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

Asset protection planning (and estate planning) frequently involves the use of one or more trusts. Possibilities include an offshore trust, Domestic Asset Protection Trust, irrevocable life insurance trust and various other kinds of trusts. 

Most of these trusts are designed to last for many years. It is therefore important to give the trustee the flexibility to adjust to changing circumstances. Many things can change during the life of a trust. Among the many changes that a trustee may be faced with are:

·         Beneficiary’s creditor problems

·         Changes in family circumstances (including divorce)

·         Cost of living

·         Legal changes

A person setting up a trust is often inclined to impose very specific requirements on the trustee (for example, making specific distributions to beneficiaries each year). But one or more of the changes mentioned above could make a particular distribution problematic. Giving your trustee flexibility and discretion often makes the most sense. This is why I frequently remind my clients that who you choose as trustee of a trust can be just as important as the trust documentation.

In any event, it is important to keep in mind that no matter what kind of trust you establish, you are going to have to give your trustee a certain amount of flexibility to react to future changes.

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Here are some of the people who should at least consider setting up an Ohio Legacy Trust:

• Business owners
• CEOs and Directors
• Physicians
• Accountants
• Attorneys
• People considering marriage
• Others who are willing to part with total control of a portion of their assets

The following chart (prepared by my partner, Paul Fidler) provides some general guidelines about whether you might benefit from an Ohio legacy trust. The chart would also be applicable to domestic asset protection trusts in other states as well. 

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The link below provides some general information about Ohio legacy trusts. The material is from a presentation given by my firm on March 26, 2013 (the day before the Ohio Legacy Trust Statute took effect). 

www.ssrl.com/attachments/download/106/Ohio%20Asset%20Management%20Modernization%20Act.pdf

This new kind of trust is not for everyone. But for some Ohio residents, it could be a valuable way to protect a portion of your assets.

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I am frequently asked whether placing your home in a limited liability company will protect it from your creditors.  The answer is generally no. 

An LLC will likely be ignored by a court if there is no business purpose for it.  If you own rental property, that can be held in an LLC.  In that situation your clearly have a business purpose.

Contributing your personal assets (like your home, jewelry, furniture, etc.) to an LLC will not likely protect those assets from your creditors.  If you could avoid all of your personal debts by simply contributing your assets to an LLC, everyone would do it!

Other strategies may be available to protect your home from creditors.  States like Florida and Texas have a virtually unlimited homestead exemption.  So called “equity stripping” arrangements (borrowing funds with your home as collateral and then using those funds for other purposes) may be reasonable in some circumstances.

But simply contributing your personal residence to a limited liability company in and of itself will likely offer little protection from your personal creditors.  

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Ohio House Bill 479, signed by the Governor on December 20, 2012 and effective in March of 2013, has a provision that specifically protects contributions to 529 plans. 

A new provision was added to Section 2329.66 of the Ohio Revised Code to protect contributions to a so-called 529 plan.  Funds held in such a plan by any person who is domiciled in Ohio will be exempt from execution, garnishment, attachment or sale to satisfy a judgment. 

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As of January 1, 2013, the annual federal gift tax exclusion has changed to $14,000 per donee.   This means that during 2013 you can give up to $14,000 per donee without filing a federal gift tax return.  So, for example, if you have three children - - you can give each of them $14,000 without any reporting requirement.

The annual gift tax exclusion amount is important to estate planners.  It is also important to asset protection planners because gifting is frequently an integral part of many asset protection plans.

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There are many factors to consider in deciding whether a particular jurisdiction is or is not favorable from an asset protection standpoint.  Certain states and foreign countries are clearly better than others.  There is a constant tension between the legal rights of creditors and debtors; and each jurisdiction is to some extent more or less favorable to one or the other.

States like Florida and Texas have virtually unlimited homestead exemptions for principal residences.  Other states have surprisingly low exemptions.

States like Nevada, South Dakota, Delaware and Alaska have had favorable domestic asset protection trust (DAPT) statutes for some time now.  Only about 15 states allow DAPTs.  While these statutes have still not been tested in the courts, they are worth considering as part of an overall asset protection plan.

For non-U.S. jurisdictions, the Cook Islands has been increasingly recognized as a favorable jurisdiction for an offshore trust.  Despite some recent negative publicity, the Swiss banking system provides many advantages for offshore accounts.  Various other foreign jurisdictions have laws that can be utilized for asset protection planning.

You always need to consider your own state’s law no matter what other jurisdictions you utilize for asset protection planning purposes.  But asset protection planning clearly requires a multi-jurisdictional analysis.  There may be significant advantages to setting up a trust, LLC or other entity in a state other than your own.

