds going to his children. Collins learned how to protect assets from lawsuits when he was living in Canada at a time when his multi-platinum solo albums were selling all over the world; he has faced a string of lawsuits ever since, but none of them have been able to claw at the benefits his children are entitled to through the irrevocable trust.
The Piet Mondrian Paintings
Pieter Cornelis Mondrian is considered to be one of the most influential artists of the 20th century. During World War II, the Third Reich went after Mondrian because they wanted to get their hands on his extremely valuable abstract paintings; this was part of a Nazi strategy to pillage masterpieces they could later sell or trade for substantial cash and influence through fraudulent transfers. Mondrian had a very good friend in Harry Holtzman, an American abstract painter who helped him collect as much of his work as possible and escape to New York City, where Mondrian passed away before the war came to an end.
Mondrian left his entire estate to his friend Holtzman, who in turn bequeathed everything to his children. Under the advice of attorneys who specialize in how to protect assets from lawsuits, the Elizabeth McManus Holtzman Irrevocable Trust was established, and this is where all of Mondrian’s paintings were legally transferred.
Fast-forward to October 2020: Four Mondrian paintings worth millions of dollars are part of the Kunstmuseen Krefeld collection, but the Holtzman heirs want them back, and they have filed a lawsuit to this effect. Mondrian loaned the four paintings in question to the German museum in 1929, four years before Hitler seized power. The paintings were supposed to be returned after a few exhibitions, but the museum director passed away. With the Nazis running Germany and making their nefarious plans, the paintings went through a series of fraudulent transfers, but clumsy SS officers lost track of them.
The Holtzman Irrevocable Trust has established ownership of the paintings and is now suing for the return because of wrongful possession. Legal analyst who follow the art world think that the Holtzman heirs have a pretty solid case because it is clear that the paintings were passed around through fraudulent transfers; moreover, they also believe that frivolous plaintiffs and legal predators will have no chance of trying to claim ownership of the paintings once they are returned. This is a perfect example of how to protect assets from lawsuits; in fact, depending how the Holtzan Trust is structured, we may never know what other masterpieces it holds. We will explain how this works towards the end of this article.
Irrevocable trusts are the common denominator in the two aforementioned cases; if you want to learn how to protect assets from lawsuits, this is where you should start, and it is always better to do it sooner than later. We can now discuss the matter of asset protection after lawsuit is filed, but this is a situation that you really want to avoid. Even the best attempts at securing asset protection after lawsuit is filed routinely fall into the issue of fraudulent transfers and their inherent problems.
How to Protect Assets From Lawsuits: The Right Way to Do It
There is more than just avoiding badges of fraud when talking about how to protect assets from lawsuits. Shielding your assets from legal predators, scammers, overzealous creditors, and other unpleasant characters is the ultimate goal. Similar to the actions taken by Phil Collins in the late 1980s, you should not wait to achieve asset protection after lawsuit is filed. The time to do it is always now. In the dysfunctional legal system of the U.S., lawsuits are always on the horizon, which is why you should protect your assets now instead of later when plaintiffs start coming out of the woodwork.
A solid derivative financial instrument combined with Ultra Trust® Irrevocable Trust accomplishes is the way to go when thinking about how to protect assets from lawsuits. You do not have to park your assets in the Caribbean and rely on someone you’re never going to see in person, nor pay $5000-$10,000 annually to maintain it. Ideally, you want to establish this structure as early as possible prior to being served with lawsuit papers, this is the smart approach on how to protect assets from lawsuits because you will have the benefit of running out the clock on the statute of limitations.
The burden of ownership is often mentioned when figuring out how to protect assets from lawsuits. Creditors and plaintiffs can only come after assets that you legally own; an irrevocable grantor trust provides relief against this burden, but only if it is structured properly. The Ultra Trust provides superb asset protection thanks to the fiduciary duty it creates, which in turn protects you from falling into a fraudulent transfers trap. When it comes to wealth protection and estate planning that remains effective through generations, what you really want is the peace of mind that only Ultra Trust Irrevocable Trust can provide.
Whereas offshore trusts have been defeated time and again in U.S. courts, a properly structured, managed, and funded irrevocable trusts enjoy a solid record of asset protection that spans 150 years, and this can be achieved through a three-stage process even after a lawsuit has been filed:
1 – The trust is properly written.
2 – An independent trustee is appointed.
3 – Assets are transferred into the trust in a manner that avoids fraudulent transfers altogether.
Finally, here’s one more thing to know about asset protection after lawsuit is filed: If a creditor is going after a tiny fraction of your assets, reaching a settlement agreement after putting yourself into a position to negotiate, could be your best bet.
If you find yourself in a difficult situation, and would like to consult an expert to see if your situation can be helped and if we can address all of the issues to keep your head above water, call now (508) 429-0011.
Watch the video on 'Revocable vs. Irrevocable Trust Advantages'
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Here we examine the differences of revocable vs. irrevocable trust advantages. If you reposition (transfer) your assets through the use of an IRREVOCABLE TRUST, you will no longer own them. If you don’t own assets, no one will want to sue you; no one will want to track your spending habits; no one will call you to interrupt your dinner. You don’t have to go offshore. US Laws, US courts will defend and support your asset protection system. These laws have been defined by thousands of court cases, over and over, right up to the Supreme Court. Hence, our analysis, based on court cases, revocable vs. irrevocable trust advantages. You must however, give-up control over your assets to a true independent trustee.
Legitimate repositioning (transfer) of assets from you to an irrevocable trust is perfectly legal. The fact is, if your assets are owned by a subchapter S. Corporation or a Limited Liability Company and in turn the shares of the Sub S or membership units of the LLC are owned by an irrevocable trust, it’s the fortress of US Asset Protection. The ultimate asset protection device is the use of an offshore asset protection trust.
The following financial grid explains the major differences between revocable vs. irrevocable trusts:
REVOCABLE TRUST (REVOCABLE LIVING TRUST)
ABSOLUTELY NO Asset Protection. NONE. The Grantor, The Trustee, and the Beneficiary are generally the same person. The Grantor did not give-up control of the asset(s).
YES. The Grantor no longer owns the assets. Assets have been transferred to the INDEPENDENT Trustee who has a fiduciary duty to manage the assets for the benefit of all beneficiaries, which may include the Grantor.
Eliminate Estate Taxes
YES. Assets are not subject to the Estate Tax. The deceased did not “own” the assets or have assets in his possession at the time of his death.
Defer / Reduce Capital Gains Taxes
YES. Assets transferred to the Trust can be structured without capital gains taxes.
Defer / Reduce Income Taxes
YES, if combined with international structure.
Form 1040 income tax benefits
YES. You have done nothing. You still “own” the assets. All Income and Expenses flow-through to the Grantor’s form 1040.
YES. If this is a Grantor-Type Trust, for income tax purposes, all income and expenses flow-through to the Grantor’s form 1040.
The Revocable Trust is designed to eliminate probate. DOES NOT eliminate estate taxes; ABSOLUTELY NO asset protection. The Revocable Trust is nothing more than an extension of your will.
For asset protection purposes the trust is irrevocable. Under certain conditions, the trust can be designed to be a pass-trough trust for income taxes.
The Revocable Trust (Revocable Living Trust):
What’s wrong with a revocable trust (revocable living trust) is that the owner of the assets (the Grantor) retains too much power over the disposition of the trust assets. This direct control nullifies any defenses against potential frivolous lawsuits. His deemed control is equivalent to ownership, and if you still own the asset you are liable to lose them in a lawsuit. And if you own the asset you will incur an estate tax.
The laws of most states permit the formation of a variety of revocable trust instruments (AB “Family” Trust, QTIP Trust, Crummey Trust, Retained Interest Trusts such as GRITS, GRATs, GRUTs, and QPRT), whereby the trust creator (Grantor) contributes assets for the benefit of others to be managed by a Trustee. While it is also possible for the creator to be either the Trustee or a Beneficiary of the trust he or she has created, such dual capacities will usually destroy the trust’s ability to shelter its assets from creditors of the Grantor. When a Grantor reserves an unqualified power of revocation, he or she is deemed the absolute owner of the trust property, as far as the rights of creditors are concerned. This is true even if a Grantor of a trust does not retain a beneficial interest in the trust, but simply reserves the power to revoke it.
The Revocable vs. Irrevocable Trust Advantages:
Unlike a revocable trust (revocable living trust), assets transferred to an “irrevocable” trust cannot be changed or dissolved by the Grantor once it has been created. The Grantor no longer owns the assets. An independent Trustee is your best defense. With an independent trustee, you generally can’t remove assets, change beneficiaries, or rewrite any of the terms of the trust. An irrevocable trust is a valuable estate-planning tool. First, you transfer assets into the trust-assets you don’t mind losing control over. You may have to pay gift taxes on the value in excess of $1million of the property transferred at the time of transfer or you may be able to set-up a mock sale by using a device known as a private annuity to avoid capital gains taxes.
