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

Holding property as joint tenants has numerous advantages.  It can be convenient, and it can generally avoid probate of the jointly held assets.  It is a big misconception, however, that joint tenancy provides very much asset protection.

A recent Ohio Court of Appeals Decision, White v. Parks is a perfect illustration of the drawbacks of joint tenancy from an asset protection standpoint.  A creditor filed a judgment lien against Robert Parks.  When Mr. Parks failed to pay the judgment, the creditor filed a foreclosure action against his residence, naming both him and his wife (the co-owners), even though the judgment was only against Robert Parks and not his wife.  The trial court ruled that even though Mrs. Parks was not subject to the judgment, the residence nevertheless had to be sold.  Mrs. Parks was to get half of the net equity after the sale and the creditor would receive the other half.  The Ohio Court of Appeals, Ninth District, affirmed the ruling of the trial court.

From the Parks' standpoint it was a lot better that their house was in joint name than in Mr. Park's name alone.  The joint tenancy provided some protection.  However, even though title was held jointly, the couple was forced out of their house.  In addition, the creditor got one half of the net equity.  Not a great result for this couple.

Holding certain assets as joint tenants (such as a checking account with relatively limited funds) often makes great sense, simply for convenience.  Advantages of joint tenancy may out-weigh the disadvantages for certain parties.  When deciding whether to hold assets jointly, the assets cannot be looked at in isolation.  How best to title your assets will depend on a wide variety of factors, including your occupation, marital status, income, net worth, asset mix and many other considerations.  Titling an asset one way could be good for one purpose and not for another.  You should not assume, however, that jointly held property will provide great protection from any of your creditors.

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A lawyer accused of hiding assets was released from prison last week -- after serving 14 years in jail.  H. Beatty Chadwick was sent to prison in 1995 for allegedly hiding $2.5 milion in assets in connection with his divorce.  By the time he was released last week from a county prison in suburban Philadelphia, Chadwick had been in prison for 14 years.

The Chadwick case is an important reminder that judges throughout the United States have broad civil contempt powers.  Judges can jail debtors who appear to be unlawfully hiding assets.  You can read more about Chadwick's case in a number of recent articles including The Philadelphia Inquirer and the July 12, 2009 New York Times. 

While the Chadwick case seems to have set a record, many other courts have imposed what asset protection attorneys call "Anderson relief".  That term comes from Michael and Denyse Anderson, who were jailed in the 1990s for refusing to return funds from their Cook Islands trust (after they had been caught by the Federal Trade Commission in an apparent telemarketing scheme).  A federal judge in Nevada imprisoned the Andersons for 6 months for contempt of court when they refused to take steps to return funds from their offshore trust.  The United States Court of Appeals for the Ninth Circuit affirmed the finding of contempt and affirmed the jailing of the couple as an appropriate way to coerce certain debtors to turn over assets from offshore trusts.  This has become known as "Anderson relief."

The Anderson case and the recent Chadwich case are important reminders that certain asset protection strategies can land you in jail.  There are many reasonable, lawful asset protection alternatives; but crossing certain lines can have disastrous effects.

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Asset protection planning generally involves transferring and/or re-titling some or all of your assets in order to better protect those assets from claims of creditors. Not surprisingly, however, there are statutory prohibitions against transferring your assets with the intent of avoiding your legal obligations. Whenever any assets are transferred or re-titled for protection purposes, it is critical to focus on applicable “fraudulent conveyance” laws, which give creditors the ability to void certain asset transfers in order to satisfy a judgment. Asset protection planners must have a thorough understanding of fraudulent conveyance laws.

The Ohio Uniform Fraudulent Transfer Act (Chapter 1336 of the Ohio Revised Code) is fairly typical of the statutes found in most other states. An examination the statute reveals how broadly a fraudulent conveyance is defined. Whether a conveyance is “fraudulent” under Ohio Revised Code Section 1336.04 depends on a variety of factors, including the following:

1. Was the conveyance intended to hinder, delay, or defraud any creditor of the debtor?
2. If the transfer was as sale, did the debtor receive a reasonably equivalent value in exchange for the asset that was transferred?
3. Did the debtor know (or reasonably should have believed) that due to the transfer he would have debts beyond his ability to pay as they became due?

Whether a conveyance is “fraudulent” depends heavily on the “intent” of the person making the conveyance. Ohio Revised Code Section 1336.04 (B) says that in order to help determine that intent, consideration should be given to many different factors, including but not limited to:

1. Whether the transfer was to an insider (like a family member or partner);
2. Whether the debtor retained possession or control of the property transferred after the transfer;
3. Whether there was a lawsuit pending or threatened;
4. Whether the transfer made the debtor insolvent.

Whether or not a transfer is “fraudulent” is often a complicated issue that depends on a wide variety of factors. Other terms in the Ohio statute also frequently raise complicated questions. Debtors and creditors frequently argue about whether an asset was “transferred” at all. The term “transfer” is defined very broadly in Ohio Revised Code Section 1336.01(L) to include a direct or indirect, absolute or conditional, voluntary or involuntary method of disposing of an asset or an interest in an asset. The term “transfer” includes the payment of money, a release, a lease, creation of lien or other encumbrance. Exactly when a transfer occurs can be very important and may determine whether or not a creditor can reach a particular asset.   

Each state has its own fraudulent conveyance statutes. The Ohio statute discussed here is typical, but each applicable state law must be reviewed separately.

