Michigan Asset Protection Lawyer Blog

Property in Domestic Asset Protection Trust Not Included in Grantor's Estate

Wed, 30 Jun 2010 14:49:47 -0500

A Private Letter Ruling (PLR 200944002) issued by the Internal Revenue Service states that under the facts and circumstances discussed in the ruling the property of a self-settled domestic asset protection trust is not included in the Grantor's estate even though he is a discretionary trust beneficiary. Many commentators were surprised that Grantor could retain this right and keep the property of the trust out of his estate. This ruling opens the door for Michigan residents to utilize the trust laws of a state such as Delaware in order to create a trust in which they are discretionary beneficiaries yet the property of the trust is both protected from creditors and not included in their gross estates for estate tax purposes.

Asset Protection, Fraudulent Transfers and Bankruptcy

Wed, 23 Jun 2010 09:46:29 -0500

Inevitably, in connection with developing an appropriate strategy for a client who is seeking asset protection planning, the issue of fraudulent transfers is front and center. An experienced Michigan asset protection planning practitioner will be able to quickly identify that certain proposed transfers will indeed violate the Michigan Uniform Fraudulent Transfer Act ("UFTA").

Another Circumvention of the Charging Order Remedy

Tue, 22 Jun 2010 15:51:12 -0500

My April 20, 2010 blog discusses how the IRS avoids being subject to the charging order remedy when seeking to collect from an LLC in which the debtor taxpayer is a member. Unfortunately, the IRS has still another offensive weapon when chasing members of LLC's for money.

Limited Liability Companies, a Staple of any Asset Protection Plan Involving Real Property

Wed, 28 Apr 2010 10:31:04 -0500

I know that many Michigan asset protection planning attorneys mistakenly take for granted that what I am about to say is common knowledge, but utilizing limited liability companies to hold commercial real estate and residential rental properties is an invaluable tool to protect your assets. I spoke with a prospective new client recently and was surprised to see that this sophisticated businessman who owns more than 100 commercial and residential rental properties throughout Michigan holds all of these properties in his sole name.

The Charging Order...Asset Protection Lawyers Overrate Its Power

Tue, 20 Apr 2010 09:21:49 -0500

Michigan Asset Protection Lawyers constantly extol the protection that Michigan limited liability companies provide debtors as a result of the charging order remedy. As the story line goes, a creditor with a judgment against an LLC member of a multimember LLC cannot reach LLC assets directly. Instead, it obtains a charging order and distributions otherwise payable to the debtor member must now be paid directly to the creditor. Since the debtor often has influence over whether distributions are made, this gives the debtor a negotiating opportunity with his creditors. However, in the real world the charging order may not be as powerful as advertised.

In dealing with the IRS, you frequently see the government attempting to collect debts owed by members of LLC's by levying directly on the assets of the Michigan LLC. How can the government do this you ask. Isn't the government bound by the charging order rules under Michigan law? Indeed the government has acknowledged in published notices that in the case of multimember LLC's it will honor the charging order rules...so what gives?

Asset Protection Planning Using Special Needs Trusts

Wed, 07 Apr 2010 10:33:43 -0500

A client in financial distress is often searching for any possible opportunity for protecting assets from her creditors. Having been advised of the applicability of the Fraudulent Transfer Act, the client understands that gifts to family members or sales at below market prices are likely to be challenged as fraudulent transfers. In general, a fraudulent transfer is one made with the intent to hinder, delay or defraud a creditor. However, intent can be also be found where the debtor transfers assets without receiving reasonably equivalent value and intends to incur debts beyond her ability to pay. In addition, a transfer is fraudulent if the debtor transfers assets without receiving reasonably equivalent value and is insolvent at the time or becomes insolvent as a result of the transfer. If a transfer is found to be fraudulent, the creditor has a number of remedies including avoidance of the transfer or attaching the transferred property.

