Asset Protection Law Journal : Asset Protection Lawyer & Attorney : Kenneth J. Laino : Schneider Smeltz Ranney & LaFond Law Firm : Trusts, Estate Planning

The IRS is continuing its efforts to identify sources of offshore taxable income of U.S. taxpayers.  This has lead to a new reporting requirement.  Many U.S. taxpayers with foreign assets must now file IRS Form 8938 - Statement of Specified Foreign Financial Assets.  This new requirement is applicable to the 2011 tax year, and must be filed with an individual's annual federal tax return.  The IRS has issued instructions for the new form.

This new requirement does not replace the annual FBAR report, which is due by June 30 of the applicable filing year.

Some, but not all, U.S. taxpayers are subject to the new requirement.  For instance, it applies to married taxpayers filing a joint income tax return if the total value of your specified foreign financial assets is more than $100,000 on the last day of the year or more than $150,000 at any time during the tax year. 

There are failure-to-file and accuracy-related penalities relating to Form 8938, and these penalties can be severe.  It is therefore very important for anyone with funds in offshore accounts to have a tax preparer who is familiar with all of the applicable reporting requirements.

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According to a recent article in The Cleveland Plain Dealer, the Cleveland Public Library has hired a national collection firm to recover fines and overdue items.  Director Felton Thomas reported that the agency had collected $550,000 in fines and $2.6 million worth of outstanding material; and fees were less than $90,000.  So it would seem that using an outside agency for collection will continue.  Other libraries have taken similar action.

My point in bringing this article to your attention is not simply the fact that libraries are now using outside collection agencies.  The main point is that almost all creditors seem to be getting more and more aggressive in their collection efforts.  For example, real estate developers and business owners in the past could reasonably assume that a bank would not immediately call a loan if you failed to meet certain financial covenants.  That is simply no longer the case.  Having been burned by so many bad real estate loans, banks and other lenders are not going to be as lenient as they used to be if any problems develop with your loan.

Stated another way --- if even libraries are using collection agencies, you can imagine what might happen with your business or real estate loan if your circumstances suddenly change.  All of this makes asset protection planning more important than it was in the past.

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The Ohio Attorney General's office recently settled a lawsuit filed against Allied Interstate, one of the country's largest debt collectors.  According to the Columbus Dispatch, Allied Interstate agreed to pay $150,000 and make changes in its practices.  Allied faced two dozen allegations of misconduct after a state investigation -- for instance, calling before 8:00 a.m. and after 9:00 p.m., and even making unauthorized withdrawals from bank accounts.  It was also accused of calling people's employers, despite being asked to stop; making idle threats; and repeatedly calling the wrong people.

This settlement came shortly after a $350,000 agreement reached in August between the State of Ohio and Credit Bureau Collection Services, which has its headquarters in Columbus.  According to the Columbus Dispatch, Allied agreed last year to pay $1.75 million to settle a similar federal probe; and Credit Bureau Collection Services agreed to pay $1.1 million.  The Ohio Attorney General has reached settlements with other collection firms as well.

If you feel you have been the victim of an unlawful debt collection practice, you should contact your state attorney general or other state consumer protection agency.  Debt collection is of course perfectly valid -- as long as it is conducted in accordance with applicable law.

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The Ohio Court of Appeals (10th District, Franklin County) recently provided some very specific guidance about "piercing the corproate veil" in Ohio.  The case is Lind Stoneworks, Ltd. v. Top Surface, Inc., 194 Ohio App.3d 98 (10th District 2011).

The trial court held a corporation and its sole owner liable for a corporate debt.  The trial court "pierced the corporate veil" and found the owner to be personally liable.  The owner admitted that the corporation had no officers, no directors, and had apparently failed to follow some other corporate formalities.

The Court of Appeals held that in this case, these facts alone were not sufficient to impose personal liability on the owner.  The appeals court basically found that there was insufficient evidence to pierce the corporate veil.  The decision of the trial court was reversed and the case was remanded for further consideration.

Many factors can influence whether or not personal liability will be imposed on a corporation owners.  The Court of Appeals noted that in general, shareholders, officers and directors are not liable for a corporation's debts.

A limited liability company does not have as many required formalities as a corporation.  Nevertheless, it should still have a separate bank account and otherwise be treated as a separate entity.

The message from this recent Ohio court decision is clear:  make sure that you follow basic formalities with your corporation, limited liability company, or other business entity.  This is relatively easy to do; and failing to do it can completely defeat the purpose of forming the entity in the first place.

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A recent decision by the United States Bankruptcy Court for the District of Alaska (In Re: Thomas Mortensen, Case No. A09-00565-DMD) is clearly worth reading -- for a discussion of fraudulent conveyances, Alaska asset protection trusts, applicable statutes of limitations, and a variety of other asset protection topics.  I will likely comment on this recent case in several different posts, but here is a quick initial summary.

