A Critically Important Overview of Asset Protection

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.”

Picking the Right Asset Protection Structure

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.

Our Client

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.

The Creditor

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.

Commonly Used Structures

Here are the most commonly used structures in asset protection. Click each to learn more.  

Community Property

Transmutation of Community Property

In a community property state, like California, a claim against either spouse will reach all of the community property assets (not just half).  One way to avoid that is to terminate community property with a written agreement (known as the transmutation agreement).  Some assets are allocated to the wife as her separate property and some to the husband as his separate property.  This way a lawsuit against one spouse reaches only that spouse’s separate property.

This was famously done by the McCourts when they purchased the LA Dodgers.  Frank McCourt had to personally guarantee the obligations of the Dodgers. The McCourts signed a transmutation agreement making the Dodgers Frank’s separate property and the parking lots Jamie’s separate property.  This would make the parking lots inaccessible to Frank’s lender if the Dodgers default on the loans.

Domestic Asset Protection Trusts

Domestic asset protection trusts (DAPTs) have many advantages including potential savings in state income taxes.

A DAPT is an irrevocable self-settled trust where the grantor is designated a permissible beneficiary and permitted access to the trust account’s funds. In the event the DAPT is correctly structured, the aim is that lenders won’t be able to gain access to the trust’s assets. As well as providing asset protection, a DAPT delivers other advantages, such as if it is taken out in a state that has no-income-tax regulations then the income tax will be saved.

There is no advantage of having a DAPT until it is funded with resources. Trust assets typically include (1) limited liability companies (LLCs), (2) securities, (3) cash, (4) company assets like intellectual property, equipment, and stock, (5) property, and (6) recreational assets like speed boats and cars.

Each asset has to be assessed individually before being transferred into a DAPT. This process requires several stages to ensure the assets are legally protected, a provided with the right amount of taxation and growth potential, and also if they can be passed on to future generations of the family. Therefore, the transferring of assets is a critical process when setting up a DAPT and as such requires a wide range of skills.

Substantial Relationship

To withstand assault, a DAPT must be built to have its considerable connection to the state where the trust is created and not the state where the settlor resides. The positioning of the trust’s assets could be a determining factor if there is a legal conflict. As a result, on a case-by-case standing, it might be a good idea to transfer the trust’s assets to trust-state LLCs: (1) property, (2) settlor companies, (3) securities and cash balances, and (4) risky or valuable business and recreational resources.


In virtually all cases, it is important that securities have been held, with appropriate privacy and LLC protection laws. The LLC must be created in the state holding the trust if the LLC-held securities are put in a DAPT

Assets that have a long-term shelf life are the only ones that a settlor should fund a DAPT with; especially securities that need careful administration. It is also a good idea that any withdrawal of profits from a DAPT should only occur on an infrequent basis.

It has been recognized that the majority of customers prefer to have a guarantee of a greater return on their investment than a lower risk factor. In an attempt to alleviate this possibly dangerous tendency, then it would be a much wiser decision to ensure that at the beginning of the expensive process each client needs to define what their risk parameters are. That would then allow a long-held portfolio to maximize its true potential based on the amount of risk chosen.


An essential aspect of managing a DAPT is convenience. It is always good practice to use a single investment account for holding all your securities and cash in. The trust can then use this one account to readily invest cash in a number of secure and efficient cash-equivalent avenues, such as treasury funds, short-term bond funds, and money market funds. Holding a portion of the money in a local bank will put the settlor in a good position with the state authorities where the trust is being held.

Real Estate

Real estate assets always cause consternation, because it is difficult to relocate a piece of land or property into the trust state.

As the real estate property will be classed as an out-of-state possession if the property is not in the state where the trust is filed, it becomes a genuine concern for the trust owner because a local court might attempt to exercise jurisdiction over the property or land. Restatement (Second) of Conflicts of Laws Section 276 provides that “the administration of a trust of an interest in property is supervised by the courts of the situs as long as the property remains subject to the trust.” The most effective readily available alternative might be to transfer possession of their property to an LLC that is created in the trust state and owned by a land trust for privacy.

Although this method has not been approved by a court, it needs to be assessed (for instance, planners need to take into consideration issues such as mortgage-lender approval and state transfer taxes), as well as evaluating the risk and also the reward because it may materialize that the transfer could be beneficially rewarding. Whether a jurisdiction eventually plays a part, in the end, relies on the relevant facts of the case and also the LLC’s structure.

Business LLC

For most cases, the settlor’s company LLC is usually registered in their home state. Depending on the state, this might be a problem. You need to understand LLC protection to realize the issues this might cause.

All LLCs are created to protect their owners’ personal assets from insurance claims occurring from within their own organization. With no protection, it would be too hazardous for entrepreneurs to invest funds in companies with underlying dangers. This idea, called “internal security,” dates back to the industrial revolution and our commercial system was founded on these principles. Traditional C corporations also offer internal protection, but they suffer from the double taxation of earnings. However, an LLC’s income is directly passed on to its member-owners and is only taxed once. LLCs are much easier to run. As a result, the majority of entities created today are LLCs.

Equally as significant, LLCs can offer external security. Let’s say you organize a Christmas party for friends and an intoxicated visitor leaves the celebrations and is involved in a car crash in which a person is either injured or killed. Even though the accident was not your fault you could have a legal action filed against you. This could happen just because you are rich, and this is where having a good asset protection plan comes into play. The plaintiff’s lawyers will try to seize your asset but will have great difficulty doing so if your assets are owned by an appropriately structured LLC in a legitimately favored state.

LLC protection functions like this. Normally, after a lender acquires a personal judgment against an offender, it ends up being the lender’s duty to determine the offender’s assets, get a court order, as well as confiscating those assets effectively to meet the judgment.

The lender’s legal solution will certainly be restricted to acquiring a lien, known as a “charging order.” Charging orders enable the lender to acquire a court lien against distributions made to the member’s interest; however, they do not enable the lender to take the place of defendant and become a participant of the LLC, with legal rights to its assets. Therefore, if the LLC decides not to distribute any income or assets to its members, then the assets will not be readily available to the judgment lender. Furthermore, only the member-owners are qualified to establish if any distributions will be made.

The laws of most states in the USA do not incorporate the language required for optimum LLC planning. If an LLC is to be effective, it must be created in just a couple of states that have favorable LLC laws or at one of the limited number of US states where personal privacy can be guaranteed.

We understand that, if the transfer is the outcome of an initiative to impede, postpone or defraud a well-known or contemplated lender, it can be reversed as a voidable transaction (illegal transfer). Later, in a lawful challenge to the credibility of the trust, the plaintiff may also raise theories such as “alter ego” and “piercing the corporate veil,” however those challenges currently exist even if there is no move. You can lower these risks by preserving and taking care of all LLCs with profession legal procedures.

Assuming the transfer isn’t designed to prevent an existing or foreseeable lender, then there is no reason why the transfer cannot be made. The legal problem ought to be purely an issue of whether the transfer is a voidable transaction. Therefore, in vetted cases, a reconstruction of the LLC into the trust state might be a feasible alternative that needs to be researched.


Risky Vehicles and Similar Assets

It is advisable to keep high-risk vehicles and similar assets in LLCs. High-risk possessions include motorcycles, boats, mobile homes, jet skis, trailers, and aircrafts. Where appropriate, the LLC must be created in the trust state and the member in interest transferred into the trust state DAPT.

There are, nevertheless, crucial caveats to be made concerning LLC security for this type of assets. The initial one is that, if the possession isn’t made use of for a business purpose (for example, automobile hire), the LLC might be at a greater danger for piercing the LLC veil claim. To minimize this worry, planners must take into consideration using a multi-member LLC instead of a single-member LLC and also encourage their clients to keep thorough documentation as well as tax obligations.

Another caveat surrounds possible liability claims. Despite the fact that the automobile or other asset is held in an LLC, an injured plaintiff might claim that the client transferor is independently accountable if they caused or contributed to the irresponsible act. An example would be if the client was in a boat and was pulling a friend too fast on a water ski and the boat swerved to the right, and as such the skier veered too far off course and subsequently hit another boat, and suffered serious injuries. Although hypothetically the defendant might suggest that the accident was a result of the boat malfunctioning, it is very easy to realize that holding the boat in an LLC will not absolve the client from accountability.

A final planning recommendation is that, if any one of the assets are used in the business (tools/building), the LLC that owns the asset (s) must rent them to the business to make sure that the rental revenue can be generated (which is far better than any form of earned income from a tax obligation perspective).


Asset protection trusts come under many names and guises.  Look at the three requirements (irrevocable, spendthrift clause, third-party beneficiary) and see if the trust meets them. If yes, you have a good asset protection trust. Whether the trust is called a residence trust, a Fortress trust, a Bridge trust, a qualified personal residence trust (QPRT), an intentionally defective grantor trust (IDGT), or any other name is irrelevant.
Equity Strips

What is Equity Stripping?

Equity Stripping is a collection of methods created to decrease the overall equity in a property. Equity stripping strategies can be utilized by borrowers as ways of making properties unappealing to lenders, along with predatory lenders wanting to benefit from homeowners who face the possibility of having to foreclose on their property.

Whether you want to protect an individual home or financial investment property, you need to recognize that lenders do not go after the property itself, but the equity in the property. Lenders need to foreclose on the property, which suggests the property will certainly be sold by a sheriff. On the foreclosure sale, after the settlement of the secured liens (like a home mortgage), after paying the sheriff’s costs, as well as after paying the homestead exemption amount to the borrower, the remaining equity will go to the lender. Subsequently, it is the equity that gets converted into money and given to the lender. Not the property itself.

If the property has no equity, then the lender will not obtain any cash sum from the foreclosure sale.  As an example: Your house is worth $2,000,000 and is mortgaged to the tune of $1,800,000. You reside in California and your homestead exemption is $75,000. The house has to be presented in a foreclosure sale, where it is eventually sold for $1,900,000. Of the $1,900,000, the initial $1,800,000 will go to the bank to settle the mortgage. After that, some of the money will go to pay the sheriff, and after that $75,000 will go to you. There is absolutely nothing left for the lender.

A smart lender will be able to do the math beforehand and will attempt to force a home in these circumstances into a foreclosure sale. In fact, many lenders will certainly drop their legal action if they come to terms with their situation and realize there is no equity left in their property to pursue. As a result, many borrowers will look to eliminate (strip out) their equity.

There are two equity stripping techniques:

  • Actual Bank Loan
  • Paper Strip


Actual Bank Loan

Obtaining a bank loan is one method of stripping the equity from a property. The bank will protect the loan by recording a deed of trust against your property. This removes the amount of equity that is equal to the amount of the loan.

While this method leads to the removal of equity, two problems are presented. First, it is hard to get a bank loan that is sufficient enough to eliminate the equity completely. Second, the amount of money required to pursue this form of asset protection is way too large for most people. Let’s say a $2 million loan has a 5% rate of interest, the equity strip cost is $100,000 each year. (Borrowers normally try to alleviate the excessive costs by investing the proceeds at an equivalent rate of return.)

Paper Strip

An additional method is to strip out the equity (regularly promoted by borrowers), to restrict the home by recording a deed of trust in favor of a close friend.

This prevents having to bear the additional cost of a loan and it can cover any amount of money. With this strategy, it is essential to have an insight into how knowledgeable and aggressive the lender is. Some lenders might quit attempting to accumulate when they realize there is no equity in their home. Others might dig much deeper, and also if the borrower cannot corroborate the transaction as a real loan, then the court will deem the deed of trust as a sham and will set aside the deed. The lender will once again have equity to pursue.

Exemption Laws

You cannot always totally depend on the exemption laws, or that your assets are entitled to several protective entities. Your objective is to convert your debt-free into debt-ridden assets that will be worthless to a complainant.

You achieve this with various types of mortgages as well as liens. A lien is a mortgage or security interest submitted against a borrower’s property or personal effects. As the homeowner, you own the home, however, you transfer the financial value of your home to the mortgage holder. This lowers your equity in your home as well as the equity your lender or plaintiff can seize.

It is pretty easy to understand. If your home is worth more than what you owe on the mortgages (or liens) against it, you have equity in your home for your plaintiff to claim. To secure your home, you would lower (or strip) your equity by raising the mortgages or liens against your home. This method is easy; however, some terms might make it more complicated.

No doubt you are familiar with mortgages – a voluntary lien on real estate to protect a financial debt that you owe. Some western states call it a deed of trust. Rather than providing the lender with a mortgage, the borrower deeds the residential property to 3rd party trustee. The borrower can live in the residential property as long as the financial debt is paid. The only difference there is between a mortgage and a deed of trust is that a trustee can offer your residential property for sale at public auction if you default on your payments. Whereas, if a mortgage holder wants to auction your property, they have to foreclose your property through a court.

There is a different set of terminology that applies to personal property. A lien on personal property is a security agreement. You might be able to secure your debt by pledging your personal property as security. It is feasible that the secured party will keep hold of your personal property (i.e. pledging your family silver to a pawn shop). What usually happens is that the borrower will continue to have the collateral. A notice of lien (a financing statement) needs to be filed in a public recording office so that third parties will realize that the property is not available.

You can place numerous liens against one property. The priority of each lien is then established by when they were entered into the public records.

The point is that when you have legitimate liens a plaintiff can only take the amount of equity you have in the property. To ensure that you are protected you need to have as little or no equity exposed. Your $500,000 house with a $500,000 mortgage is worth absolutely nothing to a plaintiff. Your objective is to ensure that all assets are worth absolutely nothing to any plaintiffs.