Fraudulent conveyance statutes do not make asset protection planning impossible. They are intended only to prevent improper transfers.  

In addition to the specific provisions of Ohio Revise Code Section 1336.04 (and/or any other applicable statute), debtors must also consider how certain transfers may be perceived by a judge who may try to “do justice” notwithstanding the words of the statute. 

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A number of offshore jurisdictions have enacted trust laws that provide significant protection for debtors.  One example is St. Vincent in the West Indies.  Its trust laws have a number of separate provisions that make assets held in a St. Vincent trust very difficult for a U.S. creditor to reach.  One such provision is that St. Vincent simply does not recognize foreign judgments with respect to trusts.  If a U.S. creditor has a judgment against a debtor in the United States, the creditor cannot collect assets of that debtor held in a St. Vincent trust without filing a new action in St. Vincent.  That new action will be subject to numerous requirements that put obstacles in the creditor’s path.  Legal proceedings in jurisdictions like St. Vincent often move very slowly.  Several years ago one of my clients was involved in a real estate transaction in St. Vincent.  I learned that navigating various St. Vincent legal requirements was difficult and very time consuming.  Jurisdictions such as St. Vincent also provide very short statutes of limitations for fraudulent transfers, which favor debtors over creditors. 

There are many other choices for offshore trust arrangements including the Isle of Man, the Cook Islands and the Cayman Islands.

While offshore trust can provide valuable asset protection, they are expensive to set up; there will be annual maintenance fees; they all involve loss of control of your assets to some degree; and they have various other risks.  They can also sometimes do more harm than good because many judges are naturally skeptical of entities formed in places most Americans have never heard of.

The bottom line is that an offshore trust arrangement may be an appropriate part of an asset protection plan, especially for certain high net worth individuals.  Generally, however, there will be simpler and less expensive alternatives available. 

Finally, it is important to note that offshore trusts cannot be used to avoid U.S. income taxes.  This continues to be a big misconception that many Americans have about offshore trusts.

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There are a number of relatively simple strategies an organization can use to provide significant protection for its assets.

1.                        Separate Entities. Consider creating a separate entity (possibly a limited liability company) to hold real estate, machinery, or assets relating to a new line of business. If there were a future judgment against the corporation, the assets held in the separate entity or entities would likely not be subject to that judgment as long as appropriate formalities were followed. Tax issues can arise in connection with the transfer of assets, and these should be considered prior to any transfers. For example, the transfer of real estate out of a C corporation into a limited liability company could trigger a significant amount of tax, and thus make the transfer impractical. But if additional real estate or a significant piece of machinery or equipment is being acquired, having a new limited liability company purchase it (and then lease it to the corporation) could have significant advantages. 

2.                        Limited Liability Companies. A limited liability company (“LLC”) is a hybrid type of legal entity that has some characteristics of a corporation and some characteristics of a partnership. 

• Owners of an LLC are called members;
• They can elect to receive pass through tax treatment like a partnership or an S corporation, or to have the LLC taxed like a C corporation;
• They have limited liability like in a corporation; 
• They have a great deal of flexibility in management structure. 

LLCs can provide significant asset protection advantages. A creditor of an owner of a corporation (that is, a creditor of a stockholder) often can gain control of a corporation by getting control of the owner’s stock. Creditors will have a much more difficult time gaining control of an LLC. Thus, many business owners now prefer to form an LLC instead of a corporation when the need for an additional entity arises.

3.                        Insurance. Review all of your business insurance with both your attorney and your insurance agent. Since your attorney is not selling any insurance products, he or she can often provide an objective review of the types and amount of your business insurance. Having adequate insurance is one of the most important (and generally one of the most cost effective) ways to provide protection for your business.

4.                        Update Corporate Records and Follow Required Formalities. Many closely held businesses do not keep their corporate record books up to date. In the event of a lawsuit against the company, a plaintiff’s attorney can attempt to “pierce to corporate veil”. This means the corporation will essentially be ignored and the owners (shareholders) will be personally liable for the corporate debts.  Following basic corporate formalities, including

• Holding an annual shareholders meeting;
• Holding regular meetings of the Board of Directors;
• Avoiding any mixing of personal and corporate assets; and
• Keeping corporate records up to date.

will all help to insure that the assets of the owner(s) of the business are insulated from any judgment against the business. One of the many advantages of an LLC over a corporation is that LLCs require fewer formalities in both their organization and operation. However, piercing of the LLC veil is also possible under various circumstances, including inadequate capitalization or failure to maintain a separate indentity (for example, failing to have a separate bank account for the LLC). 

5.                        Business Succession Plan. Many business owners lose sleep worrying about lawsuits and other potential legal claims. While these concerns are often justified, more businesses collapse from lack of a business succession plan than from a lawsuit bought by a party unrelated to the business. Lack of such a plan can lead to fights among family members, including litigation, which can be disastrous at both a business and a personal level. Paying attention in advance to at least some form of succession plan can save an enormous amount of trouble later. Life insurance should be considered as one part of the business succession arrangement. Good business succession planning is also a form of asset protection planning. 

6.                        General Legal Review of Business Operations. Is your business in compliance with applicable employment laws and other regulatory requirements? Has your employee manual been reviewed recently? One lawsuit will likely cost far more than a basic legal compliance review. A legal “check up” is like a medical check up: identifying one or more serious problems and taking care of them now can avoid a much greater problem later. 

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