With an irrevocable trust, all of the property in the trust, plus all future appreciation on the property, is out of your taxable estate. That means your ultimate estate tax liability may be less, resulting in a more tax efficient way to transfer your accumulated wealth to your beneficiaries. Property transferred to your beneficiaries through an irrevocable trust will also avoid probate. As a bonus, property in an irrevocable trust may be protected from your creditors. Of late this irrevocable trust device is being utilized by many planners for avoiding the Medicare nursing home spend-down provisions whereby if the elderly has to enter a nursing home he must first spend all his money until he does not have any money left.
A quick word about the independent trustee: most people don’t like to give up control over their assets because of their perceived notion that giving up control is equivalent to leaving the wolf in charge of the hen house. The law imposes strict obligations and rules on trustees including a duty to account for any benefits the trustee may have gained directly or indirectly from a trust. This goes beyond fraudulent abuse of position by a trustee.
The courts regard a trust as creating a special relationship which places serious and onerous obligations on the trustees. The law regards the special “Fiduciary” relationship of a trust as imposing stringent duties and liabilities on the person in whom confidence is placed – the trustees – in order to prevent possible abuse of that confidence results in a major difference in the revocable vs. irrevocable trust advantages. A trustee is therefore subject to the following rules:
No private advantage – A trustee is not permitted to use or deal with trust property for direct or indirect private advantages. If necessary the court will hold him personally liable to account for any profits made in breach of this obligation.
Best interests of beneficiaries – Trustees must exercise all their powers in the best interests of the beneficiaries of the trust.
Act prudently – Whether or not a trustee is remunerated he must act prudently in the management of trust property and will be liable for breach of trust if, by failing to exercise proper care, the trust fund suffers loss. In the case of a professional, the standard of care which the law imposes is higher. Failure to exercise the requisite level of care will constitute a breach of trust for which the trustee will be liable to compensate the beneficiaries. This duty can extend to supervising the activities of a company in which the trustees hold a controlling interest.
Revocable vs. Irrevocable Trust Advantages: The Legal safeguard of an irrevocable trust:
In cases of substantial assets, you may add one other safety measure, “the Trust Protector.” The trust protector’s sole function is to hire and fire trustees, at will and without explanation. We use limits on how much a trustee can be authorized to spend without a second signature.
Protect your assets for yourself and your children and beneficiaries and save on tax dollars and learn the revocable vs. irrevocable trust advantages. Assets can be protected from frivolous lawsuits while eliminating your estate taxes and probate, and also ensuring superior Medicaid asset protection for both parents and children with our Premium UltraTrust® Irrevocable Trust. Call today at (888) 938-5872 for a free consultation and to learn more.
In the realm of financial planning, creating a trust can be one of the most important steps in terms of achieving solid asset protection and designing an adequate estate plan. It doesn’t have to be a difficult process, but it does require thoughtful consideration and planning.
Choose the right legal or financial professional to Protect your Wealth for your family
Most individuals, and even most estate planning attorney’s unfortunately, are not familiar with estate law and how statutes can affect estate planning across different jurisdictions. It is unreasonable to expect someone who is not a legal or financial professional to be able to easily understand everything; however, certain key aspects of it can be sufficiently learned so that a do-it-yourself option becomes available.
The following 15 key points are of the essence when creating a trust. Once this information is fully understood, potential grantors will understand how to the point that they can begin the process of setting one up themselves.
1 – The Need and Purpose
They were originally created when the Renaissance period reached the nascent common law system of the English royal court. These legal instruments were born out of an important necessity: when English knights marched across Europe as Crusaders, they conveyed property ownership to trustworthy individuals to handle affairs such as managing land, paying feudal dues, etc. If the knight did not return to England after a battle, the terms of the entity would establish that the estate would transfer to beneficiaries, who were usually the spouse and children. In the absence of a structure, the Crown would simply claim royal rights over the deceased knight’s property, often leaving his surviving spouse and family penniless.
Good asset protection is like a puzzle placing together the right pieces in the right place
The historic needs of legal structures have not changed. They are still legal documents that establish a fiduciary relationship whereby personal ownership of assets is relinquished and the property is transferred so that it can be managed by a trustee for the benefit of others.
The modern purposes of these entities are: asset protection, wealth management, avoiding probate, Medicaid planning, and estate planning. Individuals and couples whose assets including real estate are worth more than $100,000 should consider creating a trust for their own benefit and to protect the financial futures of their loved ones. Please note, that only an irrevocable version protects assets from anything other than probate.
2 – The Laws and Rules Governing
In the United States, these entities fall under the laws of property, which can be different from one state to another. The most important aspects of them that can differ from one state to another are: validity, construction and administration. Validity deals with state-specific laws and rules that may render it invalid from one jurisdiction to another. For example, at one point many states adopted a rule against perpetuity, which is intended to prevent legal instruments from placing restrictions on property for too long; however, states such as Florida allows property interest that is non-vested to remain for 360 years instead of the suggested uniformity of 21 to 90 years.
Although there seems a fair amount of uniformity in terms of the laws that govern most estate planning across all states, it is imperative that individuals who set one up in one state to draft new documents when they move to another state or make sure that it’s amendable to change the situs. Once someone learns how to create one, the second time around will be substantially easier.
3 – Parties Involved
This structure create legal relationships that require at least three parties: grantor (also known as settlor), trustee and beneficiary. Each of these parties can be represented in plurality, which means that there can be more than one grantor, trustee, and beneficiary.
When learning about how to create one, the grantor must assume a decision-making role that includes certain responsibilities such as choosing the type, appointing the trustee, naming the beneficiaries, relinquishing property, and transferring the assets. Depending on the type and the way the assets are transferred, the grantor may incur into gift taxes; nonetheless, skilled advisors can come up with a strategy that can alleviate this financial burden even if your estate exceeds the federal limits for a gift exemption. The role of the grantor is pretty much completed after the assets are transferred and the paperwork is properly filed and settled.
The trustee is the party that takes over the management and oversight. The duties and responsibilities of the trustees are defined by the grantor during the construction. In some cases, grantors initially serve as trustees until they appoint someone else; some individual grantors set it up in a way that will appoint a trustee only when they become unable to assume management.
The beneficiaries are the parties who are named to eventually receive the benefits of the assets contingent on a trigger event – usually the death of the grantor(s). Beneficiaries also have duties and responsibilities: they may have to pay taxes based on the assets they receive as benefits, and they are also responsible for requesting an audit the work of the trustee to ensure that it’s being managed in accordance to the law and to the wishes of the grantor.
4 – How It Can Help a Family
With every created structure, there is an implied desire of keeping property and assets safe for the benefit of families. This implied desire is the historic factor that prompted the creation in the first place.
Structure your structure properly so conditions can be placed on distribution of assets when someone passes away
These things can be structured in ways that serve the interests of individuals who can be grantors, serve as trustees and also become beneficiaries; notwithstanding this asset protection strategy, creating an irrevocable trust (IT) is something that is more commonly associated with effective financial planning and protection for families.
With a properly structured entity, conditions can be placed on the distribution of assets when someone passes away. Gift and estate taxation can be reduced or eliminated, and family affairs can be kept away from public scrutiny by means of skipping probate court proceedings. Family fortunes can be protected from lawsuits and overzealous creditors, and trustees can be appointed with the understanding that they must adhere to the terms of the contract and help to make it grow.
5 – Do-It-Yourself (DIY) Platform
Asset protection and wealth preservation are part of an industry that generates billions of dollars in administration fees each year. Attorneys and CPA firms that offer services often charge hefty fees their planning expertise. As a result, many individuals and families shy away from setting up structures to protect wealth that they have worked hard to accumulate over several decades.
Although there is a certain amount of complexity involved, there are several DIY approaches that take each step into account making it easy that prospective grantors can take advantage of.
DIY structures are the result of advances in software and database technology and are so sophisticated and accurate today, that even most attorneys use them for their clients. Using an online platform that presents grantors with questionnaires about their finances, civil status and estate planning goals. The questions are related to the 15 key points discussed herein; once all the answers have been provided and the questionnaire is completed, two reviews take place. One review is automatically conducted by the software; the other review is conducted by seasoned professionals with years of experience. Once the correct documents are drafted, they are sent to the grantor for execution accompanied with instructions and guidance.
Once prospective grantors become familiar with the 15 key points presented in this article, going through the DIY process of creating an irrevocable version becomes a task that is not only easy to manage, but also beneficial in terms of avoiding considerable legal fees.
6 – Choosing the Trustee
Proper selection of a trustee is crucial. Some individuals who choose a living trust as an instrument primarily for asset protection and not so much for estate planning may be tempted to serve as grantors, trustees and beneficiaries, but there some caveats in this regard. A similar situation arises in family structures, whereby parents may want to automatically choose their oldest child to serve as trustee.