The key point is that each state and foreign jurisdiction has many laws that affect asset protection planning.  One size does not fit all; and each situation should be looked at individually. 

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As I noted in a post about a month ago we are facing potentially dramatic year-end changes to the federal estate and gift tax.  The “exemption amount” could drop from $5 million to $1 million.  In any event, it seems like the exemption will ultimately be less than it is now.

This means that for many high net worth individuals, 2012 is a good year to make gifts.  It also means that you may have a very valid, independent reason to transfer certain assets (other than for asset protection).  That is, a challenge to any transfer you make could be at least partially defended by the fact that there are very important tax reasons to make the transfer this year.

In any event, 2012 could be a good year for high net worth individuals to consider making gifts.  This would certainly be worth discussing with your estate planning attorney.

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 Ohio does not currently allow you to set up a Domestic Asset Protection Trust to protect your own assets.  But you can set up a trust that protects assets that you leave to a beneficiary other than yourself.  This kind of trust is commonly referred to as a “spendthrift trust”.  Many trusts that are formed for general estate planning reasons have spendthrift provisions. 

In 1963, the Ohio Supreme Court held that spendthrift provisions in a trust were not effective against the claims of a beneficiary’s creditors.  Twenty-eight years later, in 1991, the Ohio Supreme Court reversed its earlier decision and declared that spendthrift trust provisions were valid under Ohio law. 

One of my partners, Paul Fidler, recently spoke about this topic at the Cleveland Metropolitan Bar Association Estate Planning Institute. The outline of his presentation provides more detailed information about this important kind of trust provision. 

Any trust that you set up for someone else’s benefit should generally include a “spendthrift clause” which will help to protect assets from claims of the beneficiary’s creditors. 

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A so-called umbrella policy can provide substantial insurance coverage at a modest cost.

There are many reasons you need to protect your assets.  We often focus on business and professional risks, economic problems, divorce and other catastrophic events.  But disaster frequently strikes from much more routine events -- like an auto accident.

Let's say you accidentally injure one or more people in an auto accident.  You have $300,000 in liability insurance coverage.  But the medical bills of the injured parties are closer to $1 million.  It is quite possible that you could eventually lose your house or other assets in such a situation.

An umbrella policy provides excess insurance over your auto and home owners policies.   Generally, claims settle at lower amounts.  So the additional protection does not cost as much as the first level protection.  Also, an umbrella policy covers multiple risks (such as auto accidents and accidents in your home).

I advise clients with respect to some rather sophisticated asset protection techniques.  But you should not overlook the basic protections provided by some very simple, reasonable and relatively inexpensive alternatives -- like an umbrella insurance policy.

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As I mentioned in a post last March most of us now have multiple on-line accounts; and very few people consider what happens if they die and no one can access those accounts.

One of my associates, David M. Lenz, recently published an excellent article on this topic titled "Afterlife on the Cloud".  As Dave mentions, we are increasingly living in an electronic world.  When death comes, a person may now leave behind many digital items that contain valuable information -- and which may have intrinsic monetary value.  In many instances, failure to do any planning with respect to these digital items can create a huge problem.  And the inability of your executor or other personal representative to gain timely access to your digital accounts could leave them more vulnerable to creditors.

At any rate, planning for digital assets is now essential from both an estate planning and asset protection standpoint.

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 Asset protection statutes and case law vary significantly from state to state.

• More than ten states have enacted Domestic Asset Protection Trust (DAPT) legislation; but most states have not.
• There is still not a single reported court decision upholding (or striking down) DAPT legislation.  Not only can state statutes vary, but in the future, case law in each state could be very different.
• Some states have much better LLC protections than others.  State laws are constantly changing.  For example, Ohio recently passed legislation that provides significantly better protection for LLC members.
• IRA protection depends to some degree on state law (particularly with respect to inherited IRAs).
• Protection of life insurance from creditors also varies state by state.

The list could go on.  Some matters (such as 401(k) plans) are governed by federal law.

Asset protection attorneys therefore need to keep current on various state law developments in order to utilize the best strategies for clients.

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This is the time of year when we are all focused on taxes.  This includes our tax returns for 2011 and tax planning for 2012.  So it is an appropriate time of year for a reminder about retirement plans and IRAs.  We all seem to be aware of their tax advantages; but I constantly remind clients that they are also highly advantageous from an asset protection standpoint.

