Ohio is Currently One of the Best States for Asset Protection

Some states offer better asset protection alternatives than others.  There are numerous factors to consider in deciding how good (or bad) a state is from an asset protection standpoint.  These factors include:

·         Whether or not the state has a Domestic Asset Protection Trust Statute

·         Provisions of the state’s LLC statute

·         The state’s homestead exemption and various other exemptions

·         State court decisions, particularly those relating to the respective rights of debtors and creditors.

Since there are many different ways to measure how favorable or unfavorable a state is from an asset protection standpoint, commentators can disagree about which states are the best. 

                Ohio’s new Legacy Trust Statute, the provisions of its LLC statute, and various other state laws and policies offer excellent opportunities for protecting assets.  This currently puts Ohio near the top of the list when it comes to state asset protection rankings.

Mississippi is Latest State to Enact DAPT Statute

The Mississippi “Qualified Disposition in Trust Act” takes effect today.  Mississippi has now become one of about fifteen states that have a domestic asset protection trust statute.

Each of these state statutes is different.  But they all offer (with certain exceptions) an opportunity for creditor protection - - as long as appropriate formalities are followed. 

This latest DAPT statute provides another reminder that asset protection is becoming more and more “main stream.”  There should be no hesitation in making use of applicable asset protection laws that specifically allow you to better protect your assets.

Ohio and Several Other States Protect Inherited IRAs

As I noted in a blog post a couple days ago - -   

On June 12, 2014, the U.S. Supreme Court unanimously ruled that inherited IRAs are not exempt from creditor claims in bankruptcy.  So in general, inherited IRAs do not have as much protection from creditors as many advisors thought they did.  But inherited IRAs can still be protected from creditors in at least two ways:

            (1)        State law creditor exemptions; and          

            (2)        Leaving assets in trust for the intended beneficiary (rather than to the beneficiary himself/herself).

It seems that states having statutes that opt out of the federal bankruptcy exemptions (in favor of their own state-created exemptions) will still protect inherited IRAs.  A limited number of states (including Florida, Alaska, Missouri, North Carolina, Texas and Ohio) offer protection for inherited IRAs.  But it may be unwise to rely on a state exemption because the beneficiary inheriting the IRA may not live in the same state when the exemption is desired.  In any event, Ohio and some other states have provided as much creditor protection as they can for inherited IRAs. 

Another alternative that is still available is for the owner of an IRA to leave the IRA to a trust for the benefit of the intended beneficiaries.  There are a variety of potential downsides to this (including increased complexity, costs and administration, and potential income tax issues), so a trust arrangement should only be considered with the assistance of a qualified professional.


It is best to consult with an attorney experienced in asset protection issues, estate planning and income tax considerations specific to retirement assets whenever you are thinking of leaving retirement assets in trust.

Inherited IRAs Not Protected In Bankruptcy

Last week, the U.S. Supreme Court (in the case of Clark v. Rameker) decided that an inherited IRA is not protected from your creditors in bankruptcy.

Until yesterday’s ruling, courts had been split on this issue.  In the Clark case, the Bankruptcy Court ruled that an inherited IRA does not share the same characteristics as a traditional IRA and held it was not exempt from creditors in a bankruptcy proceeding.  A United States District Court reversed the Bankruptcy Court, but the United States Court of Appeals for the Seventh Circuit then reversed the District Court.  The federal courts in other areas of the country had been split on this issue as well.  The unanimous decision by the U.S. Supreme Court is a very significant ruling since there is quite a bit of wealth in the United States held in inherited IRAs.

Traditional and Roth IRAs are not affected by last week’s Supreme Court decision.  

Lawyers Can Face Severe Consequences For Helping a Client With a Fraudulent Conveyance

Courts in a number of states have specifically held that lawyers can violate applicable disciplinary rules by facilitating fraudulent conveyances.  This can result in an attorney being suspended or even disbarred. 

This is one of the reasons that an attorney must conduct a certain amount of due diligence about a new client before agreeing to assist that client with his or her asset protection planning.  Also, at times you may think your asset protection attorney is being overly cautious about transferring some of your assets.  Keep in mind that if it later appears that your attorney helped facilitate a fraudulent conveyance, the lawyer can face severe consequences. 

None of this should impact appropriate asset protection planning.  There are many circumstances under which you are free to transfer and/or retitle your assets.  The procedures followed by your asset protection attorney are not only necessary to protect the attorney - - they are likely to ultimately be in your best interest as well.