The choice of trustee should take into account a few factors: knowledge, experience, potential conflict of interest, access to the assets, management abilities, cost, and relationship. Grantors are likely to immediately think about appointing relatives as trustees because they feel that they have confidence in to manage their assets and handle their financial affairs, but this could be a problem insofar as creating a burden for a trustee who has his own family and work responsibilities.
Independent trustees should always be preferred because they fulfill the aforementioned factors and they create a fiduciary duty which is golden in the eyes of a court. Fiduciary duty is synonymous with a legal obligation to protect the assets. A CPA, for example, is a professional under the oversight of a state regulator. Appointing a CPA to handle trustee duties is the best course of action for grantors who believe that appointing multiple trustees is a wise choice. While there are no limits with regard to whom you choose or the number of trustees who may be appointed, the conflict of interest factor is amplified with the presence of more individuals acting in a fiduciary capacity.
If for some reason the grantor feels that he or she must appoint various trustees, a protector provision may be included to ensure that potential conflicts between trustees can be quickly resolved.
7 – Including a Protector
Grantors who choose to appoint an independent trustee such as a CPA, friend, in-law, or lawyer do not have to worry about completely and permanently ceding all control of the assets and property transferred to the entity. Within the agreement document, a protector provision can assign powers to an individual or an entity for the purpose of replacing the trustee as needed.
The protector strategy began being used by asset protection lawyers that operate in offshore financial havens such as the Cayman Islands, Cook Islands, and other jurisdictions and has since been implemented into the better domestic trusts.
Prospective grantors in the United States do not have to go offshore for the purpose of strong asset protection. States recognize that trustees and protectors can coexist within a fiduciary agreement. One such state is Delaware, where an individual or entity serving in this capacity is called an adviser under section 3313 of the Delaware Code.
The powers that can be assigned to a protector may include: the ability to replace trustees as needed, the right to control spending, the power to veto distributions, and the ability to step in whenever a conflict between trustees arises.
RT’s are designed to give grantors an opportunity to easily undo the terms of the agreement so that they can retain control and ownership over their assets. RTs can also be modified at will by grantors.
Irrevocable versions are designed to give grantors maximum benefits in terms of asset protection, estate planning, tax advantages, Medicaid planning, and others. Unlike RTs, grantors do not retain ownership or control of assets held in irrevocable structure, and the terms cannot be modified as easily.
Generally speaking, irrevocable versions are the better choice for individuals and for families.
9 – Married Couples
Couples who are either legally married or who live together under the terms of a common law marriage or civil union can draft agreements that reflect their lifestyle and their financial goals. To this effect, a joint irrevocable structure can be created to meet the needs of most couples. In such case, one or both spouses act as the grantor, but each spouse can designate beneficiaries who can receive a share of property owned in common.
The terms that govern the property held in a joint structure can be dictated by both spouses. The estate planning benefit, when one spouse dies, the assets and property remain in the structure for the enjoyment of the benefits. A provision can be included for the purpose of a final distribution to take place once both spouses pass away.
You can preplan a marriage with a prenuptial agreement
Individual structures can also be created by married couples who wish to keep their property separate. Reasons for doing this include: second marriages and the desire to not cede control of assets and property to a spouse. Couples who are engaged and wish to keep their property separate throughout their union can also set up individual an irrevocable structure vs a Prenup which work 100% of the time in divorce situation whereas a prenup usually creates more problems than it solves; there is nothing more romantic than asking your wife to preplan a divorce with a prenup before you commit to spending the rest of your life together.
10 – Naming Beneficiaries and Distributing Benefits
This is something that is done for the benefit of others, who are usually spouses, children, and relatives; these are the beneficiaries. By creating a one, grantors have certain advantages and can even create incentives with regard to financial planning for children and minor beneficiaries.
One common concern among grantors as they grow older is whether their children and grandchildren could be negatively affected when they inherit a substantial amount of money. When it comes to beneficiaries who are minors, it allows grantors to specify those incentives and conditions that must be met before the trustee can make a distribution. Age is an example of a broad condition; in these cases, a minor must reach certain ages before distributions are made. An incentive would be a specific condition, which could be graduating from high school or from college to encourage that beneficiaries pursue education or careers.
Avoiding lump sum inheritances that may be squandered by potentially not-yet-mature beneficiaries is a popular and wise provision among grantors in the United States.
Guardians can also be nominated for minor beneficiaries when creating an irrevocable structure, and this is a designation that should also be made in a will.
11 – Exclusions
When learning how to create a trust, prospective grantors must think about every angle that could apply in terms of estate planning and distribution of wealth over the next 50 years. One particular angle that certainly merits careful thought is not so much who will be the beneficiaries; it is important to think about who must be specifically left out of distributions.
Similar to leaving people out of a will or disinheriting someone, it can be set up in a discretionary manner so as to designate who should really benefit from the estate and who shouldn’t. Exclusions can be specified in DIY versions, but they must not run afoul of provisions against disinheritance in certain states.
12 – Depositing Assets
Transferring assets into a structure is known as “funding the structure.” Just about any type of asset or property can be transferred, and this includes personal and business assets. Cash, life insurance policies, investment accounts, precious metals, and even companies can be transferred, but grantors should keep in mind that they are ceding ownership to the entity, which means that business and investment decisions will be made by the trustee after consulting with their financial advisor, you.
It can have a home even though a mortgage is charged against it
With regard to real estate, if the property is shared with a business partner in what is known as a tenancy-in-common agreement, your equity share can be added. Personal checking accounts, everyday vehicles that have no luxury or collectible value, 401(k) and retirement accounts, and assets that are not really valuable typically are left out.
If your home has a mortgage, it can still be added and, due to the St. Germain Act of 1982, the bank cannot call your loan due or accelerate your payment schedule with them. If you stop paying your mortgage, however, they can still foreclose on the home because they are still the first lien-holder. What they cannot do is go after other real estate or assets that are properly added.
13 – Jurisdiction and Venue
When choosing the state where the entity will be created, it is important to know about the applicable statutory provisions; this is known as the situs. The significance of choosing the situs cannot be ignored, and this was something that was partially discussed in the second point of this article with regard to the rule against perpetuities. Some states offer stronger asset protection than others; however, when real estate property will be transferred into the entity, the situs should be the same state where the real estate assets are located.
This means people with a summer home in Michigan or a winter home in Florida and Colorado, will likely need to set up more than one structure.
14 – Reasons for it
Protect your assets before entering into a nursing home with an irrevocable structure
Learning how to create an irrevocable structure is mostly a matter of function; understanding the reasons for creating an irrevocable structure and how financial goals will be achieved takes more thought and consideration. When the goals are clearly defined, drafting the agreement is easier.
The most common goals chosen by grantors include: passing wealth efficiently by avoiding the probate process, reducing estate taxation, preserving assets for charities, retaining control over wealth distribution, and protecting assets by keeping them within the family instead of a creditor or nursing home.
15 – Building a Legacy
An irrevocable structure asset protection diagram of the different types of relationships involved. (Click the above diagram to enlarge)
At some point in life, prospective grantors shift their focus from wealth creation to wealth preservation. These structures are not merely for estate planning; they can be used in life to structure distributions to minors as they grow older and start building their lives, or they can also be used to alleviate tax burdens so that gifting to charities can be conducted for maximum benefit.
A properly managed entity can help to build a legacy by providing business continuity over a family fortune across generations. This is how a legacy can be built; financial success does not have to always live in the present, it can also be preserved and protected so that a family can always enjoy its benefits.
We look forward to our visit with you and your professional representatives to assist you with the advancement of your estate planning.
Rocco Beatrice, CPA (Certified Public Accountant), MST (Master of Science in Taxation), MBA (Master of Business Administration), CWPP (Certified Wealth Protection Planner), CAPP (Certified Asset Protection Planner), CMP (Certified Medicaid Planner), MMB (Master Mortgage Broker)
Managing Director, Estate Street Partners, LLC
Riverside Center Building II, Suite 400, Newton, MA 02466
“Helping our clients resolve their problems quickly, effectively, and decisively.”
The Ultra Trust® “Precise Wealth Repositioning System”
This statement is required by IRS regulations (31 CFR Part 10, 10.35): Circular 230 disclaimer: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
The threat of a lawsuit, or the prospect of litigation, sends most people into an emotional state somewhere between panic and outrage, especially if that person hasn’t protected their assets ahead of time. Running a business or getting through the daily routines of personal life can be overwhelming without the added stress of a process server, marshal or sheriff coming to your home or office with a summons and complaint.
Most people have never been involved in a lawsuit, so seeing your name or the name of your business in the caption followed by the word “DEFENDANT” can be unsettling. There are ten things you should know about lawsuits that will help you make the right decisions once the process server leaves.
