Asset protection is not a traditional legal practice area. It is a concept, a goal or an objective. We achieve that objective – of keeping your assets yours – utilizing a great variety of techniques and legal principles.
The asset protection planning we engage in today has evolved over the past thirty years applying legal concepts found in trust law, estate planning, tax planning, business entities law, debtor-creditor law, constitutional law and choice of law and forum. At the heart of asset protection is the friction that exists between the value our society places on private property rights (the debtor’s right to keep his assets) and a creditor’s rights to collect on a judgment.
It is that friction that often prevents us from being able to offer clients a foolproof asset protection plan. Creditors have rights, and under some circumstances these rights (and the sense of what is the right thing to do) may trump both the debtor’s property rights and the structures used to protect assets.
Because it is often impossible (usually for practical reasons – more on that below) to protect assets in a bullet-proof manner, what is the goal of asset protection planning? We believe that the goal of every asset protection plan is to make it difficult and expensive for plaintiffs and creditors to pursue our clients’ assets. Even when we can make it impossible for a creditor to reach our clients’ assets, is that what our clients wants? Likely, not. Few want to live with a judgment hanging over their head for many years to come.
When can we make it impossible for a creditor to reach our client’s assets? Technically, in almost every single case. But few clients are willing to do what it takes to achieve that level of protection: 1) convert assets to liquid form, and 2) pay significant legal fees to implement the right structure.
If our objective is shifted from making it impossible for a creditor to reach assets to making it difficult and expensive to reach assets, is it worth it? Let’s have statistics tell the story. (Note, that while our statistics have been compiled over the span of 3,000 transactions, we are attorneys and not statisticians, and the statistics are approximate.)
Our experience tells us that when confronted with an asset protection structure, approximately 30% of plaintiffs and creditors will choose not to pursue our clients’ assets. The plaintiffs and creditors simply walk away. They walk away from pursuing the lawsuit in the first place, because they cannot find assets. They walk away from a pending lawsuit because they are convinced by our clients that there are no assets to collect against. They walk away from an existing judgment because the debtor is or appears to be judgment proof.
What happens in the remaining 70% of cases? Approximately 95% of the remaining cases settle. They settle on terms that are now a lot more favorable to our clients. But the creditor is paid something. The creditor is given some incentive to walk away from our client. In the remaining 5% of those cases where the creditor did not walk away or settle (which is approximately 3.5% of all cases), our structures are tested. Creditors pursue fraudulent transfer attacks, or try to pierce the corporate veil of legal entities and trusts. Sometimes they are successful, and sometimes they are not.
Statistically, engaging in asset protection planning is an easy decision to make. If you do nothing to protect your assets, you have a zero chance of success. If you do something to protect your assets, maybe the plaintiff will challenge that, and if they challenge that, maybe they will be successful. Even if a creditor is successful at the end, to our client there is rarely a downside – if they did nothing they would have also lost all their assets. Given that challenges are mounted in about 3% of cases, and not all such challenges succeed, what is the downside of trying? As the great Wayne Gretzky used to say, “One hundred percent of the shots you do not take, do not go in.”
There are two dozen frequently used asset protection structures and countless iterations of these structures. Even the cornerstone structures like LLCs and irrevocable trusts present a great many variations of structuring, drafting and transferring assets to the structure. How do we then know what is the “right” structure to protect a client’s assets?
There is no right or wrong way to protect assets. For each client there are several appropriate choices that we select using the four-factor analysis set out below. Our job is to present these choices to our clients, who then pick the most appropriate one.
Clients often ask us, what is the least they can do to keep their assets safe. While that is a sensible question, it is impossible to answer. We usually do not know what is the least that needs to be done to keep assets safe until it is too late to do something about it – i.e., the creditor is already engaging in collection actions. Asset protection is often a shot in the dark. We recommend that clients select the structure that will allow them to sleep at night (knowing that their assets are safe), and not try to guess at the future.