Many traditional asset protection planning opportunities available to persons not in financial distress cannot be used by distressed debtors because of the Fraudulent Transfer Act. Sometimes, however, a family's unique situation can justify a transfer that otherwise might have been considered fraudulent. We occasionally encounter distressed debtors with children or are suffering from chronic physical or mental disabilities...autism, cystic fibrosis, muscular dystrophy and so forth. It is not unusual for a parent or grandparent, as part of his or her estate planning, to set up a Special Needs Trust for such child. This type of trust can be funded at death or inter vivos (during life). This author submits that if a distressed debtor funds a Special Needs Trust with the intent to further the interests of the child and to insure adequate funds exist for such child's needs beyond those provided by governmental benefits, and not with the intent to hinder, delay or defraud creditors, such transfer may be permissible.

Using Loans As An Asset Protection Planning Technique

Sat, 13 Mar 2010 13:44:28 -0500

Often a new client will contact me disclosing at our initial meeting significant pending creditor exposure. He will advise me that other lawyers told him that there is nothing they can do for him and that any strategy or structure that might be considered would likely constitute a fraudulent transfer. Therefore, not only would the creditors be able to avoid the transfer but the attorney could face ethical issues if she assisted the client with the fraudulent transfer. So, is there any asset protection available to someone in this position.

If the circumstances permit, a possible approach might be for the debtor to make a loan to a third party...often a member of his family. By doing so, the debtor converts liquid assets that would be readily available to the creditor's collection efforts to a promissory note. The terms of the promissory note can be such that the creditor, if it executes against and becomes an assignee of the note, is willing to accept a discount from the face amount if the borrower pays cash rather than wait for the note to be paid in accordance with its terms. If this occurs, the debtor will have accomplished the seemingly impossible...getting the creditor to accept an amount less than debtor's available liquid assets.

Asset Protection Issues and the New Michigan Trust Code

Thu, 25 Feb 2010 14:17:51 -0500

While the new Michigan Trust Code is effective April 1, 2010, it will apply to trusts created on, after or before the effective date. Thus, with limited exceptions, after April 1, 2010, all Michigan trusts will be subject to the new provisions.

We often use trusts as part of an overall strategy to provide asset protection for our clients. For example, assume we have a husband and wife and the wife has significant debts and/or contingent liabilities. We will typically have the husband create a discretionary spendthrift trust so that, upon the husband's death, the debtor wife will be the beneficiary of a trust fund which will be outside the reach of creditors. Similarly, the wealthy parents of a debtor child will not want to simply leave the debtor child's share to him outright knowing the inheritance may very well be grabbed by the child's creditors. Instead the well advised couple will set up a discretionary spendthrift trust for the child.

Until the final rules were resolved, lawyers had questions regarding the differences between support and discretionary trusts and how spendthrift provisions are applied. This was particularly troublesome in planning for asset protection and being able to provide assurances to your client that their child's creditors could not reach the assets of the trust they created. With the passage of the new Michigan Trust Code, certainty reigns.

Best practices for this asset protection strategy is for the debtor beneficiary to be a beneficiary of a discretionary trust rather than a support trust. Even though a support trust has some protections; i.e., the interest of the beneficiary is not subject to the enforcement of a judgment, the beneficiary's creditors can reach the income or principal after there has been a direct distribution to the beneficiary (but then only to the extent that income or principal is not necessary for the health, education support or maintenance of the beneficiary). One issue of concern is that the support trust requires the trustee to distribute funds for support. This provides an opportunity for creditors to reach those funds upon receipt by the debtor beneficiary. Another problem with support trusts is that there are several additional opportunities for creditors to access the trust. In the case of support and spendtrhift provisions (but notably not discretionary trust provisions) the interest of the beneficiary in the trust can be reached to pay (i) child or spousal support awarded by a court, (ii) a judgment creditor who has provided services that relates to the preservation of the beneficiary's trust interest and (iii) an enforceable claim by a state or the United States.

The discretionary trust is a much tighter structure for asset protection. With this type of trust, the trustee is not obligated to make a distribution to the beneficiary and trust property is not subject to the reach of the beneficiary's creditors. Thus, the trustee has the ability to carefully plan distributions to avoid creditor problems in many cases paying expenses of the debtor beneficiary directly.

The new Michigan Trust Code specifically recognizes spendthrift trust provisions. It restrains both voluntary and involuntary transfers and is not subject to enforcement of a judgment until actually distributed. This continues long-standing law in Michigan on spendthrift trusts.

Social Security Benefits--Safe From Creditors? Your Own Banker?

