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

The United States Securities and Exchange Commission recently filed suit against two Texas brothers (Sam and Charles Wyly) alleging an elaborate securities sham to fraudulently sell offshore assets.  Sam Wyly is on the Forbes list of billionaires.  According to a front page article by David Segal in the August 23, 2010 New York Times, Sam and his brother Charles had a maze of 58 trusts and shell corporations in two well-known tax havens-- the Isle of Man and the Cayman Islands.  Sam and Charles Wyly have denied the charges filed by the S.E.C. in a 78 page Complaint.

The New York Times article about the Wyly brothers is definitely worth reading.  The story provides some valuable lessons for those interested in asset protection planning.  One lesson is to choose your professional advisors carefully.  According to the New York Times, in 1991 the Wyly's attended a seminar on overseas trusts taught by a lawyer named David Tedder, who boasted that no creditor had ever pierced the asset protections his firm had established for clients.  Mr. Tedder would later, in an unrelated matter, be convicted of money laundering and conspiracy; and he was sentenced to 5 years in prison.  Charles Wyly is quoted in the New York Times article as saying "We relied on people we thought were fine attorneys and accountants."

A second lesson from the Wyly's situation is that careful attention is needed not only when offshore entities are established, but also after they are operating.  That is, formation of one or more entities could be perfectly legitimate; but movement of funds and other assets may have tax and other implications that have to be addressed.

The Wyly brothers clearly seem intent on fighting the S.E.C. allegations. But no matter what the outcome of this particular case, it holds some useful lessons for anyone interested in asset protection.

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Alaska was the first state in the United States to pass a domestic asset protection trust statute.  Prior to 1997, this type of protection could only be obtained in offshore jurisdictions such as the Isle of Man.  A number of other states -- including Delaware -- have subsequently enacted similar statutes.  There is now an ongoing debate about the advantages and disadvantages of offshore versus domestic APT's.

I recently came across a good summary of these issues by Jeffrey T. Getty and Kalimah Z. White.  Their article is several years old, but I recommend this link for what I think is a good general discussion of domestic asset protection trusts and their pluses and minuses compared to offshore trusts.

Keep in mind that so-called asset protection trusts (APT's) are a possible alternative -- but certainly not the only alternative -- to shield you assets from creditors.  Whether or not such an arrangement is right for you depends on a number of factors, including your willingness to surrender some degree of control over the assets placed in such a trust.

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It has generally been assumed that when a creditor of an LLC member gets a judgment against that member, the only thing the creditor can do is to get a so-called "charging order".  Such an order does not give the creditor control of the LLC -- just a right to receive distributions if and when they are made.  This is one of the advantages of an LLC over a corporation for asset protection purposes.  If you own shares of a corporation, a creditor can generally gain control of those shares much more easily than it could gain control of an LLC interest.

But on June 24, 2010, the Florida Supreme Court ruled in the case of Olmstead v. Federal Trade Commission that because the Florida Limited Liability Company Act does not specifically make a charging order the exclusive remedy of a creditor, the creditor can use other remedies to gain control of a single member LLC interest.  This means a creditor can gain total control of the LLC.  Even worse, the Court's logic raises at least some concern about protection of multi-member Florida LLC interests.  Two dissenting justices on the Florida Supreme Court strongly disagreed with the decision and accused the majority of justices of rewriting the Florida statute.

Some states (like Delaware) make clear in their state statute that a charging order is the exclusive remedy of a judgment creditor.  So this recent Florida decision is of no concern to owners of single member Delaware LLC's.  But it does raise concerns about single member LLC interests in various other states.

Like many other asset protection attorneys, I will be studying this decision in much greater detail in the coming weeks.

This case is a reminder that asset protection law is constantly evolving, so it is advisable to periodically consult with an attorney even if you already have an asset protection plan in place.

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