1. It will not go away on its own. Lawsuits must be taken seriously.
Regardless of how frivolous or inconsequential the lawsuit might seem to be, ignoring it can have serious consequences. Failing to file a formal, written answer to the allegations contained in the lawsuit can result in a default judgment against you in favor of the opposing party. A default judgment means potentially your plaintiff can go to your bank and freeze your account or go to the registry and put a lien on your home or rental property. You won’t find out about it until checks start to bounce and you “swear there was at least $10,000 in that account.”
2. That ticking sound is a clock.
The defendant in a lawsuit must file a formal answer or make a motion within a limited period of time that is set by the laws in each jurisdiction. Getting angry and tossing the lawsuit papers into a corner in your home or office to be dealt with later is a mistake. Some states limit the time to submit an answer to just 20 days or less from the date the defendant is served.
3. I can do this without a lawyer.
Without getting into all of the reasons why representing yourself in a lawsuit is a mistake, and there are many, be aware that the laws in some states, such as New York, require that an attorney appear on behalf of a corporation that is a defendant in a lawsuit. Yes, lawyers cost money that most people or small businesses cannot readily afford, but lawyers know the defenses allowed under the law and the procedures that to follow to avoid a costly errors.
4. Choose a lawyer you can depend upon.
If you are using an attorney for the first time, make certain your lawyer is familiar with the issues raised in the lawsuit. Attorney’s today are as specialized as doctors; one does not go to a brain surgeon to fix a broken leg. Ask the lawyer how many lawsuits like yours he has taken to verdict. Lawyers who settle most of the cases they handle might be good negotiators, but you also want to know that the attorney you choose can handle a trial if one is necessary.
5. Be honest with your lawyer.
The second worst mistake you can make is to attempt to defend a lawsuit without having legal representation. The worst mistake is having an attorney but failing to disclose all the facts in an honest and forthright manner. The lawyer you hire is on your side regardless of how good or how bad the facts and the evidence make you look. Lying to your lawyer, or withholding information because it portrays you in a bad light, will make it difficult for your lawyer to represent you and often times you are doing yourself a disservice because when that information you are hiding comes out in court, your lawyer will be caught off guard with no strong, well-thought out response.
6. Don’t ignore insurance options.
Some types of insurance policies provide coverage in the event of a lawsuit. Automobile insurance or homeowners insurance are two policies with which most people are familiar, but there are other types of insurance, such as malpractice or errors and omissions policies that provide coverage in the event of a lawsuit. In most instances, the insurance company will take the lead, pay for your defense, and often times negotiate a settlement.
7. Listen to the expert you hired.
You are paying your lawyer to give you expert legal guidance, but the money is wasted unless you listen and heed the advice that is given to you. Telling your lawyer how you think your lawsuit should be handled ignores the fact that your handling of the situation is probably what got you into a lawsuit in the first place.
8. Fighting over principle can get expensive and distracting.
Whether you are the defendant being sued or the plaintiff who started the lawsuit, at some point you have to consider exactly what it is that you are fighting about. Does defending or prosecuting the lawsuit make sense economically? If you find yourself spending large sums of money on legal fees, court costs and related expenses that will exceed the amount you will recover if you win, it is probably time to reevaluate your position. Perhaps it is time to stop fighting and consider a negotiated settlement to put an end to the litigation. A lawsuit that goes to trial can easily cost $100,000-200,000. Imagine trying to run your business with a lawsuit hanging over your head for 3 years. The stress distracts you from positive things like growing your business.
9. Don’t assume your legal expenses will be paid by your opponent.
Absent an agreement, such as a contract or a law requiring the losing party in a lawsuit to pay the other party’s legal fees, the parties are responsible for their own costs of defending or prosecuting a lawsuit in the United States. Even if you have a contract that states the loser in a dispute will pay legal fees, it is rare that courts award full legal fees.
10. Expect to be in it for the long haul.
People want lawsuits to end quickly so they can go about their normal lives and business, but answers, counterclaims, motions and discovery can take months or, sometimes, years to complete. Lawsuits begin with a flurry of activity that dies down as the case progresses beyond the initial pleadings establishing each party’s position. The pace picks up again months later as each side engages in depositions and other discovery procedures. Patience and trusting in your legal representation are keys to lawsuit success.
Bonus Tip: When You are Being Sued
Evaluate your options. Most lawyers will tell you that you cannot take action to protect assets once you know there might be a lawsuit coming. Most lawyers tell you this because they don’t fully understand fraudulent conveyance and how to manage the resulting 4-5 years statute of limitations on asset transfers. If there is an opportunity to make it difficult for someone to sue you – even late in the game – it could put you in a position to negotiate with your attacker and thus minimize the pain, stress, costs, and distraction that a lawsuit can bring.
Learn about the "latest inside secrets to wealth-building, tax-saving tips and strategies" for your secure financial roadmap...PLUS you'll receive a FREE downloadable eBook on precisely how the Ultra Trust® - the Irrevocable Trust Asset Protection program developed by our Expert Estate Planner - can save you thousands of dollars of legal fees and hundreds of hours of time by avoiding lawsuits; legal loophole to reduce your taxes; secure your privacy, preserve your money, and protect your assets.
Many business owners believe that they can simply incorporate their businesses into an Limited Liability Company (aka LLC) and they’ll achieve LLC lawsuit protection for their personal assets. However, that is an extreme oversimplification of the law and at the core of misleading consumers by the “LLC farms” out there. Lawyers should know that if a corporation or LLC owes a client money, they are allowed to sue the owners, asking the judge to pierce the corporate veil. Studies have shown that American courts disregard the corporate entity to hold shareholders liable for corporate debts in nearly 50% of cases.
As one Illinois Court noted, piercing the corporate veil is both the number one issue that arises in business litigation lawsuits and one frequently misunderstood. If business owners are not meticulous in following corporate formalities, they could find himself forfeiting corporate protection.
Piercing the corporate veil means that a judge may reach beyond the protection provided by the corporate form to hold a business owner personally liable for the company’s debts. There are two common reasons that this happens: under-capitalization and commingling of corporate assets.
If a person starts a business that is likely to incur a significant debts, such as a real estate company, but does not secure adequate insurance or provide funding to pay possible claims against the company, a judge may find that the corporate shareholders are personally liable on the debt resulting in the lack of LLC lawsuit protection. Under-capitalization will most likely lead to veil piercing when it is combined with the failure to observe corporate formalities. To receive protection, a company must hold shareholder meetings and keep minutes. It must have business bank accounts used for business purposes only. Shareholders must not use personal accounts to make business purchases or vice versa.
One of the reasons that piercing the corporate veil is so dangerous for owners is that it does not attach percentages of liability based on a person’s individual wrongdoing. If corporate formalities are not observed and the veil is pierced, the law treats the corporation or LLC like a partnership. That means all shareholders will be jointly and severally liable on the total debt, even a person who owns merely a single share. The plaintiff can choose to sue whichever shareholder has assets.
A cause of action to pierce the corporate veil is not a new lawsuit. The defendants do not have the ability to attack the underlying allegations in the case against the business, even if the business would have had a viable defense. Piercing the corporate veil is a way of imposing liability for an existing judgment against the business on the owners. Thus, an owner who chooses not to defend a case brought against the company because it is incorporated may come to regret that decision later.
The best way for an individual to ensure that his or her assets are protected is to maintain control rather than ownership. Assets that are owned may be seized by creditors, even a person believes they are protected through the formation of an LLC or corporation. Even funds in a revocable trust do not have protection: If the trust may be revoked by the individual who created it, the assets within may be taken by creditors. Only a properly drafted, executed, and funded irrevocable trust provides 100% asset protection.
When a Grantor establishes an irrevocable trust, he transfers ownership of the assets into the trust. A trustee will invest and distribute the assets in accordance with instructions provided by the trust documents. Income generated by irrevocable trusts may provide income to the Grantor, but the Grantor doesn’t own the assets. Subject to Medicare’s five year “look back” period, property held in an irrevocable trust may not be used to satisfy a judgment against the grantor or against the trust beneficiaries.
Below are actual court cases from all over the country highlighting these facts:
The Illinois Court of Appeals applied the concept of piercing the corporate veil to a personal injury case where the plaintiff, Peetom, fell and injured himself while walking on The Swanson Group’s parking lot. She filed a lawsuit for her hospital bills and pain and suffering, and her husband filed a loss of consortium claim arising out of the accident. The trial court judge entered a default judgment against The Swanson Group in 1997. Approximately one year later, the company was dissolved by the Secretary of State for failure to comply with taxation and annual report requirements. The plaintiffs later filed an action against The Swanson Group’s owners as individuals.