• An ERISA qualified retirement plan is protected from the plan participant's creditors pursuant to the 1992 decision of the U.S. Supreme Court in Patterson v. Shumate.
• IRAs received specific protection under the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act.
• Some IRA protections (for example, those relating to inherited IRAs) depend on state law.  For example, Texas and Florida have enacted specific legislation to provide that inherited IRAs are protected from creditors.  Ohio and some other states have passed legislation exempting inherited IRAs in bankruptcy.

The legal details of retirement plans and IRAs can be very complicated.  But a simple point to keep in mind is this: maximizing contributions to retirement accounts is a very basic (and very effective) tax and asset protection strategy.

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It is generally estimated that more than half of all Americans have absolutely no estate planning documents.  This can potentially create a lot of hassles for your loved ones.

But even those Americans with very good estate planning documents often fail to focus on asset protection for their children and other beneficiaries.  If you simply leave assets to your beneficiaries without any kind of ongoing trust arrangement, those assets can generally be reached by their creditors with little effort.

We now recommend dynasty trusts for many of our clients.  These trusts are not as exotic as the name might imply.  They simply allow your children and other beneficiaries to hold assets in a continuing trust arrangement.  This can provide better protection in the event of a divorce; and it can also provide better protection from future creditors of the beneficiaries.

Providing some added protection for the assets that you leave to your loved ones can be an important gift to them.

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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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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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Offshore bank accounts have been getting more and more scrutiny in recent years.  An article in last week's Bloomberg News by David Voreacos outlines yet another U.S. investigation relating to foreign banks.  Eight offshore banks are now under a federal grand jury investigation -- for facilitating tax evasion by U.S. citizens.

But none of this means there is anything inherently wrong with having offshore accounts.

There are many good business and financial strategies that utilize offshore investments.

Investing has obviously gone global, and offshore accounts are perfectly legitimate and advisable for many U.S. citizens.  Holding funds offshore can also have asset protection advantages by making those funds more difficult for creditors to reach.

Asset protection planning is not centered on hiding assets; and it certainly does not involve unlawful tax evasion.  It does involve using lawful means to make assets more difficult for creditors to reach.  Under the right circumstances, offshore accounts can be advisable from both a financial and an asset protection standpoint.

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Certain life insurance products (as well as certain arrangements like an irrevocable life insurance trust) can provide asset protection advantages.  For example, if you have a significant amount of cash that is not otherwise needed, and you also have the need for life insurance, a single premium whole life policy might be appropriate.  Cash that is simply sitting in a bank or money market account is not well protected from creditors.  A life insurance policy is going to have far greater protection.

I am certainly not recommending the purchase of any life insurance products without careful thought.  But life insurance can play a meaningful role in estate planning and asset protection planning.

In many jurisdictions (including Ohio), the cash value of life insurance is generally well protected from creditors.  The protection is not as high as that offered by a qualified retirement plan; but it is still very good.  And it is vastly better than assets held in a personal bank or brokerage account.

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The Court of Chancery in Delaware is well respected by business lawyers from coast to coast.  A recent New York Times article (which I discussed in another recent post) explains that the Delaware Chancery Court has a reputation for quick and knowledgeable business decisions.  This is one of several reasons that so many businesses are incorporated in Delaware.

Leo E. Strine, Jr. was recently confirmed as the new Chancellor of the Delaware Court.  Chancellor Strine is a graduate of a top national law school (University of Pennsylvania) and worked for Skadden Arps in New York City (one of the most recognized corporate law firms in the United States).  The new Chancellor previously served as Vice Chancellor of the Court, and has already written hundreds of business decisions.  While there are many competent judges in other states, the Delaware Chancery Court has very specific expertise in business law.  And it has a long tradition of excellence.  Chancellor Strine is the 21st Chancellor of the Delaware Court since 1792.

There are a variety of reasons that many businesses are formed in Delaware.  The long and very stable history of the Delaware Chancery Court, and the excellent qualifications of its judges, are among the many reasons that Delaware is often a good choice when forming a new business.

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Approximately 900,000 businesses are incorporated in Delaware, including 63% of all fortune 500 companies.  This is according to Rita K. Farrell in a recent New York Times article.

In various other posts, I have explained how Delaware's LLC statute provides better asset protection for LLC owners than the law in many other states.  The Delaware law for corporations is also advantageous (particularly for larger corporations).  This is in part because the law in Delaware is generally favorable to businesses; it tends to be stable; and it is predictable.  According to the New York Times, 21% of Delaware's revenues come from franchise taxes!  Many businesses have obviously decided to be formed in Delaware; and Delaware obviously has an incentive to continue that trend.