Tue, 23 Feb 2010 10:47:56 -0500

The rule is simple. No creditor (other than the IRS) can seize your social security benefits for payment of debts. But does this mean your benefits are asset protected in all events? The good news is that for the most part your benefits are protected. A notice of levy served on the government to intercept the payments will be given no effect. However, what are the creditor's rights if the benefits are direct deposited into a bank account? Social Security law states that the benefits cannot be reached by creditors...which is interpreted to mean the creditor cannot access the funds even after they are deposited in the recipient's bank account. To insure maximum creditor protection, dedicate the bank account solely for receipt of social security benefits and do not commingle assets.

Unfortunately, there is a hidden danger lurking. Creditors will routinely garnish bank accounts as part of their collection procedure having no knowledge of whether the bank account contains social security benefits. When the account holder is given notice of the garnishment and advises the bank that the account consists solely of social security benefits, the bank will not turn over the assets. Indeed, if this was the end of it the system would appear to work. However, it is not the end...far from it. When the banks receive the garnishment order they immediately freeze the account.The bank often charges a processing fee for freezing the account as well as overdraft fees on checks that are bounced because the funds are frozen. The episode can add up to hundreds of dollars being taken by the bank even though the garnishment itself is ineffective.

The good news is that the US Treasury is promulgating rules to limit the fees a bank can charge under the circumstances described. Also, the banks will now be obligated to investigate whether the account has been the recipient of social security benefits within the last 45 days and, if so, will be prohibited from freezing the entire account. Perhaps something like $2,200 will remain available to the accountholder to pay her bills. While the rules will certainly improve things for debtors receiving social security, it remains an imperfect system when garnishments are ordered.

Asset Protection for the Owner of Multiple Rental Homes

Thu, 11 Feb 2010 09:13:21 -0500

I am meeting more and more clients who are in the business of acquiring, repairing and renting out single family homes. Usually these clients specialize in either inner city properties, midlevel or highend. They learn their markets well and do not invest outside their comfort zone. I have found them to be hardworking, knowledgeable about their business and street savvy in that they have figured out how to minimize the risk of tenant defaults. They are generally successful. Even in this harsh economic environment most are thriving. I attribute this to 3 primary factors: (1) they were not highly leveraged and the cash flow easily covers operating income and debt service, (2) intense management and (3) their tenant application review procedures weed out the weaker applicants. Typically they have not engaged in any asset protection planning.

These clients come to see me because they know that without the proper structure, one catastrophic fire resulting in severe personal injuries can wipe out their entire empire. But they also know that as they have accumulated wealth they have become more vulnerable to other creditors...ones not necessarily related to the operation of the business. So they want to protect their assets from internal disasters as well as external unrelated creditor claims.

One of the recommended approaches is to segregate groups of houses aggregating to a certain value and have each group owned by a limited liability company. Depending on the extent of the client's holdings perhaps the client ends up with 5 limited liability companies each owning 5 or 6 properties. The 5 LLC's are all owned 100% by a multimember LLC, often owned by husband and wife, which has the strongest possible language in its operating agreement to protect against creditors including a trustee in bankruptcy. The operating LLC's are all single member LLC's but the parent LLC must be multimember otherwise the creditor protection sought, i.e., creditors being limited to a charging order remedy, may not be available.

If the client's assets are large enough, we suggest that the client consider a domestic asset protection trust to be the owner of the parent LLC. We believe these DAPT's have enormous power as an asset protection vehicle while, at the same time, retain the flexibility to allow our clients to continue to manage their properties as they have in the past. It can also be structured in a way to give our clients the comfort that they will be able to access the assets contributed to the trust when needed.

Many of you bloggers are very entrepreneurial and will want to implement structures that appear advantageous for your business.. While the above structures may sound fairly straightforward, they can be quite complex from a legal documentation standpoint. You are strongly advised to retain an experienced asset protection/business lawyer to answer your questions and help you with the legal work involved.

Divorce--No Substitute for a Good Asset Protection Plan

Thu, 19 Nov 2009 09:14:44 -0500

An Associated Press release on November 17, 2009 reported that the U.S. government could collect billions of dollars in court-ordered restitution under a new divorce decree between imprisoned former Cendant corp chairman Walter Forbes and his wife of 27 years. This is a story about a very bad asset protection planning strategy which, not surprisingly, failed in its entirety.