Foreign Entities

“Offshore” describes a place beyond one’s national borders, whether that location is land-based or water-based. The term “offshore” might be used to define international financial institutions, companies, financial investments as well as deposits. A business might legally relocate offshore for the purpose of tax advantages or relocate because of less regulated laws.

Breaking Down Offshore
Offshore can describe a selection of foreign-based entities or accounts. In order to qualify as offshore, the accounts or entity need to be based in any type of country aside from the client’s or investor’s home country. Many countries, jurisdictions, and territories have offshore financial centers (OFCs). Some of the popular ones are the Cayman Islands, Cook Islands, Switzerland, the Channel Island, and Bermuda, as well as some of the lesser-known centers such as Dublin, Belize, and Mauritius. The degree of regulatory requirements, as well as transparency, varies extensively amongst the different OFCs. The supporters of OFCs say that they enhance the flow of resources as well as promoting worldwide business transactions.

Offshoring Business
With respect to business activities, offshoring is commonly described as outsourcing — the act of developing specific business functions, such as call centers or manufacturing industries, in a country other than the country where the business usually operates. This is more often than not to capitalize on the more beneficial conditions in a foreign country, such as lower wage demands or more lenient regulations which can save the business a lot of money.

Offshore Investing
Offshore investing involves any form of situation or transaction in a country that an investor does not live in. As using offshore investment accounts can be a very costly business to operate it is primarily used by wealthy financiers. It usually requires the investor to create accounts in the country where they want to invest.

Offshore Banking
Offshore banking includes the protection of assets in foreign countries and financial institutions, which might be restricted by the laws of the client’s home country. In certain circumstances, a person could be penalized for possessing these assets in their own country whereas they would not be penalized in an offshore country. Sometimes, economic or political climates in offshore banking countries are a deterrent because they might not be able to offer the same level of protection that stable nations do, however, the most popular offshore banking nations typically offer both stability, advantageous tax laws, and incentives for businesses.

Offshoring and Company Profits
Companies that have considerable overseas sales (e.g. Amazon or Apple) may turn to using offshore accounts to gain an advantage of lower taxation for their related profits. It was estimated that around 304 US companies had approximately $2.10 trillion in offshore accounts in 2015. This was an 8% increase in comparison to 2014.

Legitimate Reasons to Have an Offshore Company
“Offshore” entities have been getting a lot of “bad press” recently. One of the more recent scandals, the Panama Papers, released an extensive list of political leaders, and celebrities among other high-profile individuals, who allegedly participated in illegal offshore activities. Before the Panama Papers scandal, most of the media focus had been on big businesses taking advantage of creative tax planning.

Undoubtedly, due to highly publicized scandals, public opinion of ‘offshoring’ is sometimes negative. However, it is essential to remember that offshore entities are legal entities and they can be used to protect hard-earned assets.

The second essential point to understand about offshore entities is that they can be very beneficial for the average person. In other words, you don’t have to be privileged or extremely rich to benefit from having an offshore entity.

Do not hesitate to make use of an offshore entity for a genuine purpose, such as …

Holding property in another country: Lots of people make use of a local entity to own property in another country. Actually, in many cases, as a foreigner, you can be allowed to hold title to a property in another country. A good example of this is an American who decides to purchase a property in Mexico. If that property is within 50 kilometers of the sea, then a foreigner cannot own that property in their own name. Because you are legally bound to use a Mexican trust (a fideicomiso) to purchase the property…in other words an offshore entity. Other countries enforce constraints on using an offshore entity to own property in their country.

Additionally, you might also want to use an offshore entity to…

Minimize probate when in the event of death: If you own property in your own name in another country, when you die, your beneficiaries must handle the probate of your estate in that country. Sometimes, this can mean you have to navigate inheritance regulations that need assets to be distributed based upon local regulations, which might or might not match your wishes.

Making use of an offshore entity that is can provide further advantages depending on the jurisdiction. If you make use of an entity from a jurisdiction that permits direct inheritance of the entity or its shares, you can prevent probate completely.

Using an offshore holding company is a very sensible management technique for someone who owns several properties in several different countries.

Provide some asset protection: In the legitimate offshore world, the word “offshore” is associated with asset protection and not with illegal activities.

A company or an LLC can offer asset protection using one of the most efficient entities, an offshore trust. One of the biggest advantages and one of the best ways of keeping your assets safe and out of reach of a vengeful complainant is to relocate them to an entity.

It is important to note that having your stock portfolio in an offshore LLC will not change your tax responsibilities in the USA, however, it will place an obstacle between lawsuits in the U.S. (estimated at 15 million) and your hard-earned assets.

Provide for investment diversification: Maybe you’re not concerned about asset protection. However, you should be keen to diversify your investment portfolio internationally. Setting up an offshore entity can facilitate this.

Operate an active business: In some instances, an offshore corporation is, in fact, a real company. That is, an offshore company can be used to run a business in another country, or to divide the main business operations of the company at home from an overseas subsidiary. You set up your company overseas for the same purpose you incorporate it in the USA — to restrict any liability the shareholders might incur (which once again is asset protection).

Several of the media companies that have been covering the Panama Papers scandal have stressed that owning an offshore entity does not mean involvement in illegal activity. However, others are using the Panama Paper documents as a chance to portray all offshore entities as being of dubious origin and totally illegal.

The reality, however, is that having an offshore entity is not unlawful and has the ability to offer vital benefits to help everyday folk to secure their assets, and as such ensure that they have a healthy and happy retirement. The truth is that offshore entities are merely a set of legally binding functional and administrative procedures to provide a person with a means of security for their assets.

Irrevocable Spendthrift Trusts

An irrevocable spendthrift trust is a type of trust that either limits or altogether prevents a beneficiary from transferring or assigning his or her interest in the income or the principal of the trust. Thus, a creditor cannot reach a beneficiary’s interest because a beneficiary has no right or ability to transfer his or her interest in the assets of a spendthrift trust. However, after a distribution is made to the beneficiary, that distribution can be reached by a creditor, except to the extent the distributed property is used to support the beneficiary. If a trust calls for a distribution to the beneficiary, but the beneficiary refuses such distribution and elects to retain property in the trust, the spendthrift protection of the trust ceases with respect to that distribution and the beneficiary’s creditors can now reach trust assets.

Self-Settled Trusts: There are exceptions to the protection provided by a spendthrift trust. For example, if the settlor of a trust is also a beneficiary, then the settlor’s interest in the trust assets will not be protected by the trust’s spendthrift clause. However, a non-settlor-beneficiary’s interest in the trust assets would remain asset protected by the spendthrift clause.

The prohibition against self-settled trusts in California is well-settled. Consequently, a self-settled trust must be established in a jurisdiction, like Delaware, Alaska and Nevada, and certain foreign nations, like Saint Vincent and the Grenadines and the Cook Islands. Forming an irrevocable trust in one of these jurisdictions may be another way to preserve the protection of the spendthrift clause of a self-settled trust.

Public Policy & Support Payments: Even if an irrevocable trust has a spendthrift clause, a court may order the trustee to satisfy a beneficiary’s support obligation to a former spouse or minor child out of any distributions that the trustee has decided, in his or her discretion, to make to the beneficiary.

This is an example of two conflicting public policy rationales. Spendthrift clauses have been enforceable, historically, because our society places a great deal of importance on private property rights. Consequently, creditors cannot generally reach a beneficiary’s interest in a spendthrift trust. However, our society places an even greater importance on satisfying support obligations, and even a spendthrift trust will not likely shield a beneficiary from these obligations.


Limited Liability Companies & Limited Partnerships

Limited liability companies and limited partnerships are regularly used in asset protection. Consider the following.

Irrespective of whatever type of asset you own (i.e. asset owned by you or the title is in your name) can be seized by a lender. For instance, if you have a bank account or a home, a lender can take those possessions. However, a lender cannot take any possession from you that you do not own. I appreciate that this is a very glib statement to make, but that is the essence of how assets protection planning works.

Any type of asset that is owned by a lawful entity is not owned by you, even if you own and manage the lawful entity. For example, if you own shares in the Ford Motor Company, you do not have any ownership to the Ford truck plant in Kentucky. This principle relates to any type of lawful entity, regardless of how big a percentage of the entity you own.

How does that benefit you? As soon as you transfer ownership of the possession to a limited liability company (LLC) or limited partnership (LP), you no longer have the right of ownership to the possession. The LLC or LP is now the owner of said possession. All you possess is an interest in the lawful entity. How can owning just an interest in a lawful entity be better than owning it outright?

Bear in mind, corporations do not provide you with any type of billing order protection. If you are the owner of a corporation, which subsequently possesses valuable assets, a lender will certainly have the ability to seize your corporate stock and as such get their hands on your assets. A corporation will only protect you from legal action that is specifically directed towards the corporation itself. The shareholders do not have any legal protection if the legal action is taken against them. If you are looking for protecting your possessions against lenders then it would be advisable not to set up a corporation. It would be much better to set a limited partnership or a limited liability company.

Some of the assets that people use an LLC or LP to protect include intellectual property, art and antiques, expensive cars and other vehicles, investments, real estate, and other valuables.

Under United States laws, the interests in limited partnerships and limited liability companies are protected by what is called a ‘Charging Order’ protection. According to the charging order protection, a lender is not allowed to seize any of these entities. The good thing is that if they cannot seize your entity, then they are not allowed access to the underlying assets.

If you are appointed as the manager of a limited liability company you will gain full control of your assets, jeopardizing the asset protection. All entities are usually structured to be neutral of any tax obligation – this means that you do not have any obligation to pay any form of taxation by setting up a limited liability company. It is possible that these entities can be structured to make sure that they will need to file any government tax returns. Whereas, for any state income tax obligations you would need to confirm with your lawyer or certified public accountant (CPA) if you are required to pay state taxes. Payment of state taxes is governed by each state on an individual basis. You might be fortunate to find that you do not need to pay them.

Limited liability companies and limited partnerships are very easy to set up, and as such are reasonably cheap to run, and provide you with a significant degree of asset protection

But you must be aware that a limited liability company and a limited partnership have to be set up correctly. Although. they both will certainly provide you with a specific level of asset protection it is only an appropriately structured LLC or LP that will provide you with the optimum asset protection you require. Correct structuring calls for both asset protection and taxation experience. Some of the innovative devices that you can include in a limited liability company and limited partnership agreements are automatic removals, buy-out rights, distribution freezes, and others.

Example: Dr. Williams owns two apartment buildings. The first building is owned through a corporation and the second building is owned through a limited partnership. Let’s say that an occupant in each of the buildings has an accident and they are both hell-bent on filing a lawsuit. Each occupant would need to to take out legal action against the owner of the respective building, (i.e. the corporation and the LLC). Each legal entity will certainly protect Dr. Williams and stop the lawsuits from reaching his personal assets. Excellent result.

Now let’s assume that Dr. Williams is involved in a road accident and has legal action taken out against him by the injured party. The complainant gets a judgment against Dr. Williams and has every intention to go after Dr. William’s assets. What will happen to the two apartment buildings?

While the lender would certainly not have the ability to seize the first building directly, the lender would certainly have the ability to seize Dr. William’s corporate stock, and then liquidate the corporation and also obtain the first apartment building. Not a great result.

With respect to the second apartment building, the lender will certainly not be able to obtain Dr. William’s interest in the limited liability company, and will not be able to obtain the second apartment building. Excellent result.

Beware! Limited liability companies and limited partnerships are easy to set up, but they are not easy to set up correctly. While any limited liability company or limited partnership will provide you with some degree of asset protection, only a properly structured one will offer you the maximum asset protection possible. Proper structuring requires tax and asset protection expertise. Our limited liability company and limited partnership agreements include such sophisticated devices as distribution freezes, automatic removals, poison pills, buy-out rights and other.



Outright Sale

An arm’s-length cash sale is the best way to protect the residence (and the equity in the residence) because it is much easier to protect liquid assets (sale proceeds) than real estate. While this technique affords the best possible protection, it is also the most radical and may result in additional income taxes.

Personal Residence Trusts

No possession is more crucial to protect from a lender’s claim than the home you live in. For a lot of people, the home represents the largest part of their personal wealth. It can also have great sentimental value.

The personal residence trust is one of the most commonly used ways to safeguard a home. This is a very cost-effective structure to implement, it is very straightforward as well as being extremely effective. You tend to find that asset protection lawyers use this form of trust on a regular basis for their clients. That is because they know they provide the security that the clients need. So, how do these personal residency trusts work?

A personal residence trust is an irrevocable trust. The word “irrevocable” can come across as being very intimidating to the majority of people. Because, nobody wants to get involved with anything that is irrevocable, especially if it is going to involve the house that they live in.

The good news is, irrevocable means that no one person (like a lender or a plaintiff) would be able to influence you to withdraw the trust fund. If the trust fund is drafted correctly, you can have the right to revoke it. For example, California law allows the beneficiary and the trustee of a trust the ability to revoke a trust just by signing a basic document. Also, a trust protector can be appointed, and they will also have the right to revoke the trust, change the trust document, and if need be, change the trustee.

Due to the fact that the trust is irrevocable, the possessions that are in the trust are not legally owned by you. Technically speaking the trust now owns your home. Therefore, as you do not own the title to your home, a lender cannot take it from you. Your legal connection to your home is the same as your legal connection to any major building in California (e.g. The Getty Centre in Los Angeles). It is not your asset and as such, no one can connect it to you.