The defendants argued that the two year statute of limitations for bringing a personal injury action had expired and therefore, they could not be liable. The original injury occurred on January 20, 1993. The lawsuit against The Swanson Group was filed on January 11, 1995, shortly before the statute of limitations expired. However, the suit against the owners was not filed until September 2000. The trial court granted the defendants’ motion to dismiss, but the plaintiffs appealed.
The Court of Appeals explained that piercing the corporate veil is not a cause of action like negligence, and therefore is not subject to the same statute of limitations. Piercing the corporate veil is an equitable remedy, a way of imposing liability on corporate shareholders for fraud or injustice that the corporation allowed or caused. As such, the action could be brought within five years after the corporation was dissolved, as provided by Illinois law on shareholder liability for defunct corporations. Neither the corporate form nor the fact that the defendants were not named in the original lawsuit protected them, thus resulting a failure of LLC lawsuit protection.
2) LLC Lawsuit Protection Case: Las Palmas Assocs. v. Las Palmas Ctr. Assocs.
Las Palmas Assocs. v. Las Palmas Ctr. Assocs., 1 Cal. Rptr. 2d 301(1991): A California Court of Appeals extended the concept of piercing the corporate veil to sister corporations owned by the same parent company. The case arose out of the sale of a large commercial shopping complex.
The contract stated that 84 percent of the complex would belong to Villa Pacific Business Company and the remaining 16 percent belonged to Gribble, president of Hahn Devcorp. Devcorp was a wholly owned subsidiary of Earnest W. Hahn, Inc. Several years later, both companies merged into subsidiaries of the same parent company. The same two individuals sat on the board of directors of both Hahn and Devcorp. By 1983, Hahn’s staff conducted business for Devcorp, leaving Devcorp a shell of a corporation. All of Devcorp’s assets had been liquidated, and all employees and directors fired. At trial, Hahn’s value was more than one hundred times that of Devcorp. The jury found that Devcorp was an alterego of Hahn and, as a result, Hahn should be liable for Devcorp’s debts.
The public policy behind allowing courts to pierce the corporate veil is that, in a situation where there is so much unity in ownership and interest between the company and the owner that the two are not really separate legal entities, it is not fair for the owner to avoid liability. These same principles apply when the owner of a corporation is another corporation. The court noted that there are many situations where a corporate entity is disregarded, and a corporation is treated as merely part of the parent corporation. In these cases, it is only equitable that veil piercing be allowed, thus resulting a failure of LLC lawsuit protection. The same line of thinking applies to two subsidiaries controlled by the same parent, if that parent company does not observe corporate formalities.
3) LLC Lawsuit Protection Case: Agai v Diontech Consulting
Agai v Diontech Consulting, Inc., 2013 NY Slip Op 51345(U): In this NY Supreme Court case, the defendants were not shareholders of the company in question, Diontech Consulting, Inc. However, they ran the company for their own gain, so it would not be fair to allow them to benefit from hiding behind the corporate form. The judge pierced the corporate veil and imposed liability.
The undisputed evidence showed that the defendants did not observe any corporate formalities in running Diontech. Two of the three, the Antoniou brothers, admitted being unaware of any records or books showing corporate operations. They could not produce any board meeting minutes, pay stubs, bank account statements, or other documentation showing the company’s existence as a separate entity. The brothers commingled business assets with personal funds and used the corporate bank accounts for personal expenses. Both brothers were paid for assisting in settling corporate affairs when Diontech was dissolved, yet both claimed no knowledge of what happened to the corporate assets, including vehicles, furniture, and computers. An accountant for the firm testified that all three defendants routinely took money from the corporate bank account and did not pay it back. No tax return was filed for Diontech because the defendants never provided the required documentation. The evidence suggested that Diontech was a sham corporation, created for the sole purpose of avoiding legal liability.
The standard in New York for piercing the corporate veil whether an individual hid behind a corporation to perpetuate an unjust or wrongful act against the plaintiff. The judge found that the defendants used Diontech to avoid paying creditors. The principals here used the plaintiff’s payments to Diontech and materials purchased for the plaintiff’s job to work on other projects. As a result, it would be unjust not to hold them liable, thus resulting a failure of LLC lawsuit protection.
4) Ted Harrison Oil Company v. Dokka
Ted Harrison Oil Company v. Dokka, 617 N.E.2d 898 (1993): An Illinois Court of Appeals found that incorporation did not protect the assets of a company owner who followed no corporate formalities and treated the company as an extension of himself. Ted Harrison Oil Company (“Harrison”) filed a lawsuit asking the judge to hold Dokka personally liable for a debt owed to him by Dokka’s company, Hess Tire. Dokka purchased all shares of Hess Tire in 1972. He later sold shares to two investors, but never created or printed stock certificates. The company was initially profitable but lost a significant amount of money between 1972 and 1981.
A review of the corporate books showed no shareholder meeting minutes, although Dokka claimed the shareholders met and were involved in the business. Hess Tire operated in a building personally owned by Dokka and paid no rent. A corporate account paid property taxes for the building. Dokka even admitted that he did not follow corporate formalities. The company’s bookkeeper testified that another shareholder, Walden, had her write checks to herself on the business accounts, which Walden cashed, keeping the money. Dokka testified that there was no business purpose for these checks or other loans and bonuses paid to Walden. Walden moved tires from Hess Tire’s inventory into storage to avoid paying creditors. Although Dokka claimed no knowledge of Walden’s activities, the Appeals Court pointed out that the deception would have been uncovered sooner if corporate formalities had been followed. Since Dokka did not treat Hess Tire as a separate business entity, he was not entitled to the protection of incorporation laws. The court held Dokka responsible for Hess Tire’s debt to the plaintiff, thus resulting a failure of LLC lawsuit protection.
5) Buckley v. Abuzir
Buckley v. Abuzir, 2014 IL App (1st) 130469: Plaintiffs John Buckley and Mama Gramm’s Bakery, Inc. won a case against Silver Fox Pastries, Inc. for violation of The Illinois Trade Secrets Act. After they realized that they were not able to collect the judgment from Silver Fox, which had no assets, the plaintiffs asked a judge to pierce the corporate veil and enter a judgment against the owner, Haitham Abuzir. Although the trial court dismissed the Complaint, on appeal, the Illinois Court of Appeals reversed, finding that the plaintiffs had alleged sufficient facts to allow the trial court to pierce the corporate veil.
After incorporated, Silver Fox never filed an annual report with the Secretary of State. It had no directors, no officers, no corporate records, and no corporate books. The company never held a shareholder or director meeting. No stock was issued, and no dividends paid. Silver Fox never made any payments on loans granted to it, and at no time had assets exceeding its debts. No corporate formalities were ever observed. On the other hand, Abuzir ran Silver Fox, maintaining 100% control over the company. Abuzir did not dispute the plaintiffs’ allegation that he and Silver Fox were, in effect, the same entity. Instead, he claimed that the corporate veil could not be pierced because he was not an officer, director, employee, or shareholder of the corporation.
After reviewing the law in other states, the Court concluded that stock ownership was not required to pierce the corporate veil. A person who exercises considerable authority over a company may be legally considered the equitable owner and, therefore, a judge can pierce the corporate veil to hold that person liable for corporate debts. Abuzir could not avoid liability by refusing to appoint himself as director or officer and failing to issue himself stock, thus resulting a failure of LLC lawsuit protection.
6) Associated Vendors, Inc. v. Oakland Meat Co.
Associated Vendors, Inc. v. Oakland Meat Co., 210 Cal.App.2d 825 (1962): A California appellate court found that a person could be held personally liable for corporate debts when the corporation was merely the “alter ego” of the individual. The case arose out of a commercial lease between Associated Vendors, Inc. (“Associated”) and Oakland Meat Company (“Meat”). and Oakland Packing Company (“Packing”). After Meat leased the premises in question from Associated, the company turned around and leased it to Packing for only a portion of the rent they had agreed to pay Associated. Associated asked the judge to hold the owner of the companies responsible for the debt owed, based on the fact that the corporations were alter egos of the owner and not treated as separate legal entities.
The company’s owner, Zaharis, loaned personal funds to Packing without a first holding a corporate meeting or requesting a shareholder vote. When it was time for the loan to be repaid, Meat issued a loan to Packing, and the funds were transferred to Zaharis. Meat applied for and received business permits used by Packing. Zaharis and Meat’s two other officers worked for Packing without receiving compensation; however, Meat continued to pay their salaries. The lawyer who negotiated the commercial lease testified that he was unaware that Meat and Packing were separate companies. A butcher who delivered products to Packing was told to bill Meat instead. Invoices sent to Meat were paid by Packing and vice versa. Several other vendors that did business with both corporations testified they were unaware that Meat and Packing were two separate legal entities. Because the directors commingled assets, did not observe corporate formalities such as holding meetings and keeping minutes, and they treated the companies as one, the court held that the owners were personally liable for the corporations’ debts.