What Walter apparently attempted to do, in order to avoid turning over his assets to the government pursuant to the restitution order, was to transfer his assets to his wife using the pretext of a divorce settlement. He obviously knew that he could not simply give his wife the assets because such a conveyance would undoubtedly be a classic fraudulent transfer and easily overcome by his creditors...including the U.S. government in its role as a creditor due to its right to restitution. So Walter and his wife conjured up the divorce scenario as a ruse to get the assets to her as part of a property settlement.

What the article left out but what must have been implicit in the court's decision was a recognition that the property settlement was a subterfuge to mask a fraudulent transfer. The article noted that Walter sold the family's nearly $6million, 11,000 square foot Connecticut mansion to his wife for $10. According to the ruling, Caren Forbes must reconvey the mansion to her ex-husband thereby permitting his creditors to seize it. There was also the matter of the 14 acre chalet-style house in Rhode Island that is likewise going back to Walter.

The moral of this story, although there are clearly no morals to be found, is that there is no substitute for proactive and disciplined asset protection planning. While this case may generate more attention due to the high profile nature of the parties, and that it involved a convicted felon who will be imprisoned for up to 12 1/2 years, it is nonetheless useful to remind even the lawbiding among us that asset protection planning is a vital and important element of any financial and estate planning process.

Recent Observations in the Asset Protection World

Thu, 12 Nov 2009 18:17:36 -0500

Given the significant number of persons I meet with who are seeking asset protection advice, I have the unique advantage of being exposed to a variety of situations and developing unique strategies to deal with them. I also have the opportunity to negotiate with different creditors, some of which are lenders while others are often trade creditors, and observe how they respond to different asset protection structures.

There is absolutely no doubt that a person who has taken the time to create some type of asset protection structure, even one that is very simplistic, is far better positioned to deal with his or her creditors than the person who has done nothing at all. While this may be self-evident, you also need to consider the creditor's mindset. The creditor is owed money, under pressue and is faced with the spectre of having to hire legal counsel to try to get paid. The greater the obstacles faced, the more expensive the legal effort will be to collect and thus the more disposed the creditor will be to make a settlement favorable to the debtor.

There are a few simple moves that a person can make to provide a degree of asset protection. Of course, while tax factors and other issues will impact which approaches are most favorable to pursue, everyone should at least be aware of these quickies. Consider using the entireties form of ownership in states that provide for this tenancy. Interestingly, in Michigan, a husband and wife who own money market accounts through a stock broker may be more protected than if they maintain joint accounts at banks. Operate your business using a multi member limited liability company as opposed to a corporation. Your creditors will find accessing your interest in an LLC is much more difficult than levying on corporate stock. On the most simplest of levels, if one spouse is exposed to debt while the other is not, where possible assets should be titled in the name of the nondebtor spouse.

I will leave you with one key message. Awareness and sensitivity to asset protection in everything you do will serve you well. Clearly, nothing will take the place of a fully thought out and strategized plan. However, in the absence of such a plan some of the suggestions here, if properly implemented, will nonetheless enhance your protection dramatically.

Submitted by Howard B. Young

Tax Fraud Scheme Masks as Asset Protection

Wed, 26 Aug 2009 11:13:36 -0500

Legitimate asset protection planning is again tainted when a married couple, allegedly engaging in tax fraud, sells their fraud scheme under the guise of asset protection planning. It is a recurring theme. Schemes to hide assets offshore are frequently but incorrectly characterized as asset protection planning.

The Justice Department recently commenced a suit in the Southern District of Florida against the assumed perpetrators, Byron Denver Hatcher and his wife, Kim Reinhart, seeking to bar their presumptive criminal activities. The scheme appears to be one where the participant is advised to set up a series of trusts and corporations offshore and thereby avoid tax on the income from their lawful U.S. based businesses. It turns out that the offshore entities are mere shams and attempts to construct a subterfuge to hide the source of the income. The real business activities continue to be conducted in the U.S. and the income is clearly subject to U.S.tax.