The personal residence trust allows you to live in your home for the rest of your life. As you no longer own the property you must pay rent to live there. You must ensure that your children and other members of your family are named as beneficiaries on your death. This form of agreement is also like a living trust.

Transferring the property into a personal residence trust doesn’t incur any income tax liability. Also, there is no need to pay any property tax or even any reassessment of property tax. A federal statute prevents your bank from doing anything with your mortgage if the ownership of the house is transferred to a personal residence trust. 

As you are appointing another person as the trustee of the personal residence trust you will still maintain the ability to sell or refinance the property. Any specific requirements you feel you need to have built into the trust can be accommodated for.

Once the trust is set up there is no need for any annual fees or filing registration procedures.

A personal residence trust is a cost-effective way of ensuring that you can live in your own home and preserve control over the property. The beauty of setting up this type of trust is that you have the reassurance that irrespective of what happens your home cannot be taken from you by any creditor. The benefits of a personal residence trust make them a favorite technique for most asset protection practitioners.

You will have to decide who you are going to appoint as the trustee or guardian of your trust fund. You or your wife/partner cannot be the trustee. It has to be someone that you can totally trust and have faith in to comply with your wishes.


Qualified Personal Residence Trust (QPRT)

A qualified personal residence trust (QPRT) is a particular type of trust that enables its creator to remove a personal residence from their estate in an attempt to reduce their gift tax liability when they transfer assets to a beneficiary.

Qualified Personal Residence Trusts permit the proprietor of the home to continue to reside in the home for a specific amount of time with “retained interest” in the house; but as soon as that period is over, what interest is remaining is classed as “remainder interest”, and as such is transferred to the beneficiaries of the trust.

The property value during the “retained interest” period and the length of the trust depend on the Applicable Federal Rates proved by the Internal Revenue Service (IRS). As the owner only retains a portion of the value means the property will fall below the fair market value and as such will incur a lower gift tax rating. Plus, unified credit will also lower the gift tax liability.

If a qualified personal residence trust (QPRT) expires before the death of the grantor, then the house can be included in the deceased estate, and as such, could be taxed.

The risk depends on establishing the length of the trust agreement, combined with the possibility that the grantor will die before the trust expires. In theory, a longer-term trust can benefit from a smaller amount of remainder interest given to the beneficiaries, which subsequently decreases the gift tax; however, this is only beneficial to younger trust holders who could live well past the end date of the trust.

A qualified personal residence trust is not the only qualified trust available. There is a bare trust and a charitable remainder trust. In a bare trust, the recipient has the absolute right to the trust’s assets (both financial and non-financial, such as property and antiques), and the income generated from the assets (such as rental income from properties or bond interest).

In a charitable remainder trust, a benefactor might offer an income interest to a non-charitable recipient with the rest of the trust going to a charitable organization. The charitable remainder annuity trust (CRAT) and charitable remainder unitrust (CRUT) are two types of charitable remainder trusts.

In each of these trusts, the benefactor gets an income tax deduction from the present value of the remainder interest.

Who will you appoint as the trustee or the protector of your trust?  It should not be you or your spouse.  It should be someone you trust.
Sale to a Friendly Third Party

Many debtors consider selling their residence to protect the equity. However, they may not want to actually move out. To accommodate these conflicting desires, the sale and leaseback of the residence to a friendly third-party on a deferred installment note may be the solution.

Under this structure, the debtor sells the residence to a friendly party and takes back a promissory note. The promissory note is usually structured as a long-term balloon note. The debtor then leases the property back from the buyer and continues to live in his old house. Instead of owning a house, the debtor now owns a promissory note, an asset that is a lot less desirable to a creditor.

This structure works only so long as the debtor can establish the legitimacy and the arm’s-length nature of the sale. Income tax consequences of the sale, and possible property tax consequences on the transfer of ownership should be considered.

Postnuptial Agreements

Will A Postnuptial Agreement Really Protect You?

Majority of people are aware of the grim statistics related to marriage and divorce rates. With that being said, some married couples look to what for them is basically an arrangement, or in other words a postnuptial. This is similar to a prenuptial agreement, but in this case, the agreement is made after the wedding.

Postnuptial agreements vary from state to state in the USA, therefore it wise to check out the laws in your specific state. Usually, the following criteria have to be met for a postnuptial to be legal and binding.

  • It must be a written agreement. When dividing marital assets an oral agreement is not legally binding and as such is not enforceable.
  • Both partners need to sign the agreement and the agreement must be notarized.
  • It must be a voluntary agreement. Either partner cannot endanger, deceive, coerce, or force the other partner to sign the agreement: If this happened, the contract is not enforceable.
  • It must be a fair and honest postnuptial agreement. It cannot be exceedingly one-sided or unjust.
  • There must be complete disclosure of their debts, property, income, and assets from partners.

Postnuptial agreements are increasing in popularity according to a 2015 survey conducted by the American Academy of Matrimonial Lawyers. But this does not signify that a postnuptial agreement is best for each and every couple.

When to Have a Postnuptial Agreement

Many couples consider having a prenuptial agreement long before they actually get married. Whereas, a postnuptial agreement is usually generated after marriage through some form of disagreement between both parties. Even if the marriage is going along nicely, couples can utilize a postnuptial agreement to specify things, like each partner’s financial obligations, their individual rights regarding the family business, or separate property.

Postnuptial agreements can address the very same sort of problems that would normally come to play with a prenuptial agreement, such as:

  • which spouse retains certain property;
  • which partner has to pay the alimony – how much and for how long;
  • who is responsible for taking care of all the financial debts (e.g. loans, mortgage(s) and credit cards);
  • how assets and property will be divided if one partner dies during the marriage.

What you can and cannot do by having a postnuptial agreement is determined by state law. For instance, as an issue of general policy, California does not take kindly to postnuptial agreements which waive or restrict post-divorce spousal assistance. And in most states, you cannot attempt to restrict or try use a contract to get out of child care or child custody – any attempt to try and to limit or establish child custody or child support is going to probably be thrown out or leave the whole contract unenforceable. You need to talk with an experienced and knowledgeable family law attorney to understand what the rules are governing your specific case.

When Should I Avoid a Postnuptial Agreement?

A postnuptial agreement is not in the best interest of each partner. A wealthy spouse, who wishes to attempt to prevent alimony or breaking up the family business may attempt to utilize a postnuptial agreement to protect their assets and income in the long run. Whereas, a partner whose income is low could receive a postnuptial agreement that gives them less alimony and property if a law trial was involved.

What Should I Do Before Signing a Postnuptial Agreement?

It is a good idea to get your own lawyer to examine the postnuptial agreement especially if it’s your spouse’s lawyer that has drawn up the agreement and they expect you to just sign it. It is in your best interest to have your own lawyer to ensure that you are getting a fair deal and also because a conflict of interest would arise if your spouse’s lawyer was representing both parties. In certain states in the USA, such as California, a court will most likely not enforce a postnuptial agreement if only one party in the case is represented by a lawyer.

It is easy to miss significant terms should you simply just skim the contract. You have no excuse to complain, at a later date, about something in the postnuptial agreement if you did not read it thoroughly. If you are still uncomfortable about registering a postnuptial agreement or do not realize what you’re agreeing to, then speak with your lawyer about what is concerning you. You should never sign a postnuptial agreement until you have agreed to the terms of the agreement because it will be too late once you have signed the agreement.

Will a Court Enforce My Postnuptial Agreement?

Many postnuptial agreements can defy being challenged by a court, meaning you ought to expect a judge to accept your agreement. But, if your postnuptial agreement doesn’t come up to scratch, then a judge will reject it.

In some U.S. states like Utah and California, it can be tough to get a postnuptial agreement enforced. In these states, as soon as you’re married, you have an increased obligation to your partner regarding your assets, financial arrangements, and property. You need to deal with each other in the exact same way business partners treat one another under the law.

A postnuptial agreement cannot cover such matters like child custody, child support, divorce, and cannot ask a partner to commit fraud or any form of illegal activity. In the event that the agreement is uncertain, exceptionally unfair, or has been signed under duress (risks of violence or injury), a judge will not apply it.

A Postnuptial Agreement Might Even Save A Marriage

Are you out of luck if you’re already married? No — certainly not! You and your partner can enter a postnuptial agreement. A postnuptial agreement is an efficient means of documenting what you intend to do with your assets and earnings throughout your marriage and will include a provision for divorce if it happened. You usually find that a postnuptial arrangement is agreed to early in a marriage because they just didn’t have the time before the wedding to set up a prenuptial agreement. Also, they tend to surface some ten years or more into a marriage when some form of conflict arises between both parties that could jeopardize their relationship.

Protecting Your Love and Yourself – That’s A Good Thing

Postnuptial agreements are usually vilified and have gained a bad reputation. The fact is that they are just misunderstood. They are an excellent means of safeguarding each other from making decisions out of anger and resentment. When you’re madly in love with each other, the very last thing that you need to be thinking about is what will happen if it all went away.

On the other hand, if you plan for any potential situations later on, everybody is covered and that in its own, offers reassurance. Marriages evolve and individuals change. If you and your partner evolve together and are able to work through hard times, there would be no need to use the postnuptial agreement. However, a postnuptial agreement offers ‘insurance’ that can safeguard a marriage and the individuals in the marriage, for better or for worse.

Asset Protection – other

Here are the most commonly used structures in asset protection. Click each to learn more.  

Why do you need protection?

PAGA Lawsuits Jeopardize Personal Assets

Are you a business owner facing a PAGA lawsuit? The Private Attorneys General Act (PAGA)authorizes disgruntled employees to recover civil penalties on behalf of themselves, other employees, and the State of California. PAGA was originally enacted to help California regulate its underground economy, but it also allows employees to act as an enforcement agency and sue for virtually every labor code violation, not just serious violations or those related to health and safety.

These lawsuits, often brought by plaintiffs’ law firms, also aim to take advantage of California’s new laws on worker classification. California has long sought to classify most workers as employees, and this was made possible by the 2018 Dynamex decision of the California Supreme Court and the enactment of AB5 in 2019. While most news articles discuss how Dynamex and AB5affect large companies like Uber and Lyft, what about the small business owner?

These new laws apply to all California business owners, and law firms are rushing to cash in. Entire law firms have been established just to pursue and profit from PAGA. These lawsuits allow plaintiffs to pursue not just the assets of the business itself, but also the assets of the individuals who own the business. While some of the 5,000 PAGA lawsuitsfiled each year are fair and reasonable, many are designed to take advantage of the law and can seriously devastate an independent business.

For example, a solar panel company in Ahaheim was sued for allowing their employees to clock in a little early and out a little late—before their shifts began and ended—as a courtesy to earn additional income. Those extra minutes on the clock meant the company was unknowingly violating labor law by not giving its employees enough rest breaks, even though those extra moments were spent socializing, smoking, or eating breakfast. As a result of the lawsuit, the company has racked up millions of dollars in debt and was forced to cut their workforce from 175 employees to eight.

An event rental company in Van Nuys was sued by two former employees for being terminated. Their lawyer, using the PAGA act, did more than go after the company for termination and filed a lawsuit for $29 million over alleged missed lunch breaks. A janitorial service provider in Southern California recently agreed to a $5.4 million settlement in a class-action lawsuit on behalf of 3,000 employees. The employees claimed they were not reimbursed for the use of personal cell phones to communicate with their supervisors. The list of frivolous PAGA lawsuits that have been filed in the past couple of years is long, and unfortunately continues to grow.

If you are a California business owner, your personal assets, including your home, may be exposed to a PAGA lawsuit. In just the past two years we have represented dozens of California business owners facing these types of lawsuits.

We specialize in protecting our clients’ assets from plaintiffs and creditors.  We have completed over 3,000 transaction over the past 20+ years. If you are facing a possible PAGA action, please call us to learn how we can protect your business and personal

Last Minute Asset Protection

Is it too late to protect your assets if you have already been sued? If you have already defaulted on a personal guaranty? Were involved in a car accident? Received a letter from a government agency opening an investigation? These are the most frequently asked questions. It is our position that it is almost never too late to plan for asset protection.

When an unfortunate event threatens your assets, your choice will be binary – do something to protect your assets or do nothing. If you do nothing to protect your assets, your odds of success are zero. If you use an asset protection plan, your odds of success will be infinitely greater than zero. In the immortal words of Wayne Gretzky, “One hundred percent of the shots you do not take, do not go in.”

It is true that if you plan “after the fact”, i.e. after something bad has happened, the odds of success will be lower than when planning beforehand. But your odds of success will still be high. Depending on the assets you need to protect, how aggressive the plaintiff will be, and the structures we utilize, the odds of success will range from 50-99%!

Here is a recent example of last minute asset protection. You will find other examples in the case studies section of this website.

Harold is a real estate investor and developer in Manhattan. Over the past several years he had experienced a string of bad luck. Projects kept failing and Harold kept dipping into his savings to cover shortfalls. On two occasions he had to sell some of his portfolio properties to cover creditor claims.

Most recently he found himself facing a possible loan default on one project and a lawsuit by investors on another project that had failed. The potential exposure would have led to Harold’s financial ruin.

His primary remaining assets were three small apartment buildings that he had inherited from his parents and have been in his family for close to fifty years. When we recommended to Harold that she should sell these buildings and then seek structures to protect the cash proceeds, he was adamant that he could not sell these family “heirlooms.”

This is something we commonly encounter. Many of our clients are very reluctant to part with their real estate – whether it is their residence or an investment property. While we understand the emotions involved, when faced with serious financial adversity logic should prevail. Harold’s real estate was an heirloom to him, not to his creditors. Creditors would never hesitate to take your home or your prized income producing property. To them, it is just money.

