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

The recent economic downturn has caused creditor problems for many wealthy Americans who never dreamed they would be in this kind of situation. A front page article in the July 9, 2010 New York Times reported that one in seven homeowners with loans in excess of $1 million is seriously delinquent. Foreclosures are occurring at shocking rates in affluent areas. One of several examples given by the New York Times is that the sheriff in Cook County, Illinois is increasingly in demand to evict foreclosed owners in the upscale suburbs to the north and west of the city -- like Wilmette, LaGrange and Glencoe.

In the past, most affluent Americans have paid little attention to asset protection. In better times -- when the real estate market and the stock market seemed to go nowhere but up -- it was difficult for many affluent Americans to imagine they would ever face serious creditor problems. Those days are gone. Focusing on the downside has now become a critical part of the planning process for the wealthy. Part of that focus should include a review of how all your accounts are structured and titled to be sure you have not missed opportunities to protect certain assets from creditors. As I have said many times before: the best time for that planning is before you have any financial problems -- and not once you are facing issues with creditors.

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More than 30 foreign jurisdictions now have asset protection trust statutes.  The Cook Islands was the first to adopt an International Trust Act for asset protection purposes in 1989, and many other jurisdictions have based their statutes in whole or in part on Cook Islands' law.  A number of other jurisdictions have traditionally relied on court cases (rather than a statute) to provide asset protection for trust beneficiaries.  The leading example is the Isle of Man (used by many wealthy individuals long before any offshore asset protection statutes were enacted).

Offshore laws vary widely, and there is no one jurisdiction that will automatically meet the needs of all clients.  There are varying statutes of limitations relating to fraudulent conveyances; differences in whether a U.S. judgment will be recognized or whether a new trial will be required; differences whether contingent legal fees will be permitted; and a variety of other variations.

Beware of anyone who is simply trying to sell a particular kind of trust, like a "Cook Islands Trust", or a "Cayman Islands trust".  There is no way someone can know the best choice for you without a careful analysis of your particular situation.  Whether an offshore trust is even a good idea for you in the first place requires careful analysis.

The bottom line is that there is no foreign or domestic asset protection trust that automatically meets the needs of all individuals.  Each situation must be analyzed on its own.

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I recently received an inquiry from someone who will be entering law school in the Fall, and he is interested in becoming an asset protection attorney.  He asked what areas of law he should focus on.

While asset protection law has become somewhat of a specialty, it requires knowledge and experience in at least four areas of law: (i) litigation; (ii) business entities, particularly limited liability companies; (iii) debtor/creditor rights; and (iv) trusts and estates.

Asset protection involves careful judgment about what would ultimately happen in a courtroom under various circumstances.  An attorney who has participated in some trials and who has taken and defended depositions will more likely have a good idea what will happen in a lawsuit brought by one of your creditors.  Experience with limited liability companies, limited partnerships and trusts is also important.

An attorney who went to law school in the Cayman Islands will not necessarily be a very good choice as an asset protection attorney.  A good asset protection lawyer does have to know about domestic and foreign trusts.  But he or she must have a broad enough background in several other areas of law in order to provide meaningful advice about the best ways to protect your assets.

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It is probably just a sign of the times, but my law firm seems to assist more and more people each year with prenuptial agreements.  These agreements are important from an asset protection standpoint.  Many of the assets accumulated during your marriage will be subject to claims of your spouse if you get divorced.  A prenuptial agreement can identify separate property and keep it separate.  It can insulate that property in the event of a future divorce.

Prior to any marriage in which either party already has significant net worth, consideration should be given to a prenuptial agreement.  This is particularly true in the case of a party who has already been divorced, who has inherited substantial family wealth, or otherwise has assets he or she wants to keep separate.

Whether or not to enter into a prenuptial agreement is a personal decision and must be based on the particular facts and circumstances of each case.  Each party to a marriage brings many things to the marriage (some good and some not so good!).  But if you want to keep certain assets protected in the event of a divorce, you need to consider a prenuptial agreement.

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The Dow Jones industrial average fell 324 points last Friday, its second worst slide of the year.  The drop pushed the stock market back into a "correction" -- meaning a decline of at least 10% from its recent high.