7) Kinney Shoe Corp. v. Polan
Kinney Shoe Corp. v. Polan, 939 F.2d 209 (4th Cir. 1991): The United States Fourth Circuit Court of Appeals found that the business owner, Polan, was responsible for paying a corporate lease entered into on behalf of his company.
In November 1984, Polan filed paperwork with the Secretary of State to create Polan Industries, Inc. He incorporated Industrial one month later. Neither corporation elected any officers, held organizational meetings, or issued a single share of stock. Both corporations were created for the same purpose.
Shortly after the first business was established, Polan began negotiations with Kinney Shoe Corp. to sublease a building owned by a third party. Although the parties signed the sublease in April 1985, their actual agreement started in December 1984. Ten days after the sublease with Kinney was signed, Industrial subleased half of the property to Polan Industries. Polan signed the sublease on behalf of both corporations.
Industrial owned no assets other than the sublease, not even a bank account. The corporation had no income, other than the payments Polan Industries owed under the sublease. When the first lease payment to Kinney became due, Polan issued a check on his personal bank account. This first payment was the only one Kinney received from either company. In 1987, after receiving no further payments, Kinney sued Industrial and obtained a judgment of more than $166,000. Kinney then sued Polan personally to collect its judgment. Despite the long-established rule that the stockholders are not responsible for corporate debts, the Court held that it was appropriate to reach beyond the corporate veil and hold Polan personally liable for the judgment against Industrial because Polan did not follow corporate formalities. Thus, the corporate veil did not protect Polan’s personal assets and the Court upheld the judgment against Polan, thus resulting a failure of LLC lawsuit protection.
8) Minnesota Mining & Manufacturing Co. v. Superior Court
Minnesota Mining & Manufacturing Co. v. Superior Court, 206 Cal. App. 3d 1027 (1988): The California Court of Appeals held a shareholder responsible for paying a corporate debt after they pierced the corporate veil, even though the company had other shareholders. The case also clarified that, when the corporate veil is pierced, a shareholder may be held liable for one hundred percent of the debt, not a percentage equal to his proportionate share in the company, even if he owns only one share of stock.
Maximum Technology (“MaxiTech”) sued several defendants, including Minnesota Mining and Robert Schwartz for more than $2 million. Schwartz and MaxiTech settled their claims for only $20,000, and Minnesota Mining filed a suit after the judge appealed the settlement. The settlement was based on the erroneous conclusion that Schwartz, as a 40 percent owner of one of the companies being sued, was only responsible for paying 40 percent of that company’s liability if the corporate veil was pierced. However, that is not how the law works. If a company forfeits the protection of the corporate veil by not observing corporate formalities, all owners become jointly and severally liable for corporate debts, as if the business had never incorporated. It is not relevant whether a shareholder owns one share of a company in that scenario or all but one. In this particular scenario where only two of the company’s three shareholders were sued, the two of them would have to bear the burden of the entire corporate debt. As a result, the settlement agreement was based on a faulty assumption of law and could not have been found to have been negotiated in good faith, and Schwartz not only lost the benefit of the corporate veil, but also the advantageous settlement he negotiated.
Protect your assets for yourself and your children and beneficiaries and avoid tax dollars. Assets can be protected from frivolous lawsuits while eliminating your estate taxes and probate, and also ensuring superior Medicaid asset protection for both parents and children with our Premium UltraTrust Irrevocable Trust. Call today at (508) 429-0011 for a no-cost, no obligation consultation and to learn more.
Rocco Beatrice, CPA, MST, MBA, CWPP, CAPP, MMB – Managing Director, Estate Street Partners, LLC. Mr. Beatrice is an “AA” asset protection, Trust, and estate planning expert.
Learn about the "latest inside secrets to wealth-building, tax-saving tips and strategies" for your secure financial roadmap...PLUS you'll receive a FREE downloadable eBook on precisely how the Ultra Trust® - the Irrevocable Trust Asset Protection program developed by our Expert Estate Planner - can save you thousands of dollars of legal fees and hundreds of hours of time by avoiding lawsuits; legal loophole to reduce your taxes; secure your privacy, preserve your money, and protect your assets.
Fraudulent Transfers, Civil Conspiracy, Uniform Fraudulent Transfer Act
What are Fraudulent Transfers? What is Civil Conspiracy? What is the Uniform Fraudulent Act state regarding LLC and creditor claims? Discuss the Single Member LLC within the context of owning public shares in a stock and its role in asset protection.
Under the Uniform Transfer Act you would be committing a crime, see Section 19.40.041
“…(a) a transfer made or obligation incurred by a debtor is fraudulent as to a creditor whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation: (1) with actual intent to hinder, delay, or defraud any creditor of the debtor…”
Watch the video on 'Fraudulent Transfers, Civil Conspiracy, Uniform Fraudulent Transfer Act'
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Fraudulent conveyance has to do with transferring assets at less than the “fair cash value” thereby defrauding a potential creditor or the intentional divesting of assets which become unavailable for satisfaction of the creditor’s claims. Fair cash value means cash or near cash value at the time of transfer, not the price you paid for the asset.
For example, you transfer your portion of your equity in your home to your wife for $200.00 and the fair cash value of your portion of the equity was $250,000 (total value of the home was $500,000) or you transfer title to your Mercedes to your brother for $100.00. Additionally the IRS would claim that such a transfer is a gift subject to a gift tax return and assess a penalty for the non-filing of Form 709 (PDF) United States Gift (and Generation-Skipping Transfer) Tax Return.
What is Civil Conspiracy?
The “civil conspiracy theory” has been defined by the courts as (1) an agreement (2) by two or more persons (3) to perform overt act(s) (4) in furtherance of the agreement or conspiracy (5) to accomplish an unlawful purpose or a lawful purpose by unlawful means (6) causing injury to another.
To be convincing, the creditor must allege not only the conspirators committed the act but also the act was tortious in nature. The conspiracy alone is not enough to trigger a claim for civil conspiracy without the underlying tort. Lately, however, advisors have been dragged into the creditor claims as co-conspirators for suggesting and implementing everyday common asset protection strategies. This has made me more cautious, making sure that I don’t get dragged in to my own legal nightmare.
Example of Single Member LLC Membership Units and Shares in a Public Stock
SINGLE MEMBER LLCs should be avoided. The example I can use is this: If you own 1,000 shares of General Motors it’s considered a personal asset subject to a creditor claim. If the claim is perfected by litigation in favor of the creditor the owner of the 1,000 shares of General Motors will have to transfer those shares to the creditor in satisfaction of his claim. Owning single member units of an LLC is not any different. The Owner of the LLC membership units is equivalent to owning the 1,000 shares of General Motors and therefore subject to a perfected creditor claim.
Asset Protection: Placing Title of Assets in Another Legal Entity
THE CONCEPT OF ASSET PROTECTION includes the possibility of placing title in certain assets in the name of a less vulnerable spouse or other family members, or a legal entity. One should be very attentive in transferring title without an open invitation to a “incorrect transfer” claim against the asset transferred or the possibility of death by the spouse or family member, or possible dissolution of the marriage, or a court judgment.
The most common methods of holding assets by INDIVIDUALS:
Joint Tenancy with right of survivorship
Tenants in Common
Tenancy by the Entirety
LEGAL ENTITIES (Artificial person created by application of law):
Limited Liability Company
Corporation under Chapter “C”
Corporation under Sub Chapter “S”
Revocable Trust (There are many Revocable Trust variations, since a Trust is nothing more than a Contract)
Irrevocable Trust (There are many Irrevocable Trust variations, since a Trust is nothing more than a Contract)
To learn more about avoiding conveyance rules and how to avoid civil conspiracy theories when repositioning assets and implementation of precise asset protection systems speak with an experienced and knowledgeable financial planner and advisor in these matters such as Estate Street Partners offering free initial consultations.
I always caution against simply speaking with only an attorney and only an accountant in complex financial planning with regards to single member LLC scenarios, partnerships in Limited Liability Company formations, regulations surrounding conveyance and civil conspiracy and asset protection. It’s best to develop or consult with a group or team consisting of an attorney, accountant and financial planner or advisor to offer you the best, well-rounded protection. You will gain a more thorough understanding of the nature of asset protection from LLC formations to avoid incorrect conveyance and civil conspiracy judgments.
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“LATE-R” is already too “LATE.”
“If you’ve taken NO steps to protect yourself, your wealth, and your family from thieves, con artists, ruthless greedy lawyers, overzealous bureaucrats; you have underestimated the abilities of these shrewd, ruthless, invasive, money-hungry, predators.” – Rocco Beatrice, CPA, MST, MBA
It’s the concept of protecting and preserving one’s assets from frivolous, illogical, ill motivated, more often than not, devastating catastrophic claims against your wealth, designed to destroy your current and future lifestyle. In short, they want what you’ve got and they want to inflict maximum pain.