We explained this to Harold, but he could not commit to taking any action. Several months passed and the potential litigants had all filed lawsuits. Was it truly too late to do something at that point?

Harold finally took action and sold all his real estate. We protected the sale proceeds with an offshore structure, and Harold settled with all his creditors for less than 10 cents on the dollar. After he negotiated settlements with all his creditors, Harold unwound the offshore structures and used the money to repurchase one of the heirloom properties and to purchase other investment properties.

We will always advise our clients to protect assets as early as possible. When planning late, remember, doing something is always better than doing nothing.

When You are Faced with a Lawsuit

Being sued is stressful and scary. If the plaintiff obtains a judgment against you, they will be able to use that judgment to take your assets. You must be realistic about your odds of success and what will happen when the plaintiff prevails. Often, we see clients hide behind wishful thinking and optimism. Hoping for the best is not a strategy for success. You want to hope for the best, and plan for the worst.

Even if you are innocent the lawsuit may go against you. We have seen it countless times. Jurors may side with the plaintiff who appears to need the funds rather than the defendant who they assume has money to spare. Plaintiffs may lie and defraud the court system. The judge may not find your side of the story believable.

Even a judge’s own personal feelings can put you in jeopardy.


As long as I am allowed to redistribute wealth from out-of-state companies to injured in-state plaintiffs, I shall continue to do so. Not only is my sleep enhanced when I give someone else’s money away, but so is my job security, because in-state plaintiffs, their families and their friends will re-elect me.
West Virginia Supreme Court Justice


Many believe that once a lawsuit has been filed against them, it is too late to shield assets from plaintiffs. They are often told so by their litigation counsel or their friends. Our clients are happy to learn that usually there is still a lot they can do to protect their assets.

We strongly recommend protecting your assets before a lawsuit. The old saying, “Prevention is better than cure” is especially relevant in Asset Protection planning. Being proactive is better than being reactive because the odds of success decrease with time. For example, if you are sued because you caused an automobile accident, the best time to plan is before you get into an accident. Once you are in an accident, it is better to plan before the plaintiff files a lawsuit. If they have already filed a lawsuit, it is better to plan before they obtain a judgment. At each stage, the effectiveness of the asset protection structures decreases. But it never decreases to zero. Which means you are always better off doing something rather than doing nothing.

The U.S. is a litigious country and is fraught with frivolous lawsuits. People get sued every day for many reasons. You may have been involved in an accident, an unhappy client sues your business, or a disgruntled employee believes they have been wronged. Everyone is susceptible to being sued, but there are several occupations like medical professionals that are more prone to lawsuits.

Protecting assets is just as important as accumulating wealth. There are many sophisticated asset protection structures available that make asset protection, before and after a lawsuit, possible.

You Are in a High Risk Business

Many businesses and professions are exposed to a significant amount of risk and often insurance coverage is not available, not affordable or not sufficient. Medicine is a good example. Malpractice premiums, especially for surgical specialties, are very expensive. Insurance does not cover all claims or the coverage amount is not sufficient to cover the more significant claims.

Many of our clients are doctors, attorneys, real estate developers and investors, high-tech entrepreneurs, distributors, manufacturers subject to product liability claims and small-business owners. Almost all of our clients carry insurance, and yet often find themselves in situations when insurance is not enough. For those who do not have insurance, quickly realize that when something bad happens, it is too late to insure.

Life is full of surprises and some are unpleasant. Bad things usually happen to other people – but not always. Over the past twenty years we have seen every conceivable type of business and individual get sued. We have seen clients who are in their 90s get into their first car accident. We have seen big Hollywood producers fail spectacularly and get sued by investors. We have seen accountants practice for forty years and then face their first ever malpractice claim. If you operate a high-risk business, your odds of getting sued are even higher.

The consequences of a lawsuit can be financially crippling.  It is better to be prepared. We recommend that you seriously consider taking all available steps to protect what you have worked so hard for.

Do you have adequate insurance? It is tempting to cut corners here, but don’t because this is the first line of defense against lawsuits.

Does your business have the right structure to give you the best protection?

Do you have a solid, updated asset protection plan for your personal assets put together by a reputable attorney?

We have structured thousands of transactions and will be happy to help you analyze your risks, determine the optimal business structure, separate assets from liabilities and protect your personal assets.

For clients who desire privacy and want to separate themselves from their business, we are adept at setting up privacy shields and anonymity structures. If your existing business is facing a creditor claim, we can help you set up a new business and avoid successor liability. Call us, we will be happy to help.

You Have Been in an Accident

The very nature of an accident is unpredictable and unintentional. Traffic accidents can happen anytime, to anyone, anywhere.

The sheer number of people out and about, driving cars and motorcycles; riding bicycles and skateboards, and running or walking, makes it highly probable that someone, somewhere will have a traffic accident. When combined with factors such as distractions, negligence, age, alcohol, and drugs, the possibility of an accident is quite significant.

About six million traffic accidents occur each year in the U.S with 6% of these ending in a fatality, 27% in a non-fatal injury, and 72% in property damage.

Unfortunately, as if accidents weren’t bad enough, they usually come hand-in-hand with a lawsuit. There is a significant plaintiff’s bar that looks to make a living off victims of traffic accidents. With traffic accidents claiming the highest number of personal injury cases, which could involve drivers, riders, and pedestrians, almost anyone on the road right now is in danger of a lawsuit.

We have represented hundreds of clients who were involved in traffic accidents. Our clients include those who have run over pedestrians or crashed into other cars and motorcycles, as well as bicyclists who have struck trees and cars. We have also represented a great many parents whose children were involved in accidents or illegal street races and who are facing lawsuits for a negligent entrustment of a car to a minor child.

The goal of a lawsuit is to get as much money out of the defendant as possible. Many times, the defendant is facing the possibility of losing everything they have. In fact, there are approximately 150,000 practicing attorneys in California alone. Many of them look to suing you and seizing your assets to make a living. We will make it a lot more difficult and a lot more expensive for the plaintiff’s lawyer to take your assets.

How we can provide asset protection for you in the event of an accident

Here is a recent example:

Charles is in his early 90s and is sharp and in great physical health. Charles is married to Susan, who is in her early 80s and is not doing as well as Charles.  Charles was recently involved in an automobile accident, which was determined to be his fault. He carries a $150,000 insurance policy, which the plaintiff’s attorney alleged was not enough to cover the injuries. While the injuries did not appear to be very severe (the plaintiff was back at work two weeks later), the PI lawyer saw deep pockets and was demanding $900,000.  Charles and Susan have a paid off house worth $1.2 million, and approximately $800,000 in the bank. That is their entire life savings and it was very important for Charles and Susan to keep their assets. They are considering moving to an assisted care facility, and will need the cash to get in.

We understand that these cases are usually not driven by the plaintiff – they are driven by the plaintiff’s lawyer. The plaintiff’s lawyer is working on a contingency basis – he gets paid only if he prevails in the lawsuit and then collects on the judgment. If we can make it more expensive and more difficult to collect, he may be reluctant to move forward with litigation.

Following the structuring that we completed with Charles and Susan, we brought in an experienced litigator to negotiate a settlement with the plaintiff. The case was settled for $60,000, much to the satisfaction of Charles and Susan.

We encourage you to be proactive in protecting your assets before anything happens. We also encourage you to carry higher insurance limits and to acquire an umbrella policy.

If you have already been involved in a traffic or other accident and you are concerned that you may be sued, or you have already been sued, contact us immediately and we’ll explore your asset protection options together.

You Are Being Pursued or Investigated by a Federal or State Agency

There is nothing as daunting as the wrath of a government agency. Government agencies operate with unlimited budgets, are stuffed with zealous bureaucrats and usually presume guilt of the person or entity being investigated. We have represented many clients who were investigated, audited, or sued by the Federal Trade Commission, the Food and Drug Administration, the Securities and Exchange Commission, Customs and Border Protection, the Internal Revenue Service, and countless state agencies. We have even represented clients facing inquiries and investigations by the various committees of the U.S. Senate and Congress.

Some government agencies possess powers of seizure and are able to freeze assets. The FTC is a good example of an agency that not only has such powers but eagerly exercises such powers. Recently we saw a client investigated by the FTC. Upon launching an investigation, the FTC froze the bank accounts of the business and of the principals who own the business. Weeks later the investigation was concluded and no wrongdoing was found. In the meantime, our client was unable to pay its employees and vendors and had to declare bankruptcy. Because all accounts were frozen, the client could not even hire lawyers to represent itself before the FTC.

We make it our business to know how aggressive each government agency will be and what steps they will take to collect or seize our client’s assets. We act swiftly to move assets beyond the jurisdiction of the agency in question and to move assets into structures that can withstand a significant attack.

You Owe Money to a Lender

Accruing debt is the easy part. Owing money and the stress that comes with it is not. Many people find themselves in a bad debt situation. We have seen hundreds of clients who have: purchased real estate before the collapse of the market, undertaken real estate development projects to have the funding cut off at the last minute, borrowed money to fund a new business that went under, signed personal guarantees on a real estate or a business loan, lost an anchor tenant at their shopping center, or taken out a credit line.  We have seen these clients borrow money from or sign personal guarantees to large international banks, small community banks, private lenders, private equity funds, former friends and business associates, and the SBA.

Commercial lenders usually make for aggressive and formidable creditors. It is important to know just how aggressive your creditor will be when collecting the debt. Some lenders will immediately issue a notice of default and then move to file a lawsuit. They will prosecute the lawsuit to a judgment and will then move to collect on that judgment and they will not settle or negotiate. Other lenders will allow years to slip by before they take any action. We have represented hundreds of borrowers and guarantors, and know which lenders are aggressive, which will hire private investors, pursue judgments across state lines, which will settle, and which will never negotiate.

If you are worried about a loan default (whether you are the borrower or the personal guarantor), it is very important to pursue asset protection planning before the default takes place. This makes it a lot more difficult for a creditor to defeat the asset protection structure. However, even if you have already defaulted, there are many possible structuring options that will either shield your assets or place you into a much better negotiating position.

What do you want to Protect?

What to Protect

Your Home | Your Business | Your Investments

Our asset protection planning can reduce or eliminate threats from creditors, plaintiffs, unhappy business partners, state and federal agencies who threaten your assets. Learn what you should consider protecting here.

Your Home

For our clients, their home is the most important asset to protect. The home represents a significant portion of their wealth, has sentimental value and is not as easily moveable as other assets. Imagine having to move – packing all your belongings, finding a new place to live, moving, unpacking, etc. All of these are true whether the home is worth $300,000 or $30 million.

Your personal residence, like any other real property, is one of the most difficult assets to protect. Ownership of real property is public information, your name is already part of and will always in the chain of title, and anything you do with the property is easy to discover. More importantly, regardless of what clever planning structures we can develop, a local judge would always retain jurisdiction over real estate and can choose to ignore the asset protection planning that was implemented.

You need to realize and accept that there is no structure that can protect your home 100%. It simply does not exist and if someone promises you bulletproof protection for real estate – run! When we are charged to protect a client’s home, our goal is to make it difficult and expensive to reach, changing the economics of the case. This will often cause plaintiffs and creditors to either walk away or to negotiate on better terms.

Protecting a personal residence is commonly accomplished by transferring title of the property out of your name (see Personal Residence Trusts and LLCs) or by eliminating the equity in the real estate (see Equity Strips). We find these structures to be effective in 70-90% of cases, depending on your circumstances.

If you do want to shield the equity in your real estate 100%, you would need to sell the real estate (thereby converting your assets from real property to cash) and protect the cash. Cash we can often make unreachable with an offshore structure (see Foreign Trusts). You can also consider moving to a state that has an unlimited or a large homestead exemption (Florida, Texas, Kansas and Nevada).

We also have several structures that we use to protect a personal residence that are not disclosed on this website. Contact us today at (818) 935-6057.

Your Business

An interest in a business is personal property, and similar strategies are utilized to protect business interests as other personal assets like cash and investments. Our inventory of strategies to protect your business include incorporation, limited liability company, limited partnership, UCC-1 liens in favor of friendly lenders, parallel conversions, sale of assets to friendly third parties, various estate planning structures and trusts (including domestic self-settled trusts, foreign trusts and private retirement trusts). With our broad experience, we custom-design the asset protection strategy that fits your business and circumstance best.

Your business may also be a significant source of liability exposure, and just as it is important to protect the business from your own liabilities, it is important to protect your personal assets from business liabilities. Here the analysis focuses on selecting the correct type of legal entity and structuring the entity and the business operations in such a way so as to avoid the piercing of the corporate veil. A creditor may be able to pierce the corporate veil of your business if the business is undercapitalized on formation, the business does not correctly observe the required corporate formalities (meetings of shareholders, minutes of meetings, corporate records, state filings, tax filings, etc.) or there is commingling – the income of the business is deposited into the personal bank account of the individual owner or the personal expenses of the owner are paid by the business directly.

Here are two examples of how we protect businesses and how we protect personal assets from business lawsuits.

Our client had a successful gold trading business. One night, either because he was tired or careless, he caused a multi vehicle accident. Our client was adamant that he will cover the medical costs of the other drivers involved in the accident but was scared that the plaintiff’s lawyers were out for blood and would take from him everything that they could.