U.S. Bankruptcy Judge Donald MacDonald IV held that a transfer by Thomas Mortensen of real estate into an Alaska asset protection trust was a fraudulent conveyance.  The Judge found that there was persuasive evidence of an intent to hinder, delay and defraud present and future creditors. The Bankruptcy Judge voided the transfer of real estate to the trust as a fraudulent conveyance.

There are numerous lessons to be taken from this court decision and here are just two of them --

• Transferring assets when you are insolvent is likely to constitute a fraudulent conveyance.  While Mortensen was found to be solvent at the time of the real estate transfer, his own testimony from a child support action was used against him in the bankruptcy proceeding. In a child support proceeding against his ex-wife, Mortensen took the position that his divorce had thrown him into heavy debt.  This is simply a reminder that whatever you say in one court case can obviously be used against you in another!
• Think carefully about choosing the trustee of a trust.  Mortensen named his brother and a personal friend as trustees of his Alaska asset protection trust, and named his mother as a "trust protector."  All of these individuals were named as defendants by the Chapter 7 Bankruptcy Trustee in his adversary action against Mortensen.  While it is perfectly appropriate in many instances to name family members as trustees or trust protectors, you need to consider that these individuals can sometimes be dragged into litigation.

Many court decisions are difficult to read, but the Mortensen case is fairly easy to follow.  It is useful reading for anyone interested in some of the more technical aspects of fraudulent conveyances and other asset protection issues.

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A federal judge in Cleveland, Ohio recently ordered a convicted public official to pay $57,000 in damages by taking those funds from his retirement account.  An Ohio law passed several years ago specifically authorizes such an action if a public official has been convicted of certain crimes, including bribery.  The decision by U.S. District Judge Sara Lioi was reported in an October 29, 2011 article by James McCarty in the Cleveland Plain Dealer.

The convicted public official (former state court judge Steven Terry) was ordered to cash out the $57,000 from his retirement fund.  Mike Tobin, a spokesman for the U.S. Attorney's office, acknowledged that this was clearly a precedent.

Retirement accounts are generally well protected from creditors.  The Ohio statute involved in this particular matter has limited application -- to certain convicted public officials.  It is nevertheless important to be aware of cases like this one -- because we would not want to see a law like this one extended too far.

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It is clearly better to engage in asset protection planning before you have any creditor issues.  But planning after a lawsuit has been filed -- or even after a judgment has been entered against you -- is frequently possible.

State fraudulent transfer statutes vary in a number of respects.  But as a general rule, a conveyance is voidable (i) if there is intent to improperly prevent a current creditor from collecting against you or (ii) if the transfer would make you insolvent.  See for example Section 1336.04 of the Ohio Revised Code. 

Stated another way, you are not always prevented from transferring assets just because there is a lawsuit or judgment pending against you.  For example, lets say that you have a net worth of $1 million and a judgment against you for $10,000.  As long as you have no other known creditor issues, that $10,000 judgment does not prevent you from protecting the other 99% of your assets.

Again, it is clearly better to engage in asset protection planning before any creditor issues arise.  But trasnferring assets after a lawsuit has been filed or even after a judgment has been entered may, under many circumstances, still be appropriate and advisable.

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Asset protection attorneys assist clients with domestic and offshore trusts, limited liability companies, and a variety of other asset protection alternatives.

I have recently reminded a number of clients, however, that they should not overlook one of the simplest and most effective asset protection strategies -- insurance.

When was the last time you reviewed all of your insurance policies?  While you may have health, life, homeowners, auto, professional malpractice and other insurance, have you recently analyzed whether your coverage is adequate?  Things change very quickly these days, and the amount of insurance you had five years ago may no longer be adequate.

I realize that insurance costs money, so there is always the issue of how much is too much.  But for anyone with significant net worth, it is highly advisable to err on the side of having a bit a more insurance than less.

An umbrella policy is a great way to get extra liability insurance coverage for a relatively low cost.  This type of policy provides excess coverage for your auto, home and possibly other insurance policies.

Insurance does not cover all risks.  So a thorough asset protection review certainly does not end with your insurance coverage.  On the other hand, insurance should certainly not be overlooked; and it can be a very important part of an asset protection plan.

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In a recent survey of millionaire baby boomers (by U.S. Trust), less than half of the respondents said it was important to leave money to their children when they die.  That is according to an article in last Friday's Los Angeles Times by Walter Hamilton.

But here is an important reminder:  asset protection planning (and estate planning) is still critical even if you are unconcerned about what your children will inherit from you.

• First of all, most of us do not know when we will die.  So even if you plan to spend down your children's inheritance, you can never be sure that you will do so.  You still need a Will, a Trust and/or other estate planning documents to cover distribution of assets on your death.
• You also need to focus on asset protection planning in order to protect assets during your lifetime.
• So even if you have decided that you are not very concerned about what your children will inherit -- you should still have some sort of an estate plan.  And you should certainly have a meaningful asset protection plan to be sure your assets are as well protected from creditors as they lawfully can be.

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