Asset protection has two goals:
To make the enforcement of judgments against your protected assets virtually impossible, and
To allow the “owner” of protected assets to retain engineered “control” over his assets
How Good Asset Protection can Protect Your Privacy:
“Identity Theft” is the fastest growing financial crime in America – source: the U.S. Secret Service
There are literally hundreds of ways to protect your assets. Some are just common sense. Don’t flash your money around; don’t talk too much at parties, etc. By implementing a properly crafted asset protection plan, your creditor will have to jump through several hoops, before he even finds your money. A contingent fee predator lawyer will want an easier target.
There are approximately 950,000 lawyers. Just go through your own yellow pages. Most of them live on what they can “squeeze out of you.” Don’t become a statistic. Learn from other people’s mistakes. Learn how to become every contingency-fee lawyer’s nightmare.
The Internet is spyware on steroids and can be used as invisible wealth snatchers. Information collection about you, your associates, your family, your finances, has been compromised by the enhancement of data gathering technology through the internet. “Even if you’ve got nothing to hide” your very basic privacy can be had for a few bucks by thieves, con artists, ruthless greedy lawyers, and overzealous bureaucrats.
How “paranoid” are you? How “paranoid” should you be? the problem is not the zillion merchants collecting data about your spending habits. The problem is who’s collecting the data without your knowledge. And, for what purpose?
A Good Plan will:
Protect your current and future lifestyle
Discourage litigation and promote settlements, in your favor
Keep the ownership of your assets confidential and hard to find
Eliminate the need of prenuptial agreements
Internationalize your investments as a hedge against the unexpected surprise
Spread out your control over your most valuable assets
Help you in getting a fresh start, if you ever became insolvent in any of your other assets
Hedge against potential political, economic, and personal instability
Chartered Blueprint of Wealth Preservation and Steps to Protecting Assets:
What are your financial goals?
Think about each of your personal/business assets that you need or wish to protect
Will there be domestic and/or international platform(s)?
*Customized Hybrids, i.e. LLC, Family LLC, Limited Partnership, Family Limited Partnership or General Partnership is owned by an UltraTrust®
* = My preferred structures
Foreign Platform(s)1 (please read note – 1)
Foreign Bank Account
International Business Company
Foreign A/P Trust
Foreign Security Trust
Foreign Limited Liability Company (FAPT)
Offshore Uni Trusts
Offshore Mutual Fund
International Trading Company
Multi-Currency Bank Deposits
Foreign Credit Card
Foreign Stock Trading Account
Registered Foreign Office
Registered Foreign Sales Facilities
Note – Use “Good” planning NOT “Secrecy.” Rely on “Law” NOT “Secrecy.”
1**Watch out for Foreign and Offshore Scams & Practitioners**
There’s a thriving industry of “offshore practitioners” advising IRS definition of “U.S. Person” to set-up offshore bank accounts and other financial structures thinking that they have “just become NON-U.S. Taxable.” They persuade the U.S. Persons to trust the “Iron Clad” secrecy laws of the jurisdiction and not to report ownership of their funds or structures to the Internal Revenue Service and other agencies. This is pure and simple tax fraud and gets many U.S. Persons in trouble.
WARNING: Complexity(ies) of U.S. laws requires many tax reporting and other various reporting requirements. Protect yourself, make absolutely sure that you seek competent professional expert legal, accounting, and tax advice before you consider implementing your foreign A/P plan. Contact Estate Street Partners and get the facts for proper U.S. reporting procedures.
Authorities are looking for NON-COMPLIANCE, not for those who report and comply. We believe in full disclosure. If there’s no reporting form, we make-up our own and file.
To my knowledge, there are no laws prohibiting you from protecting your hard-earned money with offshore international structures, as long as you file all proper documentation with proper reporting agencies. When protecting your assets / wealth preservation plan is professionally and carefully implemented by competent professionals, the foreign side of life becomes significantly enhanced. Most international jurisdictions do not recognize U.S. based creditor judgments.
For example: a proper utilization of a foreign bank account should be part of protecting your assets / wealth preservation plan, it’s the less complex and the most useful part of protecting your assets / wealth preservation strategy. Your cash will become an “A/P fortress,” just make sure that you check the box on your Form 1040 schedule B, and file TD F 90-22.1. NO BIG DEAL. There is absolutely no downside to proper reporting on the existence of a foreign bank account.
No Financial plan is ever 100% bullet proof: Know These Facts about a good plan
You can’t lose your assets without first being sued and them winning the lawsuit. Winning and getting the money are two separate issues.
Implement your A/P strategy when times are good. It’s too late when the crap starts flying. You will have to deal with several “fraudulent conveyance” laws – that is, if you had some warning, or you merely became aware (real or potential), or you should have been aware that someone was going to potentially sue you. By implementing any A/P plan, you made your assets unavailable to satisfy creditor claims. Therefore, you may be found guilty of a “fraudulent conveyance.” The judge may set aside your attempt to hide your assets and hand it over to your creditors. In addition, the judge may decide to throw the book at you with other financial and possibly other consequences. PLAN EARLY, when the sea is calm. Don’t become a statistic.
Your creditors can’t take what you don’t have. Don’t put everything in your name. Don’t be so obvious.
What your creditor’s don’t know becomes your asset. Don’t volunteer information, don’t flaunt your wealth, don’t talk too much at parties, don’t tell them your business, don’t tell them how smart you are.
No country in the world will automatically honor a judgment against you. Outside the United States there are no contingency lawyers. Your creditor must re-litigate his case in the foreign country. Your creditor must put up a bond. Your creditor must pre-pay attorney fees. If your creditor loses his case he must pay your attorney fees. Finally, your creditor must prove that the laws of their country are invalid, the judge is a bum, and that the whole country should disappear into the sea.
There’s a greater chance that you will be sued more times than you will have a hospital stay.
Your Individual Retirement Account (IRA) is not protected by ERISA. Your Individual Retirement Account is usually the second asset to be attacked, behind your cash and investment account. Your IRA is an easy target because (1) It’s always in the United States and (2) Your IRA is usually in cash or near cash.
The United States is the only country that permits contingent fee litigation.
There are approximately 950,000 lawyers. Just go through your own yellow pages. Most of them live on what they can squeeze out of you. Don’t become a statistic.
For many self-made, hard working citizens, the “American Dream” can become the “American Nightmare.” Exorbitant taxes, lawsuit-friendly courtrooms, persistent predator plaintiffs, and contingent-fee clever lawyers are a constant threat to everything you’ve worked so hard to accomplish. It could all evaporate before your very eyes.
Take personal responsibility. If you’ve taken no steps to protect yourself, your wealth, and your family from thieves, con artists, ruthless greedy lawyers, overzealous bureaucrats…you have underestimated the abilities of these shrewd, ruthless, invasive, money-hungry predators.
Asset Protection in Divorce: How to Protect Assets From Divorce
Will learning about asset protection in divorce be a waste of time if you live in a community property state? How does one protect assets before or during a divorce? Common steps to divorce asset protection for gifts, family heirlooms, and real estate. You will need to consult with a divorce lawyer, professional appraiser, and estate planner. Definition of Equitable Distribution and fair market value of assets in divorce.
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How to protect your assets during a divorce? Protecting assets through a divorce can be a complex financial process further complicated by the emotional devastation. If you are going through a divorce it may be important to you to determine ahead of time what your assets are and how you will protect them from your spouse.
The first step will be to hire a lawyer familiar with the laws for dividing property in your state. Good legal council will prove invaluable in defending your claims to property and can give you names of appraisers and accountants to help your case. Your divorce lawyer will also assist you on how to remove any Powers of Attorney granted to your spouse for control of your property and finances.
There are several steps you should consider when trying to protect your assets during Divorce:
Identify everything that was given to you as a gift or family heirloom.
Identify community property.
Hire a professional appraiser.
Figure out how you will split retirement and physical assets.
Identify Gifts and Family Heirloom to Protect Assets During Divorce
A camera will prove to be your best friend during a divorce. You should make a list of all items which were given to you before and after the wedding and take pictures of these items prior to removing them from the residence. Once you have compiled your list you should remove all your personal items to a location not easily accessible to your spouse.
Your spouse will be within their rights to claim any items you leave behind in the residence and do not immediately claim. If you or your spouse left the residence voluntarily, either of you is entitled to return at any time and retrieve belongings. If locks have been changed, except in the case of a court order, you are within your rights to have a locksmith open the doors. Your next step will be obtaining, if possible, written proof of who gave you the items and when they were received.
Community Property Assets
Community property of assets refers to the belongings shared by you and your spouse, such as the furniture, pots and pans, etc. It is important to take pictures of these belongings as well before you remove the items you wish to claim as your own. Photographs are especially valuable if there are expensive items you would like to have but did not have the ability to move and you feel your spouse may try to take them. All photographs should be kept in a secure location not readily accessible by your spouse.