The gold trading business was organized as a corporation, which is not the optimal business entity in most cases. Our client owned the shares of stock of the corporation – which like any other personal property a debtor owns can be attached by a creditor. We moved quickly to convert the corporation into a limited liability company and made the election to continue to tax the entity as a corporation. This way there were no tax consequences of the conversion. At the end of the day, our client owned a membership interest in an LLC – which is not attachable by a creditor.

In California and many other states, our business clients routinely face lawsuits from their employees for unpaid or underpaid wages, missed meal breaks and misclassification of employees as independent contractors. Just recently we represented a large janitorial company that used its own employees and also used the workers of its subcontractors. The subcontractors were classifying their workers as independent contractors. A plaintiff’s law firm organized a large class of these workers and filed a lawsuit against the subcontractors and against our client for misclassification under the Dynamex decision (a 2018 California Supreme Court decision on classification of workers as employees versus independent contractors).  While these cases are filed against the corporate entities, plaintiffs frequently attempt to pierce the corporate veil of the entities (here, the janitorial company) and in some cases the owners of these corporate entities have personal liability under the applicable state law.

We implemented aggressive asset protection structures for our client’s personal assets and were able to persuade the plaintiff to seek their payday elsewhere.

We also often help clients restructure their existing business operations to separate the valuable assets of the business, like intellectual property, real estate or equipment, from the liabilities of the business.  We recently had a client with a very successful business distributing flooring materials. The flooring materials were imported from China and sold throughout the United States. The bulk of the business was generated through the website, which had a very high traffic domain name. The client was worried about possible anti-dumping penalties (which can be imposed retroactively). If penalties were imposed by U.S. Customs, they would be imposed against the business entity, which owned the operating business and the domain name.

We advised the client to transfer the ownership of the domain name and several trademarks into a standalone entity. This way if there ever was a lawsuit by U.S. Customs, a vendor or an employee, the lawsuit would be against the operating entity which no longer owned the valuable intellectual property.

We also have several asset protection structures not disclosed on this website. Contact us at (818) 935-6057 to learn how we can help you protect your business assets.

Your Investments

Bank accounts, investment accounts and other liquid forms of wealth are usually the most desirable assets to pursue for any creditor. These assets are pursued with vigor, and private investigators are frequently used to locate these assets. To protect liquid assets look to the following structures: Limited Liability Companies, Foreign Entities and Foreign Trusts.

We also have a few tricks up our sleeve that are not disclosed on this website. Contact Maximum Asset Protection for help protecting what matters most to you.

California Collection Laws

The Californian Collection Laws are statutes that provide the legal rights and powers that a creditor has to enforce a judgment against a debtor. The details of these rights and powers can be found in Title 9 “Enforcement of Judgments” of the Californian Code of Civil Procedure (CCP).

What happens after a creditor has legally received a judgment against the debtor? What is the creditor allowed to do to enforce the judgment and be able to claim on the judgment?

The CCP states that all assets owned by the debtor, with some exceptions, can be subject to the enforcement of a judgment against the debtor. The judgment can include all the property owned by the debtor along with any community property owned by the debtor’s spouse.

Any form of asset protection planning is based on the ability of the creditor being able to collect the debt. But if the creditor has no entitlement to collect on a judgment then there is no need for protective planning.

Any additional charges and interest may be introduced to the judgment. As any further money is made available from the debtor to the creditor, it is applied to meet any extra fees and interest, and only in this instance will it be added to the outstanding balance of the judgment. Interest usually only accrues on the original amount of the judgment other than when judgments are periodically re-recorded, in which case the interest compounds.

When a judgment has been entered, it can exist for 10 years with the option of renewing the judgment for an additional 10 years.

A judgment is normally collected via the lien mechanism. By documenting a lien with the county recorder’s office or the Secretary of State, a lien can be placed on the debtor’s real and personal property. The property will have to be sold by the debtor or foreclosed by the creditor for the lien to be satisfied. Only when the judgment is satisfied will the lien be released.

When a real property judgment lien is created, the judgment must be recorded in the county where the debtor owns the real property and the creditor must register a lien against the debtor in each county if required. A judgment lien is valid for 10 years unless it is renewed.

In California, a personal property judgment lien is valid for five years from the date it is filed with the California Secretary of State. A creditor can collect on a judgment via the lien process as well as through the writ of execution. A writ of execution is theoretically a levy and is issued by the county clerk where the judgment was issued, and the writ gives the county sheriff permission to secure the debtor’s property in the relevant county. A separate writ of execution must be issued if the creditor wants to put a levy on the debtor’s property. A writ of execution is valid for 180 days.

A levy can be placed on all of the debtor’s property that is stated in the judgment via the writ of execution process. The debtor’s real property can be included in the levy, but before this can take place the levy must be recorded in the county where the property is situated. There are some exceptions that can play a part in a levy being placed on the debtor’s property. They include a partnership with the debtor’s partner, a limited liability company membership, the value of a life insurance loan or a beneficiary of a trust.

Irrespective of whether the debtor’s levied property is real or personal property, once the sheriff collects the property it is sold at a foreclosure sale, for cash or cashier’s check, to the highest bidder. If there are any tax liens involved with the property, they must be added to the overall total value of the property. Therefore, the property must be sold for a price that is above the combined total of the tax liens and the exemption amount of the property. As soon as the property is sold then the lien on the property ends.

After the sale of the property, the sheriff will deduct any costs and provide the creditor with the remaining balance. If the property had liens on it that were of a higher priority than the judgment creditor then the creditors are paid off first and what is left goes to the debtor. Special rules apply if the judgment is for the foreclosure of a mortgage.

Although they are not easy to obtain, a debtor can attempt to apply a turnover order instead of a writ of execution. A turnover order is a court order that allows the debtor to turn their assets over to the creditor. This usually applies to a specific asset.

Here is an example of an issue that is often ignored by asset protection practitioners.

A creditor tries to protect their property by transferring the title of the property to a limited liability company (LLC) or an irrevocable trust. In order to do this, the creditor must record the judgment lien with a county recorder, but as the lien to the property is not in the debtor’s name, the debtor believes they have successfully protected their property from their creditors. Theoretically, the creditor will not get the debtor’s property but, it is possible that the insurance company on the property’s title can step in and refuse to insure the sale of the property because the lien is not attached to the creditor. This will make it impossible for the creditor to sell the property.

Fraudulent Transfers

UFTA | Types of Fraud

The original 16th century English Statute of Elizabeth was the basis for the American law that encompasses fraudulent transfers. Back in the 16th century, the penalty for fraudulent transfers under the Statute of Elizabeth was to forfeit the value of the property. The value of the property was split two ways. Half went to the Treasury and the remainder went to the creditor. The Statute of Elizabeth has formed the basis for the majority of English law jurisdictions.

In 1918 the United States decided to use the Statute of Elizabeth for the first time, as a basis for creating the Uniform Fraudulent Conveyance Act. This act was subsequently adopted in 26 jurisdictions. In January 1987, the Uniform Fraudulent Transfer Act (UFTA) was created. It is a modern-day version of the Uniform Fraudulent Conveyance Act.

If a debtor tries to reduce the value of their property by transferring a portion of their assets to a family member, trust, partnership, corporation, or any other person or business venture, then the transfer may be deemed fraudulent by a creditor.

If a creditor feels any form of transfer is suspicious and possibly fraudulent then they must set aside the transfer and only proceed after the transferee. In some cases, to stop any additional transfers a court may grant the creditor injunctive relief (including pre-judgment). If the debtor is filing for bankruptcy, then a fraudulent transfer There is the possibility that the debtor will be denied relief if they are filing for bankruptcy because a fraudulent transfer allows the creditor to prevent this form of transfer.

The fraudulent transfer laws only apply to property transfers that have the debtor as the benefactor. The debtor has to legally own the title to the property (e.g. retitling a property for getting a loan). The creditor cannot set aside transferring this type of property.

Although the majority of people believe that a fraudulent transfer is fraud, it is most definitely not. Most people usually look upon fraud as a way of lying/cheating to gain some form of advantage. The Black’s Law Dictionary interpretation of fraud is “a knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment”.

A simple example of an act of fraud is when a local used car dealer turns back the odometer on a car to make a sale. If the claimant can prove that the defendant has deliberately created an act of fraud, they should be entitled to some form of compensation. On the other hand, it is not necessary for a creditor to prove that an act of fraud has taken place in order to file a fraudulent transfer claim.  A creditor may deem a transfer fraudulent without the presence of ill intent by the debtor and void the transfer.

Fraudulent transfers of property are valid, legal transactions, except as it applies to a creditor. In California, the UFTA is part of the California Civil Code (CCC) and the current legal position of the UFTA is that a fraudulent transfer falls into two categories.

Transfers which are created to intentionally defraud a creditor. In this instance, we need to determine why the debtor wants to engage in a fraudulent transfer. The CCC defines this type of fraudulent transfer as:

A transfer made, or a responsibility incurred by a debtor is fraudulent to the creditor, irrespective of the creditor’s claim being earlier than or after the transfer took place, or if the debtor completed the transfer or obtained the agreement as follows:

With the intention to block, put off, or defraud any of the debtor’s creditors.

Does not receive a reasonable price in exchange for the transfer or responsibility, and the debtor:

Was intending to enter into a business transaction with the debtor even though their assets were smaller than the intended business or transaction; or

Was intending to incur debts higher than their ability to pay for them when they were due for payment.

The second type of fraudulent transfer is when a debtor, irrespective of being insolvent, creates the transfer as a gift to another person. What the debtor intended to do is irrelevant. This is a constructively fraudulent transfer.

When a creditor claim comes before a transfer is made, or the transfer made does not receive equivalent value, or the debtor was insolvent, or the debtor became insolvent because of the transfer or the obligation.

A creditor only has a small window of opportunity to enforce a fraudulent transfer action. The fraudulent transfer is canceled unless the action is brought:

If the claimant discovers under subdivision (a) within either one year or four years, after the transfer was created that there was intent to delay, defraud or hinder the transaction. Under subdivision (b) the equivalent value of the transfer was not received within four years after the transfer was made. Any cause of action against a fraudulent transfer or obligation ends if no action or levy is made within seven years after the fraudulent transfer or obligation was implemented.

A conveyance of real estate by a debtor can be simply addressed as a “transfer” with regard to fraudulent transfer reasons in the event that this type of conveyance reduces the price of the debtor’s property. The transfer of actual property subject to encumbrances, featuring judgment claims, might not really be set apart as a fraudulent transfer, as the creditor may not suggest exactly how they were actually injured. Also, if there is an available exemption covering the transferred property, that cannot be classed as a fraudulent transfer because it will not reduce the amount the creditor will receive

The California Civil Code describes the term “transfer” as each and every form, indirect or direct, actual or conditional, optional or unintentional, of getting rid of or even parting with a possession or an interest in a possession, as well as involving the repayment of any amount of money, release, lease contract, and even generation of a claim or additional burden

As well as dealings that are generally actual transactions, various additional activities might be addressed as transactions: inaction, a disclaimer regarding defenses, the ending of a lease contract, an loan increase, a waiver, creating an income tax judgment, taking money out of a bank account, approving a safety and security interest in residential or commercial property, alteration of non-exempt resources to excluded assets (despite the fact that the deal could be defined as a borrower moving assets to themselves), improving a security interest or perhaps acquiring a claim, and the leasing of a residential or commercial property for lower than the legitimate market price.

Equally, it is really essential to recognize what establishes a transfer, it is just as essential to understand what is not a transfer: a clerical decision (such as retitling residential or commercial property in order to rectify the title), a transfer (by a procedure of law) by a person other than the borrower, or even a mandatory (by a procedure of law) transfer by the borrower. For instance, a transfer of assets to an ex-spouse following a divorce decree does not constitute an avoidable transfer.

For bankruptcy law purposes, a transfer (for fraudulent transfer purposes only) will take place when the title in the transferred property is perfected in such a way that no one would be able to acquire title in the property superior to that of the transferee. The timing of the transfer may be of crucial importance, as it determines the value of the transferred property and must also coincide with intent to defraud.

Along with deals that are transfers per se, there are other instances that might be dealt with as transfers: such as: inactivity, a waiver of any form of defense, the ending of a lease, an extension of a loan agreement, a disclaimer, paying taxes or making a bank transaction, etc.

Furthermore, indirect transfers are generally not addressed as transfers. A transfer by a firm managed by a debtor is not actually considered as a transfer being generated by the borrower. In a financial transaction where the borrower obtains possession or even sells off a possession, the transfer occurs as soon as the commitment to pay occurs. Therefore, regarding a transference of land for a promissory note, the transference for UFTA reasons occurs whenever the initial payment is actually due on the note.


Fraudulent Transfers under the Bankruptcy Code

The Bankruptcy Code is the government’s equivalent to the state fraudulent transfer laws. It offers two kinds of fraudulent transfers similar to the states and the California regulations reviewed above: the real intent to defraud, as well as constructive fraud bankruptcy. Good faith buyers are safeguarded just the same as they would be under state legislation.

In the context of insolvency, the insolvency trustee might nullify a fraudulent transfer only if it was embarked on within two years of declaring the insolvency application. This implies that all pre-bankruptcy preparation needs to be carried out at the very least a minimum of one year before declaring of the insolvency application. If the borrower participates in a fraudulent transfer yet, later on, reverses the transfer before applying for insolvency, the earlier fraudulent transfer will be disregarded. The earlier fraudulent transfer will be disregarded if the borrower engages in a fraudulent transfer but later on reverses the transfer prior to submitting it for insolvency.