Another Blow to Swiss Bank Secrecy

As highlighted yesterday on the front pages of the Wall Street Journal, the New York Times and other newspapers across the country- - Credit Suisse has pled guilty to conspiracy to aid tax evasion (by helping U.S. citizens unlawfully evade taxes through Swiss bank accounts).  The large bank agreed to pay about $2.6 billion in penalties.

U.S. regulators have spared the bank from losing its U.S. investment adviser license and other potentially harsh results.  So other than the monetary penalties, the negative impact on the bank may be limited.  In any event, this is another significant reminder that attempts by U.S. citizens to evade taxes through offshore accounts (and the institutions that help facilitate that tax evasion) are under close scrutiny by the U.S. Department of Justice and other federal regulators.

All of this unfortunately means that U.S. citizens who legally and properly take advantage of foreign bank accounts will likely have even more paperwork and regulatory hoops to jump through when they open offshore accounts. 

Second Annual Ohio Asset Protection and Legacy Trust Institute

Yesterday I attended the Second Annual Ohio Asset Protection and Legacy Trust Institute.  The Institute was a full day continuing legal education program of the Ohio State Bar Association.  It was sponsored by a trust company and several major banks, as well as a large accounting firm.  It was presented via live simulcast at seven locations throughout Ohio.  One of the speakers who provided introductory remarks was an Ohio state senator.

I mention all of this because it shows how “mainstream” asset protection is becoming.  That is, Ohio and many other states have various laws that specifically allow both businesses and individuals to protect their assets.  Yet there are many businesses and individuals who fail to take advantage of what the law allows them to do.

Recent changes to Ohio law (particularly the new Ohio Legacy Trust Statute and changes to the LLC statute) make Ohio an excellent state for asset protection.  So this is an excellent time for anyone concerned about protecting their individual or business assets to at least consider some of the alternatives that are currently available. 

Asset Protection Strategies Can Have Significant Tax Consequences

Asset protection requires expertise in many different areas of law.  One key area is litigation, since the ultimate test of any asset protection plan is how well it will hold up in court.  Asset protection attorneys must also have expertise in business entities (particularly limited liability companies); trusts; and estate planning (since asset protection planning should generally be integrated with your estate plan). 

Asset protection strategies can also have very significant tax consequences.  For example, moving assets in and out of business entities (or even between individuals) can potentially have both gift and income tax consequences.  Changing an S corporation into an LLC may result in a liquidation of the company for tax purposes.  Holding funds in offshore accounts will likely mean that you will need to file FBAR and FATCA reports.  And those are only a few of the many tax-related considerations that might have to be addressed with an asset protection plan.  So the law firm doing your asset protection planning should have expertise not only in litigation, business law, trusts and estates, but in tax matters as well.

Consider Converting an S Corporation to an LLC

Both corporations and LLCs provide asset protection in that the owner will generally not be responsible for debts of the entity.  But when it comes to protecting an owner’s personal assets from his or her personal creditors, an LLC generally offers better protection than a corporation.  A creditor who controls the stock of a corporation essentially controls the whole corporation.  A creditor attempting to gain control of an owner’s LLC interest has a much more difficult task. The creditor can generally obtain only a charging order against distributions from the LLC.

Given the advantages of an LLC for certain asset protection purposes, a number of our clients have recently been converting S corporations to limited liability companies.  There can be serious tax and other consequences to this kind of conversion so it should only be done with the assistance of a qualified professional. 

The conversion can be a liquidation for federal income tax purposes.  This may not be the case, however, if you elect to have the LLC taxed like an S corporation.  Again, there are a number of very technical tax implications that have to be addressed in connection with any such conversion.  But in a number of situations there will be clear advantages to converting an S Corporation to an LLC to provide better asset protection.  

Trust Protector Can Provide Added Flexibility For An Irrevocable Trust

A recent article in the New York Times by John F. Wasik provides an excellent discussion of trust protectors.  Many states now allow for trust protectors - - someone other than the trustee who essentially provides some checks and balances in a trust arrangement.

A trust protector is a bit like a watchdog.  He or she is not the trustee, but rather someone who keeps an eye on the trust (and the trustee) to be sure it is operating the way it was intended to.

A trust protector also might be able to make certain changes in an irrevocable trust arrangement in response to changes in the law.  Since asset protection statutes, tax laws, and trust laws are changing so rapidly these days, it is advisable to build as much flexibility as possible into an irrevocable trust.

A trust protector may be given the power to replace the trustee under certain circumstances, which obviously provides a very significant check on the power of the trustee. 

The role of a trust protector should be discussed with your asset protection attorney and/or your estate planning attorney whenever you set up an irrevocable trust.