While I remain optimistic about the economic future of our country, we obviously face great challenges in the coming years.  Stock market volatility is here to stay.  General economic conditions remain uncertain; and competition from abroad will be a constant challenge.  So it remains critical to examine your assets from time to time (business and personal) and consider how well they are protected from creditors.

If you are a resident of Florida and own a home in Florida, and most of your assets are in IRA's and qualified plans, you have little to be worried about from an asset protection standpoint.  On the other hand, if you live in Northeast Ohio and a significant portion of your assets are invested in a family business, it is vitally important that you consider how well your assets are protected from creditors.

Many people focus on asset protection after some economic disaster strikes them.  By that time it is often too late.  The time to focus on protecting your assets is now -- before you have any creditor problems.

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The "Internal Affairs Doctrine" means that the law of the state of incorporation normally determines issues relating to the internal affairs of a corporation.  For example, if there is a dispute between two shareholders of a Delaware corporation, it would typically be decided using Delaware law, even if the company operates in another state.  This means that the state in which you form a corporation or a limited liability company can be important.

A recent decision by the Court of Common Pleas of Franklin County Ohio affirms this doctrine.  The Court held that the law of Delaware (where the corporation was incorporated) rather than the law of Ohio (where the case arose) applied to a dispute involving corporate directors.

While many state corporation and LLC statutes are similar, they are not all the same.  Frequently it is fine to form a new entity in the state where it will be operated.  In some circumstances, however, it is advisable to form the new entity in another state.

So whenever an entity is formed for asset protection purposes, one factor to be considered is whether to form the entity in one state rather than another.

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Family limited liability companies can be a convenient vehicle to hold and administer family investments.  They offer significant benefits from both an estate planning and asset protection standpoint.  Until recently, the entity of choice for family investments was a family limited partnership (often just called an FLP).  While there is nothing wrong with an FLP, we are now using LLC's more frequently.  There are some technical legal differences between the two forms of entity, but the benefits are basically the same.

Holding family investments (such as marketable securities and real estate) in a family LLC makes it significantly more difficult for a creditor to reach those assets than if they were held individually.  Keep in mind that not only you, but also your children and other family members could potentially have future creditor problems.  So an LLC can help protect the interests of all family members.

A family LLC can also be a useful vehicle for estate planning purposes.  Rather than making outright gifts to children, you can gift interests in the family LLC.  You may be able to take advantage of some discounts for gift and estate planning purposes.

The bottom line is that a family LLC can be a useful tool for both asset protection and estate planning purposes.

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Poor (or no) estate planning can lead to catastrophic losses of family assets.

Check out the article by Claudia Buck in The Portland Press Herald with some sad stories of families who wasted lots of money due to poor estate planning.  Some simple steps can avoid family fights and save legal fees.  These include earmarking personal property; carefully choosing your executor and trustees; and carefully thinking through the provisions of any trust agreements.  This particular article does not discuss federal and state death taxes, which are another important consideration.  Failing to take these taxes into account in connection with an estate plan can result in staggering losses for many families.

Having basic estate planning documents in place will not provide a complete asset protection plan.  Estate planning is, however, one of the important components of an overall plan to protect your assets.

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UBS (the giant Swiss financial institution) has received a lot of bad press recently in connection with offshore tax evasion schemes.  More UBS clients were indicted earlier this month, but federal authorities are focusing on other financial institutions as well.  Lynnley Browning reported last week in the New York Times that arrests have now been made in connection with an international tax evasion scheme said to involve HSBC.

The latest case involves real estate developers who sold a hotel in New York City and allegedly routed the proceeds through sham accounts in Panama, the Virgin Islands, Liechtenstein, Switzerland and the Bahamas to evade taxes.  The complaint against the real estate developers (filed in federal court in Fort Lauderdale, Florida) describes how federal agents used wire taps in 2007 to record various phone conversations.  This shows that authorities are using more aggressive techniques in fighting offshore schemes.

I was setting up companies in Panama for clients more than thirty years ago.  These entities, however, were used for very legitimate business, tax, and asset protection purposes.  Using offshore companies or trusts to unlawfully evade U.S. taxes or for other unlawful purposes is becoming more and more difficult -- as it should be.

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