Due to the fact that courts deal heavily with borrowers participating in fraudulent transfers, it is very important for borrowers to complete all pre-bankruptcy planning transfers at the very least one year before the bankruptcy, as well as to completely divulge the transfers. An attempt to deceive the creditor or hide a transfer from a creditor can result in a denial of discharge. Once again asset protection planning must not involve deceptive or dishonest conduct. If done right, asset protection needs to be open, honest, as well as lawful, while continuing to be efficient.

Just how does one differentiate between a fraudulent transfer and pre-bankruptcy planning? In a commonly mentioned decision, a California bankruptcy court specified that:

… if the borrower has a specific creditor or a variety of creditors in mind and is also attempting to remove his assets from their reach, this would certainly be grounds to reject the discharge. However, if the borrower is just looking after his future wellbeing the discharge will be approved.

In the event of a fraudulent transfer within one year of the declaring, not only will the transferred property be included in the bankruptcy estate, additionally according to the Bankruptcy Code a bankruptcy discharge might be rejected totally. Denial of discharge is an extremely effective tool in the bankruptcy court’s toolbox that is mainly created to handle pre-bankruptcy planning.

Usually, the conversion of non-exempt assets into excluded assets on the eve of insolvency would not be an indication of fraud in itself. Nevertheless, depending upon the amount of the exemption as well as the conditions surrounding the conversion, a court might discover the conversion to be a fraudulent transfer. This is particularly true when the conversion amounts to nothing greater than a short-term arrangement. The cases that held a conversion of non-exempt assets into exempt assets can be deemed fraudulent transfers because they appear to concentrate on the presence of an independent factor for the conversion.

As an example, if a borrower bought a house that was protected by a homestead exemption with the intent to live in such house, that would be a permitted conversion into non-exempt property. However, where the borrower bought the house with all of their available funds, leaving them with no cash to live off, it could be presumed that this was a short-term endeavor, suggesting it was a fraudulent transfer. As soon as the courts realize this, they will certainly take a look at the timing of the transfer as one of the most important factors of the conversion. The further the transfer is removed from the insolvency, the better it will look in the eyes of the court.

The Uniform Fraudulent Transfer Act

The Uniform Fraudulent Transfer Act (UFTA) is included in the California Civil Code (CCC). There are two kinds of fraudulent transfers. The first kind of fraudulent transfer is one made with intent to defraud a lender. The second kind of fraudulent transfer under UFTA is a constructively fraudulent transfer which occurs when a transfer is essentially a gift and, the borrower is unable to pay off a debt either before or as a result of that transfer. More on these below.

Fraudulent Transfer with actual intent to defraud a lender: Here we are taking a look at the borrower’s motivation for engaging in the transfer. The CCC specifies this kind of fraudulent transfer as:

A transfer made, or responsibility sustained by a borrower is fraudulent to a lender, whether the lender’s claim occurred prior to or after the transfer was made or the obligation was incurred if the borrower made the transfer or incurred the obligation as follows:


(a) With actual intent to impede, delay, or defraud any lender of the borrower.

(b) Without getting a fairly comparable value in exchange for the transfer or commitment, and the borrower:

(i) Was involved or was about to participate in a business or a transaction for which the remaining assets of the borrower were very small in relation to the business or transaction; or

(ii) Planned to incur, or thought, or reasonably should have thought, that he or she would sustain debts beyond his or her ability to pay when they became due.


Fraudulent transfer where the transfer is essentially a gift: In this scenario, the transfer is made when the borrower is bankrupt, or will become bankrupt due to the transaction. Here, the borrower’s intent is pointless, and the transfer is called constructively fraudulent. The CCC provides:

A transfer made, or a commitment sustained by a borrower is fraudulent to a lender whose claim occurred before the transfer was made. Or the commitment was sustained if the borrower made the transfer or incurred the commitment without obtaining a sensible amount in exchange for the transfer or commitment and the borrower was bankrupt at that time or the borrower ended up being bankrupt as a result of the transfer or commitment.

The lender has a restricted amount of time to bring a fraudulent transfer action. The CCC provides in part:

A reason for an action in regard to a fraudulent transfer…is extinguished unless the action is brought…

(a) Under subdivision (a) (intent to prevent, defraud, delay), within four years after the transfer was made… or, if later, within one year after the transfer…if the transfer was discovered by the claimant.

(b) Under subdivision (b) of (a comparable value was not obtained in return for the transfer), within four years after the transfer was made…

(c) Regardless of any other regulation, an action in respect to a fraudulent transfer or obligation is extinguished if no action is brought or levy made within seven years after the transfer was made or the obligation was incurred.


In a transaction where the borrower obtains an asset or sells an asset, the transfer takes place when the commitment to pay occurs. Therefore, with a transfer of land for a promissory note, the transfer for UFTA purposes will take place when the first installment is due on the note.

Usually, anybody going into bankruptcy understands that they will lose most of their possessions. In an effort to prevent lenders from removing some of their valuable belongings, debtors try to disperse them, in some cases to their loved ones, as soon as possible. However, large transfers of assets can increase the suspicion in a trustee, judge/court or even the creditors.

Today, the Fraudulent Transfer Act enables lenders to reverse some unjust transactions that happened before a borrower’s bankruptcy. One kind of transaction that can be reversed is when an asset is transferred for a relatively small price at a time when the borrower was bankrupt.

A borrower is financially bankrupt when their liabilities exceed their equity. An example of such a transaction can be seen when Mr. Jones decides to sell his $60,000 Mercedes car to his neighbor Mr. Jackson for $30,000.

Having no liens on the car makes the Mercedes an asset that lenders would certainly be permitted to get in a Chapter 7 bankruptcy. If the transaction between Mr. Jones and his neighbor had not occurred, the lenders would have obtained at the very least some form of their investment back, the partial value of the Mercedes. However, after the deal, the lenders will only be able to get the $30,000 that Mr. Jones got from the sale of the Mercedes. That is if Mr. Jones still has the money. The UFTA allows the transfer to be reversed and the lenders will be able to get the Mercedes back from the neighbor.

In this instance, Mr. Jones transaction is seen as being presumably a fraudulent transaction. After all, the $30,000 that Mr. Jones is giving away to his neighbor, in the form of the Mercedes, is not his property but his lenders’.

Types of Fraud

Actual Intent | Any Creditor | Constructive Intent

Actual Intent

Looking for Intent

A transfer will certainly be fraudulent if made with actual intent to prevent, hold-up, or defraud a lender. One must bear in mind that while the intent to defraud is normally the concern, a transaction can likewise be set aside with the intention to postpone or prevent, such as payment of assets to a partnership or a company. Therefore, if a transfer is made with the specific intent to prevent satisfying a particular obligation, then actual intent exists. Nevertheless, when a borrower chooses to pay one lender as opposed to another, that is not a fraudulent transfer. For these types of fraudulent transfers, it is the transferor’s intent that is the primary factor of the transfer.

Actual intent concentrates on the mindset of the borrower at the time of the transfer. Despite the financial circumstances of the borrower or the amount of the consideration obtained by the lender, if there is definite proof of actual intent to defraud then a transfer can be set aside.

One of the most essential principles of asset protection planning is acting whilst everything is calm. The actual intent test gives a key insight into why this principle is paramount. The actual intent test requires the presence of a link between the borrower and the lender at the time of transfer. If a borrower transfers assets when they have no lenders, then the borrower will undoubtedly lack the requisite actual intent to defraud a specific person.


Badges of Fraud

Proof of actual intent is hardly ever available to a lender, for it would certainly need evidence of someone’s inner thoughts. Because of that, lenders frequently need to depend on circumstantial evidence of fraud. To verify actual intent, the courts have created “badges of fraud,” which, while not definitive, are taken into consideration by the courts as circumstantial evidence of fraud. The ten badges of fraud are:

  • Becoming bankrupt because of the transfer;
  • Lack or inadequacy of consideration;
  • Family or insider relationship among parties;
  • The retention of possession, benefits, or use of property in question;
  • The possibility of the risk of litigation;
  • The financial situation of the borrower at the time of transfer or after transfer;
  • The presence or a cumulative effect of a number of purchases after the borrower had got into financial difficulties;
  • The basic chronology of events;
  • The secrecy of the transaction in question; and
  • Deviation from the usual format or course of business.

The visibility of several badges of fraud will certainly serve to move the burden of evidence from the lender to the borrower. Therefore, initially, the lender is settled with the duty of developing the existence of this circumstantial evidence. When that is effectively achieved, the borrower must then verify that in spite of this circumstantial evidence, the transfer was made with no fraudulent intent.

Badges of fraud were initially created by the common law English courts. The exact same concepts continue to apply today, and there is a massive amount of case law on the subject.

Based on these cases, you must remember the following guidelines:

  • Asset protection planning should not be secretive, or hidden. It must be open as well as recorded if entailing real property.
  • Transfers of assets must be completed at arm’s length, following traditional business practices, and should be documented like any other business deal.
  • Transfers to relevant parties, whether family members or managed entities, are constantly suspicious and looked at much more closely by the courts.
  • Transfers need to be created for adequate consideration, and, preferably, the sufficiency of such consideration needs to be supported by an evaluation.
  • If there are currently outstanding claims against the borrower, any transfer of assets will be suspicious. However, if the claims are pointless or have no substance, they can most likely be ignored.
  • The borrower transferring the assets must stay clear of any strings (control) over the assets, and they must not keep any benefits from such assets.
  • Finally, borrowers who have a criminal past will be investigated very closely.

One of the most important badges of fraud is the borrower’s financial circumstances at the time of the transfer; especially, whether the borrower was bankrupt at the time or as a result of the transfer is a vital aspect of actual intent. The bankrupt scenario is reviewed in more detail below.


Overcoming the Badges

As soon as a lender generates enough badges to establish actual intent, the borrower will need to explain and prove that although the badges of fraud existed, the actual transfer was not fraudulent.

Relying on the advice of counsel is a common method of mitigating the badges.

If the borrower seeks guidance or help from an attorney before the transfer, and they are subsequently informed that the proposed transfer is not a fraudulent transfer then that will put the borrower in a strong position.

Remember, the borrower is attempting to show that they have no intention of defrauding the lender, and seeking legal guidance is an excellent way of achieving that.

However, dependence on the recommendations of counsel is not outright protection. The borrower will certainly need to establish that their reliance was reasonable, and that every one of the pertinent facts was disclosed to the lawyer and that the counsel’s interpretation of the law was likewise reasonable. Even if reliance is established, it is not in itself an absolute defense, but only one of the elements that the court might take into consideration.

The more regular method of overcoming the badges of fraud is by creating an independent business purpose specifically for the transfer. For example, A badge of fraud will definitely be triggered if life insurance is transferred into an irrevocable trust for the transferee’s children.

However, bearing in mind that the badges are used entirely to infer intent, they can be overcome by setting up the trust as an estate planning tool to reduce the borrower’s estate when they die. A transfer of assets to an entity managed by the borrower might also trigger certain badges, but to overcome this the borrower could say they were intending to use the entity in a joint venture with other investors.

In asset protection planning, as in tax planning, developing a profitable independent company is vital. To be more reliable, the business objective must be established (i.e., documented on paper) before the transfer.

Types of Transfer – Any Creditor

The ‘real intent’ examination looks to the borrower’s intent to defraud “any” lender. The modifier “any” is extremely important. A lender looking to set up a fraudulent transfer doesn’t have to show that the borrower intended to defraud a particular lender. The lender only needs to show that the borrower, at the time of the transfer, wanted to defraud a lender.

However, while the borrower needs only to have intent to defraud “any” lender, that declaration is misleading. For fraudulent transfer purposes, the world of lenders is split into three classes: present creditors, future creditors, and future potential creditors.

The California Civil Code (CCC) specifies that the transfer might be considered fraudulent “whether the lender’s claim occurs before or after the transfer was made.” This would appear to suggest that any lender, present or future, would be protected by the UFTA; which is in dispute with the common law principles of the free alienability of property by its owner.

While the UFTA plainly applies to existing lenders, the difference between a future lender and a future potential lender is not as clear. An existing lender is one who is holding a matured claim. That is, an existing lender who has submitted a lawsuit, received a judgment, or was just run over by the borrower (and therefore accumulated a claim against the borrower. A future lender is defined as a lender whose claim develops after the transfer concerned. However, there was a foreseeable link between the lender and the borrower at the time of the transfer. As an example, a doctor’s pool of patients are future lenders of the doctor, as there is a foreseeable link. However, what is a foreseeable link for an OBGYN might not be a foreseeable link for an oncologist. The homeowner is the future lender of the building contractor because there is a foreseeable link. A future potential or contingent lender is one whose claim develops after the transfer, and there was no foreseeable link between the and the borrower at the time of the transfer.

Usually, a future lender is one who holds a contingent, unliquidated, or unmatured claim against the borrower. A transfer is fraudulent regarding a future lender if there is fraudulent intent directed at the lender at the time of the transfer. For example, if a borrower is about to default on a loan and transfers their assets in anticipation of such default, the owner of the guarantee is a future lender and the transfer is made with intent to defraud the lender.

A future lender must not only be foreseeable at the time of the transfer of assets, but the timing of the lender’s claim must be close to the time of the transfer. A court can define the term ‘future creditor’ as one whose claim is “reasonably foreseen as arising in the immediate future.”

Future prospective lenders are identified from future lenders by the fact that there is no intent to defraud a particular future prospective lender. For instance, a borrower is worried that they have insufficient automobile insurance protection and transfers their assets. Those who might in the future be in an accident caused by the borrower are future potential lenders, as there is no intent to run over a particular individual.