The story is unfortunate because it links asset protection planning with a tax fraud scheme. Authentic asset protection planning does not involve hiding assets or income. To the contrary, asset protection planning is usually tax neutral with the client paying the same amount of tax he would have paid on his income had he not created the asset protection plan.

Clients considering asset protection planning are either under financial duress already or desire to be proactive and take steps today so that if they get into a financial crisis or encounter significant claims, a portion of their assets will be out of reach of their creditors. If the client does a little advanced research before coming into the asset protection planner's office and sees that this area is frought with tax fraud issues and IRS criminal actions, it will be no surprise that the potential client decides to cancel his appointment. The sad part is that asset protection planning and tax fraud have nothing in common and the client should not be diverted from discussing and implementing legitimate strategies because of these rogue cases.

The government suit stated that "for Hatcher and Reinhart, the term 'asset protection' is a euphemism for 'tax fraud'." Hopefully those of us in the industry will continue to work hard to debunk this connection and educate the public that asset protection is a permissible form of planning and does not involve tax evasion.

Insurance Does Not Mean Your Assets Are Protected

Wed, 05 Aug 2009 09:28:48 -0500

I came into the office today and noticed that overnight my fax machine had spit out a flyer addressed to Attorneys and carrying the following message: "BEFORE you accept insurance policy limits in a PI case, let us do an asset search on the driver to determine his current bank balances, his real estate holdings..." and so forth. The message was clear. Defendants cannot assume that that their judgment creditors will merely accept the maximum insurance payout. If there are assets available beyond the insurance they will go after them.

This email, obviously from some type of private investigator, demonstrates and reinforces the notion that persons with accumulated assets must consider asset protection planning as part of their estate planning and tax planning processes. I have heard too many doctors tell me that they are adequately insured and therefore can always settle within policy limits. It is simply not true and such thinking leaves them vulnerable in the event of a malpractice action.

Although perhaps more common in the case of professional malpractice, the concept is equally applicable to anyone who drives a car, operates a boat or owns a business. Being adequately insured with appropriate umbrella coverage is a must and strongly encouraged by this author. But it is not enough. Asset protection planning must be considered and, if indicated, should be implemented by an attorney with experience and background in the area.

Avoiding Fraudulent Transfers-Another Tool for Asset Protection Planners

Sat, 25 Jul 2009 11:36:13 -0500

One of the most difficult issues facing a Michigan asset protection lawyer is how to help a client who is already in severe financial distress with banks and other creditors breathing down her neck. We all know that any tranfers made with the intent to delay, hinder or defraud the creditor will be a fraudulent transfer subject to the remedies of the Fraudulent Transfer Act. Are there any techniques that can be used at this stage that will provide asset protection to the debtor but avoid or at least withstand a fraudulent transfer challenge. A couple of lawyers in Boston believe so and this author agrees with them.

Alexander Bove and Melissa Langa assert in their June 2009 article appearing in Trusts & Estates Magazine that a post-nuptial agreement may provide a solution. It is suggested that a debtor spouse can transfer assets to a non-debtor spouse in consideration of the non-debtor spouse entering into a post-nuptial agreement provided there is adequate consideration and the post-nuptial agreement otherwise conforms to the requirements of state law. Their premise is that marital rights accrue and gradually vest over the course of the marriage and there is no reason the couple cannot agree to formally acknowledge the existence of those rights and transfer property to reflect their actual legal interests. Perhaps it is best understood if you consider a 25 year marriage where significantly all of the assets, which were generated during the marriage, are titled in the name of the debtor spouse. It is well accepted that a long-term marriage such as this one would entitle each spouse to 1/2 of the marital estate in the event of a divorce. If such is the case, why shouldn't they be able to effect a transfer of assets to reflect this legal reality.

Certainly an aggrieved creditor will claim the transfer was a fraudulent transfer and that it was made with the intent to defraud the creditor. However, a transfer for fair consideration is not a fraudulent transfer. Moreover, a transfer which merely reflects or confirms the existing rights of the parties in and to the property also may not be a fraudulent transfer. And so the question becomes whether these arguments will defuse an aggressive creditor. While each case is different it is fair to conclude that the post-nuptial agreement and accompanying asset transfer will certainly pose an obstacle for the creditor and an opportunity to negotiate a settlement for less than the full amount of the claim...one of the goals of asset protection planning.