Hire a Professional, Independent Appraiser for Divorce Asset Protection
Division of property during a divorce is determined by the fair market value of the disputed items to ensure one party is not being favored over the other during settlement. An appraiser will be necessary to determine accurate estimates, although you should consult your lawyer on finding a qualified individual.
Using the same accountant who handled your assets in the past may seem suspicious and a court may order another appraisal or rule in favor of your spouse’s accountant. It is critical that an appraisal be straightforward and unbiased for the protection of assets during Divorce.
Estate Planner Consultation to Divide and Protect Assets During Divorce
When considering how to divide assets prior to divorce settlement, it is wise to consult a professional estate planner or financial analyst. For example, if you are thinking about selling your home it may be wise to do so prior to settlement since you are entitled to deduct up to $500,000 of the sale from capital gain taxes.
Selling the home after the divorce is final and reduces your benefit to only half of the sale price. Retirement assets and stocks should also be discussed. If you and your spouse choose to split the retirement benefits you must sign a Qualified Domestic-Relations Order (QDRO) which notifies the pension sponsors how to pay the benefits. Although you cannot take stocks in your spouse’s name you may be entitled to the proceeds once they are sold.
Exceptions to the Rule on Divorce Asset Protection
Some states, such as New York, are known as “equitable distribution” states. “Equitable” mean “fair” and assets will not be divided right down the middle based on their fair market value. Division of assets according to New York Divorce law states that all property obtained prior to the marriage still belongs to the individual and all property obtained afterwards will be distributed by the court based on established guidelines.
The factors a court considers in equitable distribution states for divorce assets are:
The difference in income and property from when the marriage began to the date divorce was filed.
The age of both individuals and how long they were married.
The needs of a parent who has won full custody of children involved (i.e. will they need the house to properly care for the child?)
Any loss of pension or inheritance.
What contributions the parties made to acquire the property.
Future earning potential of both parties.
If you are considering divorce it is wise to consult a lawyer as soon as possible to ensure the protection of your assets and help you understand your rights as they pertain to individual state law.
Estate Street Partners is available for consultation on how to protect your assets during and before a divorce. Please call our toll-free line at 888-93ULTRA (888-938-5872).
Read more articles on hiding your assets, how the rich hide their assets, offshore asset protection, getting sued and hiding assets, frivolous lawsuits, grantor trusts, and estate planning and trust:
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An “A/P TRUST” is nothing more than an unchangeable (irrevocable) to the outside world “CONTRACT” between the person who wishes to protect his property (the Grantor) the person who will manage the money (the Trustee) for the benefit of all Beneficiaries which may include the Grantor, his spouse, children and grandchildren.
The Contract requires the transfer of property from the original owner (Grantor) to a legal entity for the purpose for which the Contract was created.
What’s the distinction between Grantor, or Non Grantor?
A Grantor Trust take a special place within the tax code and for tax purposes is treated as a disregarded legal entity. The disregarded entity is “Income Tax Neutral” meaning that the original Grantor retained strings attached so that for purposes of the IRS he retains the property in his complete control, thus he did nothing for the purpose of protecting your property. Income tax benefits and income tax expenses are retained by the Grantor, thus he pays income taxes on the income of the entity. It’s a “pass-through” to his form 1040 i.e. real estate tax deduction and mortgage interest deduction on his person income tax return.
Revocable or Irrevocable, what does that mean?
Revocable is when the original person with the property transfers (repositions) the property to the entity with strings attached. The Grantor, the Trustee, and the beneficiary are the same person. Effectively you have kissed yourself on the hand and blessed yourself as the Pope. A revocable trust does absolutely nothing for protect your wealth. Many lawyers recommend revocable versions for avoiding probate, recognizing that the entity is not worth the paper it’s written on for protecting assets against frivolous lawsuits and the avoidance of estate taxes.
An irrevocable version is when the Grantor (the person with the money) gives-up complete control to an independent Trustee who in turn will use his judgment as Trustee to manage the property for the beneficiaries. The fiduciary relationship of the Trustee is to the protection of the assets at any cost. The Trustee must protect and must diligently invest under the prudent man rules, he cannot ever deal for himself. The courts do not look favorably on dereliction of duties while serving as Trustee. An irrevocable version is the only significant method to protect assets and for avoiding frivolous litigation, avoiding the probate process, avoiding estate taxes, and is the only device for avoiding the mandatory spend-down provisions for qualifying into a nursing home.
A domestic irrevocable A/P entity when combined with a Limited Liability Company is an impenetrable fortress, short of a foreign entity. A foreign entity is the Rolls Royce of asset protection – it’s expensive to set up and maintain, while the domestic irrevocable version with an LLC is the Tesla – not inexpensive to set up, but very low maintenance costs while providing 99.8% of the protection of the foreign version.
Watch the video on 'Can a Trust Be Sued – Land Trusts Myths for Asset Protection'
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The response to “Can a Trust Be Sued?” question has to be answered with reply of, anyone can sue anyone or anything at anytime, but the real question should be, if it gets sued will it hold up in a court. The right kind of trust, with the right trustee, written the right way, and with assets that are transferred properly will hold up. However, simply put, a land trust is a “revocable” living trust with unique features when it comes to “hiding” the true owner of property in the trust. (*Land trusts can also be irrevocable trusts which could provide terrific asset protection due to the fact that the client no longer owns the property. Clients use land trusts to keep the property in their possession and hide them not to give assets irrevocably out of their estate (which may have gift and income tax consequences)).
You’ll know that I get disgusted when I hear “asset protection” advisors tell clients that a good way to protect assets is by hiding them. There is NO legal way to “hide” assets. Having said that, land trusts are sold on this very concept.
Because asset protection is such an important topic today, marketers have picked up on this and are heavily marketing land trusts as asset protection tools. Why? To generate legal/administration fees. The problem is that a client or advisor reads that land trusts can be an affective asset protection tool and blindly jump in to use them not knowing that there is no real asset protection provided.
Can a Trust Be Sued: The Problem with The Land Trust?
As stated above, a land trust is a “revocable” trust. Asset protection 101 is that revocable trusts provide NO asset protection from creditors. For example: if Dr. Smith has a Christmas party at his house where he is serving alcohol and someone drinks too much and drives home and gets into a terrible car accident killing three people in another car, Dr. Smith is going to be sued. As a general statement, ANY assets in his own name or ANY assets in a “revocable” living trust will be at risk to the lawsuit that will ensue.
The Sale’s Pitch of the Land Trusts
The sale’s pitch with land trusts is that everyone should have their real estate in a land trust because when a plaintiff suing you (or thinking of suing you) does a search to find out what assets you own, they will not be able to “find” the assets you own in a land trust because they are affectively “hidden.”
I found one website which gave an example of a client getting in a car wreck where the client was sued for $3,000,000. The client had $1,000,000 of auto insurance and because the client had his house in a “land trust” the plaintiff’s lawyer was not able to find the house and therefore, settled for the $1,000,000 of insurance coverage instead of going after $3,000,000 in assets.
The above example is absolutely absurd and one of the reasons of the importance of this newsletter to inform you what is reality. Remember that I had several people e-mail me and basically tell me that they thought land trusts would “asset protect” their homes. Land trusts technically provide NO asset protection.
Can a Trust Be Sued: “Hiding Assets” with a Land Trust
Land trusts only temporarily hide your assets so that IF a personal injury attorney does a search to find your assets, the attorney will not be able to do so from an initial cursory search. In the car crash case, the client is going to be sued and the assets owned by the client will be found.
Isn’t a land trust better than nothing? I suppose. If having real estate in a land trust will help your clients sleep at night, than have them use us a land trust IF and ONLY IF they are coupled with other asset protection tools such as the UltraTrust® irrevocable trust (the best asset protection tool in my opinion), Limited Liability Companies, Family Limited Partnerships, etc. The problem with the way land trusts are pitched is that they give the client a false sense of security that the land trust will “protect” the assets in the trust. Again, land trusts provide NO asset protection from creditors.
You need to understand that in the “real world” what will happen with a lawsuit is that a personal injury attorney will file suit and then take the deposition of the person being sued. At that deposition, the attorney will simply ask the client to list off their assets. While it may be premature and objectionable, in a deposition the question will be answered, the defendant will have to disclose assets in a land trust and the objection will be noted. Again, there is no legal way to hide assets.
Conclusion of the Asset Protection of Land Trust
In my opinion, land trusts are not very useful when it comes to “asset protection.” If you use one, make sure the asset(s) being transferred to the trust are already owned by a separate entity which provides “real” asset protection. The bottom line is that land trusts do not protect assets notwithstanding what the marketers of the topic will tell you. Can a Trust Be Sued? Absolutely, and if it’s a land trust you choose to use, then don’t expect it to hold up in court.
Call Estate Street Partners 888-93-ULTRA (888-938-5872) for more information.
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