Due to the fact that the UFTA is usually applied only to future lenders, but not to future potential lenders, asset protection planning concentrates on future potential lenders.

To summarize, only an existing or future lender may bring a fraudulent action under the actual intent test. Future potential lenders do not have standing to bring a fraudulent transfer action. It is also impossible for the borrower to have actual intent to defraud an individual if the borrower does not know they exist.

Therefore, the word “any” is rather misleading, due to the fact it does not really mean “any.” The borrower must have a particular lender in mind to create actual intent.

This difference between types of lenders protected under the UFTA is much easier to understand by trying to imagine the faces of one’s lenders. As a rule of thumb, if the borrower understands what the lender looks like when the transfer is completed, that lender is protected.

For example, if the lawsuit has actually been submitted before the transfer of assets, the borrower understands what that creditor/plaintiff looks like. Therefore, existing lenders can be visualized with excellent uniqueness. If at the time of the transfer of assets, the borrower has a good idea of what the lender looks like, then they are referred to as future lenders. If the borrower cannot imagine what the lender looks like because the borrower doesn’t know they even exist, then this is a future potential lender.

Obviously, this is only a guideline, however it does make these principles much easier to comprehend. The emphasis is on the connection between the borrower and the lender at the time of the transfer, as shown in these examples:

Example 1: Dr. Smith runs over an old lady and her poodle. Being concerned that a lawsuit was imminent, Dr. Smith transfers $50 to his sister. At the time the old lady was run over, she became a present lender. The old lady is a present lender due to the fact that she has a claim against Dr. Smith. A claim is a “right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, matured, unmatured, contingent, disputed, undisputed, equitable, legal, secured or unsecured.” Dr. Smith had every intention to defraud the old lady, and as such she has the right to set aside the transfer of $50.

Example 2: Dr. Smith transfers $50 to his sister. A few days later, he runs over the old lady and the unfortunate poodle. In this instance, there is no direct connection between Dr. Smith and the old lady when the money was transferred. The old lady has no legal right to try and set aside the transfer of money.

Example 3: Dr. Smith signed an agreement to buy a stethoscope. The other party to the agreement became a “present creditor” as soon as Dr. Smith authorized the contract.

Example 4: Dr. Smith is experiencing early stages of epilepsy. Afraid of mucking up a surgical procedure, he transfers $50 to his sister. A few months later, Dr. Smith has an epilepsy attack during a surgical procedure, and chaos ensues. Can the mutilated patient try to set aside the $50 transfer? Due to the fact that there is a foreseeable link between the good doctor and the patient when the transfer was made, and the timing of the transfer and claim were relatively close, then the patient is a future lender and as such has a valid reason to challenge the transfer. Obviously, an argument can be made in Dr. Smith’s favor if, at the time of the transfer, the doctor-patient relationship did not exist.

Constructive Intent

Constructive Intent to Commit Fraud

The California Civil Code (CCC) offers that a transfer might be fraudulent without any kind of actual intent to defraud a creditor if a transfer was made without getting an equivalent value in return in one of 3 situations. The law usually does not need the debtor to get the exact very same market value in return, but the values need to be reasonably near.

  •  When a borrower was involved or was about to participate in a service or a deal for which the remaining assets of the borrower were unreasonably small in relation to service or deal;
  •  The borrower meant to incur, or believed or reasonably must have thought that they would certainly incur debts beyond their capability to pay on time; as well as
  •  The borrower was bankrupt at the time of the transfer, or the borrower ended up being bankrupt as a result of the transfer.

The fair market value of the property received in return is an essential component of the fraudulent transfer laws. As a matter of fact, a financial institution would have a very hard time verifying an illegal transfer where the debtor obtained a complete and fair market price in return. Valuations and appraisals form the basis of establishing fair market value. It is very crucial to document the sufficiency of the value at the time of the transfer. It is also paramount that both the valuation and the transfer were performed separately. When a borrower transfers possessions for consideration, even if the transfer is to a member of the family, establishing the fraud element is exceptionally hard to prove.

 Frequently, monetarily distressed borrowers are compelled to offer their properties, such as in a foreclosure sale or various other deal sales. In these situations, the assets are usually sold for less than their true market value. The Supreme Court stated that any assets sold in a forced sale must be sold for an equivalent value. However, this judgment can only be protected if a competitive bidding process took place. The consideration obtained in a foreclosure sale will certainly be considered sufficient only if the sale was open to a public bidding process.

The use of collaborations comes to be of significant importance in decreasing the amount of an acceptable fair market price. Since partnership interests can often be marked down for lack of control and marketability, the debtor may be able to offer a discounted rate in the opportunity to entice a partner to help out, and still reach a solution to satisfy the market value test. However, to follow the above referenced Supreme Court judgment, it may be a good idea to disclose the sale in a local newspaper, therefore, theoretically, opening the sale up to the local community to bid publicly.

Under the real intent test reviewed above, both existing and also future financial institutions can bring an action to invalidate a transfer. This does not apply under a constructive fraud test. Under this test, only present creditors can test the transfer. Future creditors have to always constantly establish actual intent, which is usually a great deal harder than showing that the borrower was insolvent and also made a transfer for much less than full consideration.



The debtor’s financial problem, specifically the inquiry of whether the debtor is bankrupt, is the most important question under the constructive fraud or the actual intent examinations. In any asset protection case, this will always be the first inquiry. It is typically recommended that the client’s accountant prepare a current balance on a fair market value (not book) basis. While solvency does not mean that the borrower is OK to make any transfer, insolvency generally leads directly to uncovering a fraudulent transfer. 

Creating a debtor’s balance sheet is not an easy job for an accountant. The balance sheet must detail the fair market value of all the assets. All the assets and liabilities must take all factors into account irrespective of their transfer date.

Therefore, for example, in figuring out the debtor’s assets, anticipated income streams, foreseeable capital sources, and also loans should be accounted for. All future cash flow the business generates must be considered to assess whether the business is in a viable position going forward. Value is normally established by thinking that the borrower would have a significant amount of time to sell their properties. As no liquidation discounts will be applied puts the debtor in a favorable position because all they want is to establish their solvency.

 As valuations usually rely on the testimony of an expert, it is paramount that simultaneous appraisals must be used.

There are certain types of assets that cannot be considered (bad news for a debtor who is trying to establish their solvency):

  •  Exempt assets—any assets that are protected by state or bankruptcy exemptions (like the homestead exemption), and any other asset that cannot be reached, like when the debtor is a beneficiary of a spendthrift or discretionary trust.
  • Any assets that are intentionally transferred to delay, hinder, or defraud a creditor.
  • Any assets that are outside a court’s jurisdiction—assets located in foreign jurisdictions.
  • Any assets that have been transferred to entities (limited liability companies (LLCs), partnerships) must have valuation discounts applied to their valuation.

Under the UFCA (the precursor statutes to our current fraudulent transfer legislations), obligations were considered on their face value and even pointless lawsuits served to decrease the borrower’s solvency. Under the UFTA and also the personal bankruptcy code, responsibilities must be marked down from their face value to mirror the likelihood that they will mature and accumulate. This means that a $10 million legal action submitted against the borrower, where the borrower has an 80% opportunity of prevailing, must be assessed and shown on the borrower’s balance sheet as a $2 million liability.

Although certain contingent liabilities need to be accounted for, any future liabilities do not have to be considered. Therefore, as a general rule, any future liabilities that only require to be footnoted for GAAP are not considered.

As a rule of thumb, assets are normally valued from the creditor’s position, in other words, what would the creditor make from these assets. Any liabilities are valued from the standpoint of the debtor, that is, what will the debtor have to pay.

An insolvency test only allows any present creditors to proceed with an action for constructive fraud. No future or future potential creditor is legally allowed to take out an action. However, a future creditor could still class insolvency as a badge of fraud.

1. Overcoming Insolvency

 While not immediately apparent from the language of the California Civil Code, it is insufficient for a financial institution to show that a bankrupt debtor made a transfer for much less than full and adequate consideration. There has to be some link between the bankruptcy and the transfer. Typically, this means that there needs to be something more to these two elements (transfer and bankruptcy) than their proximity in time.

For example, a debtor makes a transfer that is far less than full consideration which is quickly followed by a labor strike and the loss of a major customer that made the debtor bankrupt, but the actions were not intentionally fraudulent. The court took into consideration that at the time of the transfer the imminent bankruptcy was not foreseen. Therefore, an unforeseen event that makes the debtor bankrupt has every probability of invalidating the constructive fraud test.

2. Businesses with Unreasonably Small Assets

When a person transfers their assets for less than their fair market value, they could trigger a constructive fraud test if they declared bankruptcy.

 A constructive fraud test will be implemented when a debtor makes a transfer and keeps a small amount of their assets, and those assets are so small that they will not be sufficient enough to meet the debtor’s obligations.

A constructive fraud test focuses mainly on companies and not individuals. Although it may apply to individuals, it is very rarely applied in practice.

This test protects any creditor who participates in a business transaction with a debtor’s company that does not have enough assets to pay their liabilities. However, not all transfers will be suspect under this test. This test, unlike the insolvency test, does not concentrate on the debtor’s balance sheet on a specific date but looks forward past the date of the transfer. The test concentrates on the debtor’s continued capability to run their business, which implies that those transfers that do not diminish that capacity cannot be voided by a creditor. 

For example, by engaging in a sale and leaseback transaction, a business reduces their operating costs, then that transaction will not be looked upon as a transfer and as such will not be challenged under the constructive fraud legislation.

A business may or may not have sufficient capital to pay its liabilities as they come, is a question of fact for each specific business.

There are many different factors that come into play with respect to a business’s viability. None more so than it’s volatility (greater volatility requires greater capitalization) and any expansion plans in the future.

In respect to insolvency, a business must ensure that their business is continuing to grow following a transfer by turning to their accountants and financial advisors for help.

3. Incurring Debt beyond Ability to Pay

The third set of circumstances that could trigger constructive fraud on a transfer for less a fair market value is for debts to be incurred beyond the debtor’s ability to pay.

This test is extremely similar to the above test, except that it focuses mostly on transfers made by individuals and not companies. In theory, both tests are rarely identified, as both focus on a borrower’s ability to pay their obligations.

The main difference between the two tests is that the first one focuses solely on business debts, while the second one focuses on personal obligations.

Exempt Assets

USA government bankruptcy legislation and ERISA regulations excluded specific properties from financial institutions, including certain retired life plans. All fifty states additionally have laws that excuse certain possessions from creditors. All fifty US states supply some security for the assets of a trust versus the lenders of the recipients.

Maximize the Use of Exempt Assets

Shrewd financiers optimize the usage of exempt assets in a portfolio. Assets that are exempt are those which cannot be claimed in a lawsuit. Exempt assets include some or all of the primary residence, alimony, annuities, life insurance, retirement accounts and personal property ($23,000 in total), as well as others. These types of assets carry significant asset-protection characteristics and are important to a well-protected portfolio.


Exempt assets are regarded as a great asset protection tool because:

  1. They account for minimal accounting or legal fees. There are excessively high fees associated with other financial tools.
  1. You do not lose ownership or control of an exempt asset. Exempt assets give you the ability to own and access the asset at any time.
  1. The assets are well protected from creditors and litigation. Exempt assets are usually protected up to their exempt amount.


Federally Exempt Assets

Federally excluded assets are those that are protected under Federal bankruptcy legislation. If the offender is prepared to file for personal bankruptcy, Federal legislation shields certain properties from lenders as well as lawsuits. The two major asset classes secured by Federal law are qualified retirement plans (QRPs) and Individual Retirement Accounts (IRAs). Qualified Retirement Plans comply with Employee Retirement Income Security Act (ERISA) rules.

Individual retirement accounts are similar to qualified plans with a handful of technical differences. While the protection is maximal (+5), the debtor only receives this level of protection if he or she has filed for bankruptcy. In other cases, such as litigation outside of bankruptcy, asset protection may not apply.

If the debtor does not file for insolvency, the value of the QRP or IRA that would be secured beyond bankruptcy would be controlled by the appropriate Federal and state laws.

Back in 1992, the U.S. Supreme Court, in Patterson v. Shumate, 504 U.S. 753, held that a participant’s interest in an ERISA-qualified pension plan was omitted from the individual’s insolvency estate and could not be used to please the individual lender’s insurance claims.

Beyond going bankrupt, if a customer’s retirement plan is an ERISA-qualified pension, creditors will generally not be able to access the asset. To comprehend the degree of defense of QRPs and also individual retirement accounts in your state, it is a good idea to go over the matter with your wealth management advisors.


Chapter 7 Bankruptcy

In any type of Chapter 7 bankruptcy case, the individual in financial debt has to surrender some possessions to their assigned trustee to allow them to sell the property or possessions and use the proceeds to resolve financial obligations. Any property included in a bankruptcy estate can be found in Section 541 in the Bankruptcy Code.

Technically, the estate is the legitimate supervisor of all the borrower’s belongings and is responsible for all the individual has in the property at the beginning of a bankruptcy. If a person brings any additional income into the estate after the filing of the documents, that income will not be part of the estate.

Regardless of whether you are an individual or an organization you can quite easily get into debt. Being in debt can lead to all kinds of concerns and worries as to what possessions and assets you are entitled to keep and what you have to disperse. The court will need to have an inventory of all the exempt assets. These exempt assets are protected from being sold to satisfy the debt.