Each client we represent is different. They come from a variety of businesses and professions, different life experiences, different countries and different financial means. They each also have a different degree of risk tolerance. For example, many of our real estate developer clients are risk takers by nature, and want basic structures. Many real estate investors or doctors are risk averse by nature, and want very robust structures, that will protect their assets to the greatest extent possible.
Some of our clients are married and live in community property states, which results in different planning than clients who live in common law states, outside the United States, or are single. Some of our clients are legal entities or trusts, and we are tasked with protecting both the assets of the entity and the assets of the entity’s beneficial owners.
Example: We recently represented two business owners who had signed personal guarantees to lenders, defaulted on their guarantees and were facing litigation. They owed approximately the same amount of money, and had almost identical assets – a personal residence, a retirement plan and some cash in the bank. One client wanted to take no chances – he liquidated all his holdings and we transferred assets into an offshore structure. The other client was somewhat concerned with the lawsuit, but deep down believed that somehow things will work out. For him we set up an irrevocable trust and an LLC. In both cases, we were successful in keeping the lenders away from our clients’ assets.
No two creditors are alike. Some are aggressive and intelligent, and some are not. Most are motivated by money and some by emotion. It is very important to understand each creditor – their aggressiveness, capability and drive. If we know a creditor is not likely to be aggressive or is not well-versed in challenging asset protection structures, we will take advantage of that and utilize simpler structures. Defending against an aggressive creditor requires an aggressive asset protection defense.
Some of the most intimidating creditors our clients face include: former spouses, former business partners (both are often driven by emotion and not money), the FTC, the IRS and the SEC.
This is where experience plays a key part. Having completed over 3,000 transactions we have faced every conceivable creditor. We know which banks are aggressive and which will negotiate. We know which federal and state agencies will pursue our clients to the end of the world, and which will obtain a judgment and never attempt to collect.
Example: We were engaged to protect the assets of an elderly man involved in an automobile accident. Our client had a net worth of about $6 million and the plaintiff was asking for $1.5 million. We knew that the plaintiff’s attorney on the other side was not likely to challenge our structure. We settled for transferring all of the client’s assets into an irrevocable trust. That allowed our client to provide the plaintiff’s attorney with a financial statement that showed no assets. The case was settled for $35,000. A solution as simple as a domestic irrevocable trust would have never worked in this case if the party on the other side was a small business bank – a usually aggressive creditor.
Timing is another factor that greatly impacts what we do to protect our clients’ assets. Given that a fraudulent transfer attack is often the only viable way for a creditor to pursue the assets we protected for our clients, structures set up well in advance of a creditor claim have a nearly 100% chance of working. When you have no creditors, a transfer of assets cannot be challenged as a fraudulent transfer. There cannot possibly be any requisite intent. This means that when we are planning prospectively, even the simplest structures have a very high chance of working. Our clients just need to watch out for a possible piercing of the corporate veil.
When planning after the fact – after a car accident, after a loan default, after a lawsuit has been filed – there is a much higher likelihood of a successful fraudulent transfer attack. In turn, the asset protection planning has to be more aggressive to either defeat the possible fraudulent transfer attack or to make it moot.
Approximately 90% of our clients come to us when there is a specific reason to protect assets – something bad has already happened. While the planning we do is then more complex, we find that it is still highly effective and worth the effort.
If you wonder why so many clients do not protect their fortunes on a prospective basis, the answer is simple – bad things always happen to other people. Which is a great example of how wishful thinking often leads our clients to the brink of disaster.
You have placed a lot of effort into building your fortunate. Protect it!
Our clients’ assets greatly influence the available structures. The options available to protect a personal residence are vastly different than the options available to protect cash in the bank or a professional practice. Some assets may also be exempt under the applicable law from creditor claims, or can easily be made exempt.
We will usually analyze the available asset protection options on an asset by asset basis, taking into account the factors set forth above.
Here are the most commonly used structures in asset protection. Click each to learn more.