An experienced bankruptcy attorney will help to alleviate worries and concerns and as such will ensure your bankruptcy procedure runs as smoothly as possible.

Every US state can adopt their own exemption guidelines so long as they follow the guidelines laid down by the Bankruptcy Code. The debtor can opt to choose the local exemptions instead of the federal exceptions.

Items which the individual would normally get rid of includes items such as costly instruments (unless they are a professional musician), stamp collections, antiques, bank accounts, cash, stocks, and shares. Also, a second car, a second home or even a holiday home would also be sold.

A debtor is allowed to keep property that is exempt. The type of property that is classed as exempt can include automobiles (up to a specific amount), essential clothing, furniture, household appliances, jewelry (up to a certain value), part equity in the debtor’s home along with various types of welfare benefits and any salary and unemployment and injury benefits received from an accident.  

A debtor must make sure that they consult an asset protection professional who will be able to clarify what they can and cannot retain under the local area’s laws and regulations and how they correlate with the range of federal exemptions.

Claims and Assets

For a number of years, asset protection has been one of the fastest expanding areas of law. It is also one of the most controversial.

Simply put, asset protection is about structuring the ownership of one’s assets to protect them from possible future threats. The majority of asset protection structures are typically made up of estate planning as well as business tools, such as family limited partnerships, trusts, limited liability companies, and the like. A correctly executed asset protection planning structure must be legal and honest. It must not be based upon concealing assets and is not a way or a reason to evade U. S. tax obligations.

There is no one “magic bullet” in asset protection. The term “asset protection” incorporates a variety of planning as well as structuring mechanisms that might be applied by an asset protection professional to reduce a client’s direct exposure to risk. For each and every client the asset protection service will certainly be different, depending upon (i) the nature of the claim; (ii) the nature of the assets. These are two of the four threshold variables that are either specifically or unconditionally analyzed in each asset protection case. The evaluation of these two variables, along with the debtor’s and creditor’s identities will establish what planning would certainly be feasible as well as reliable for a particular client.


The Nature of the Claim

It is not enough to know the identity of the debtor. The asset protection attorney will need to understand what kind of a claim will be brought against their client. Here are some variables:

Do any particular claims against the client already exist, or is asset protection being embarked upon as result of a general concern for legal action and the need to protect the client from lawsuits?

Has the claim been reduced to a judgment? If the claim has been reduced to a judgment, what assets does the judgment encumber? For instance, a lien will certainly cover the assets that are titled in the defendant’s name. If there is any difference, the judgment lien will certainly not attach. Likewise, a notification for a debtor’s examination will certainly enforce an automatic lien only on those assets which are titled in the debtor’s name.

Has the claim matured to the degree that any type of transfer of assets will constitute an illegal transfer?

Is the claim brought against the debtor a tort claim? A tort claim is usually covered by liability insurance. However, additional protection may be desired, and the level of protection would be determined by the potential threat to personal assets, in addition to the liability insurance, by the creditor.

Specific debts undergo pre-judgment attachment, if: (i) they occurred in the context of the debtor’s business, and (ii) the amount owed is easily ascertainable. In this instance, the plaintiff does not have to wait until they have obtained a judgment in order to encumber the asset. Nevertheless, the amount of the financial debt must be evident based on the information provided in either a promissory note or a liquidated damage provision.

A recurring pertinent question is the dischargeability of the claim in the event of insolvency. If the claim is dischargeable in an insolvency, and the debtor’s financial debts are excluded or otherwise inaccessible, then asset protection planning might not be required – an insolvent person discharging the claim will certainly suffice.

If a claim is dischargeable then that allows for a certain amount of leverage when bargaining with creditors.
Asset protection planning and bankruptcy planning usually go together. Usually, the objective of asset protection planning is to structure the debtor’s assets so that when declaring for bankruptcy the debtor’s claims are discharged and the assets are preserved.

Specific debts, such as debts generated from fraud or a violation of an executor’s duties, are not dischargeable in a Chapter 7 bankruptcy. Nevertheless, if the debtor qualifies under Chapter 13, there is the possibility that any type of fraud claims may be successfully removed.

Federal income taxes are usually dischargeable in bankruptcy, provided that:

  • The tax obligation is assessable;
  • The tax obligation has been evaluated or has been assessable for more than 240 days; and
  • The tax return was submitted after the three-year date originally stipulated, or more than two years from the date of a late-filed return, whichever is later.

California income taxes are dischargeable four years from the due date of the return. Nevertheless, if the California tax occurs because of a federal income tax liability, the California tax is not dischargeable until four years after the filing date of the modified return that occurred because of the federal liability. Federal and also state employment tax obligations are usually not dischargeable. It is uncertain whether sales tax obligations are dischargeable.

What is the statute of limitations for bringing the claim?

The IRS may not assess any income tax after 3 years from the filing of the return.

Exceptions: There is no statute of limitation for fraud or an unfiled return
If gross receipts (not income tax) is greater than 25% of the tax return figure then there is a six-year statute of limitation.

The IRS has ten years to collect any tax on a tax obligation. If the IRS cannot collect on a tax obligation within ten years of assessment, the tax lien is removed and the obligation to pay the tax is also removed. Likewise for any assessments resulting from overdue employment taxes. Collecting an assessment relating to California employment and income taxes has a 20-year statute of limitations.

How big is the potential claim? Creditors become more hostile if the liability is higher. Furthermore, specific asset protection strategies tend to be more costly than others.

The Nature of the Assets

The nature of the assets that need protecting is a major factor of asset protection because it determines the asset protection structures implemented and what might be done to protect the debtor:

Which assets can be excluded from the creditor’s claims?

Depending in the circumstances, the California Homestead Exemption is either $75,000, $100,000 or $175,000.
Assets in a certified plan, i.e. assets in a plan under the Employee Retirement Income Security Act of 1974 (“ERISA”) are usually excluded from the claims of a creditor.

A legal exemption exists for divisions of property related to a divorce. A partner may acquire a Qualified Domestic Relations Order (“QDRO”) which allows the trustee of the plan to discharge assets to the other partner according to the order. The partner might also get to the certified plan’s assets to obtain child support or alimony payments.
Assets in a certified plan that are entirely for “employee-owners,” i.e. plans that the only participants are owners, do not qualify for the exemption.

Assets in a non-qualified plan (called “private retirement plans” under California law) are exempt from the claims of creditors; and assets in an Individual Retirement Account (IRA) or any other self-employed retirement plan are exempt to the degree that the assets are essential for the debtor during their retirement, and also the needs of the debtor’s dependents.
There is no limitation on the amount of protection you can provide for life insurance and annuity policies, however loan values are protected only up to $9,700.
Specific small exemptions detailed in the Code of Civil Procedure. This consists of appliances, jewelry, heirlooms, household furnishings and clothing (exempt without a limitation but to the level usually and reasonably required by the debtor), tools of the trade and art (both up to $6,075.

Exactly how are the assets titled? If assets constitute community property, it doesn’t matter if the title is in the name of the spouse. Even if only one spouse is the debtor, the creditor is allowed to attach all of the community property. This might be true even if the debt was incurred before the marriage.
The capability of a creditor to foreclose the assets of a trust that the debtor is a beneficiary of because the trust is governed by the Probate Code. As the trust is classed as a spendthrift trust, a creditor has no right to attach the assets of said trust.

Also, as a general rule, if a beneficiary does not have the right to receive a trust’s assets (i.e. in a trust where the trustee has the power to hold back distributions, or they have a limited power of appointment to select from different beneficiaries) the beneficiary’s creditors will certainly have no greater legal rights to the trust’s assets than the beneficiary does.
A settlor in California cannot stop their creditors by putting their assets in a self-settled trust. This regulation does not prevail in many international jurisdictions, and in Nevada, Delaware, Alaska and Rhode Island it has actually been rescinded.

Each of the concerns provided above must be taken into consideration by an asset protection attorney prior to structuring as well as executing an asset protection strategy. 


Third Party V. First Party Asset Protection

The majority of people are hard-working and successful, and as such throughout their working lives, they can accrue assets of some value. These assets could be in the form of: money property, antiques etc. It is only natural that they will want to keep their hard-earned assets protected.  To ensure the assets are protected from lenders and predatory outsiders, it is necessary to implement some form of asset protection. By asset protection, we mean using several strategies, depending on the factors (debtor, creditor, assets, claim) such as insurance entities, trust, business structures and more, to secure assets from the predatory claims of outsiders. There are many threats to assets, especially in the U.S., which is a highly litigious society. The threats include business partners, creditors, divorcing partners, the government and more.

To ensure that you get the best asset protection options available for your assets it is very important that you fully understand the rules of asset protection. The options that are readily available typically depend on where the assets originated from, as well as the lenders and, also the creditors that are being protected against.

This article provides an insight into the principles of “first party” and “third party” in relation to asset protection.

Are there any significant differences between first party and third party asset protection?

In the context of asset protection, “first party” and “third party” describe both the source of the assets being protected as well as the source of the problems being protected against. First party asset protection tries to secure your assets from your problems. Third party asset protection tries to protect your assets from another person’s problems. Historically, most of the states discouraged first party asset protection due to the fact that it was deemed to be against public law to permit an individual to protect their assets from their own lenders. State legislatures were afraid that permitting first party asset protection because they feared it would enable people to protect their assets and allow them to participate in contracts they had no intention of honoring, and as such cause innocent third parties to suffer the resulting losses without any redress.

Nevertheless, the practice of third party asset protection was permitted in many states. This implied that if you set the assets aside for another person, that you had, at the very least, some means of protecting your assets from another person’s problems. These alternatives had the tendency to take the form of laws that permitted “spendthrift” trusts. Allowing third party asset protection to be justifiable based on the premise that the ownership rights of your property gave you the right to regulate who, and to what degree, others might take advantage of your assets.

Estate planning makes use of third-party asset protection by having assets that pass to the client’s family members via a trust, rather than a direct transfer.

These trusts can protect assets passed on to family members from future potential issues, such as divorce, bankruptcy, business debt, or student loans. While the degree of protection offered can vary from one state to another, this type of asset protection is usually approved as well as relatively easy to achieve.

In the 1990s, the historical view that first party protection should not be allowed began to lose support, and a trend started, from which states in the United States altered their laws to permit self-settled trusts. On top of that, several international countries also permitted these trusts and they started to become rather popular amongst the wealthy. Although, the laws that permit self-settled trusts vary extensively, in the majority of jurisdictions, the principles of the trust are: The trust’s creator signs a trust agreement with a third party and does not act as the trustee. The trustee typically needs to be an individual or corporation that resides in the jurisdiction whose law is meant to apply the trust. The creator of the trust has the ability to transfer assets to the trust. The trust is irrevocable and permits benefits to be paid to the creator as well as the creator’s family members if, and to the level, the trustee chooses to do so.

The trust is valid as long as the creator of the trust was not bankrupt when the trust was created and did not end up being bankrupt as a result of the transfer to the trust, in the United States. The trust is meant to be protected against the lenders of the creator of the trust. Nevertheless, due to the fact that not all states permit self-settled trusts, and due to the fact that there currently is still not a great deal of case law including challenges to these trusts, there are a great deal of open questions as to just how well these trusts will certainly offer the first party asset protection they are meant to provide, specifically for the creator of the trust that does not reside in the state where the trust was created.

Additionally, it currently appears that the federal government might take a dim view of these trusts. For that reason, people who create these trusts need to be extremely cautious in exactly how they create and preserve these trusts. Furthermore, it is usually not a good idea to attempt to protect all of your assets: instead, ensure when you create a self-settled trust that you maintain a lot of other assets outside of the trust.

How does the law try to prevent first party asset protection? Based on the premise that previous case law and older statues state that an individual is not permitted to place their assets in a trust for their own benefit, and as such prevent their lenders gaining access to their assets. The majority of states in the United States have some variation of the Uniform Fraudulent Transfer Act (UFTA).

The UFTA was created to protect lenders from borrowers that make any type of transfer or incur any type of obligation with the real intention to prevent, delay, or defraud a lender. It can also protect lenders if the borrower merely makes a transfer or incurs a commitment that causes the borrower to end up being bankrupt, even if the borrower did not mean to prevent, delay, or defraud the lender by making the transfer or incurring the commitment. One of the most significant concerns with the UFTA is that it covers an extremely wide variety of financial debts, and can also consist of financial debts that are not in fact expected to occur at the time a transfer is made. If a transfer is considered to have been a fraudulent transfer under the UFTA, a lender or a bankruptcy court might have the ability to invalidate or reverse the transfer, attach the assets, and also potentially obtain additional penalties.

Currently, it is unclear exactly how well transfers to a U.S.-based self-settled trust will stand up where the creator of the trust does not reside in the state where the self-settled trust was created. Nevertheless, like various other types of asset protection planning, having a self-settled trust in place might give the creator of the trust some additional leverage when bargaining with lenders. This is an alternative that clients need to consider.

Irrespective of whether you have an interest in first party asset protection or third party asset protection, there are alternatives readily available that can allow you to protect your assets from possible future problems. Third party protection is relatively very easy to create and execute. It should also be taken into consideration as an alternative when you are thinking about other estate planning concerns. There are options available for first party asset protection, but there is no magical, one-size-fits-all option readily available. A good first party asset planning entity requires a relatively complex and highly individualized planning structure that relies on numerous factors. Nevertheless, to ensure that a first party asset planning structure works you must do the work before the problem emerges. You will be way too late to protect your assets if you already in possession of an existing or potential claim from a lender.

Ready to discus your options?