Various other states are also very viable alternatives for forming a corporation or a limited liability company.  I am still forming a number of Ohio corporations under certain circumstances.  Each situation must be analyzed on its own.  But as noted in the New York Times article referenced above, Delaware is obviously a very popular choice for incorporating a new business.  It is also becoming a very popular choice for forming a limited liability company.

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Some new investment vehicles -- called "black swan funds" -- are designed to go up in value if there is an economic collapse.  They are designed to protect against what some investment professionals are calling "tail risk" (basically meaning the economy going into some sort of disastrous tail spin).

Not all analysts are sold on this new kind of costly protection (similar to buying insurance).  There is an excellent discussion of this new type of investment product in a front page New York Times article written by Azam Ahmed.  The article is appropriately subtitled "On Off Chance of a Total Collapse, a Little Insurance".  Not very long ago, this kind of investment protection probably would have been ridiculed.  It seemed for a while that things like housing and the stock market were always going up.  We have certainly learned in recent years that this is not always the case.

I am not an investment specialist, and I do not know a lot about the so-called black swan funds.  Their existence, however, is a stark reminder that protecting your assets in advance of a calamity is clearly a good idea.  While black swan funds, hedge funds and various other techniques can be used to protect the value of certain assets, a variety of legal techniques can be used to better protect your assets from creditors.  Our litigious society and our uncertain economic times make asset protection planning more important than ever.

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Given the poor state of our economy in recent years, one would expect that the number of lawyers in the United States would be declining. There has been significant downsizing at larger law firms. Many businesses have been deferring some discretionary legal services. So one would expect a decreased demand for lawyers.

But according to James Podgers (writing in the July 2011 edition of the American Bar Association Journal), the lawyer population in the United States in still on the rise'. Mr. Podgers reports that only five states experienced a drop in their lawyer population between 2010 and 2011. There are over 1.2 million active attorneys in the United States. The American Bar Association reports that is an increase of 2% over 2010 and a 17% increase over 2001. 

Ironically, despite the increasing number of lawyers in the United States, many low and middle income individuals simply cannot afford basic legal services.

We live in a litigious society. The ever-increasing number of attorneys (many of whom are coming out of law school with huge amounts of debt) is certainly not likely to make us less litigious at any point in the near future. This is just one of many trends in the United States that make it increasingly important for individuals and businesses to protect their assets to the greatest extent permitted by applicable law – preferably before they end up in any kind of catastrophic lawsuit.

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A June 8, 2011 New York Times article by Steven M. Davidoff (a law professor at the University of Connecticut School of Law) notes that personal liability for directors and officers of large publicly held companies is less common than most of us think.  Professor Davidoff argues that the upside of serving as a director or officer of a large public company is huge, and the down-side is very limited.

Even if the potential liability of public company officers and directors is not all that high, such individuals are still in need of asset protection planning.  These individuals will generally have a high net worth.  They can face potential liability from numerous other sources -- anything from divorce to an auto accident.  While many potential risks can be covered by insurance, personal asset protection is still advisable.

Small business owners may face a far greater risk of personal liability than public company officers and directors for a variety of reasons:

• Small business owners frequently have to personally guarantee company obligations -- which makes them directly responsible for those debts.
• "Piercing the corporate veil" arguments will more likely be raised against a smaller business than a larger one.
• Legal fees alone can be catastrophic for a small to medium sized business owner, even if he or she is eventually successful on the underlying claim.
• Smaller businesses and their owners frequently carry less insurance than larger companies.

Whether you are running an international conglomerate or you own a small or medium sized business, you should focus on protecting your personal assets to the greatest extent permitted by applicable law.

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Many things in my law practice run in spurts -- just like things in our daily lives.  I may go a whole year without having a client buy or sell a business, and then several clients are engaged in business sales all at once.

This past month I have a had a disproportionate number of inquiries from people across the country who are asking about asset protection options after they have had a lawsuit filed against them -- and even after a large judgment has been entered.  About a week ago I spoke to someone who had lost a court case; a judgment had been entered against him; he had appealed; and then he had lost the appeal.  Now he was thinking about protecting his assets.  Guess what?  I was not able to offer any good options for him.

There are situations in which certain legitimate asset protection alternatives could still be available to someone with a judgment against them.  But your options decline drastically once you are sued.

As I have mentioned many times before, the time for asset protection planning is right now, before any problems arise.

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Asset protection planning is usually triggered by fear of a catastrophic lawsuit.  Most of the clients I work for -- especially physicians, closely held business owners and high net worth individuals -- are concerned that a single lawsuit could wipe out everything they have.  And this concern is entirely justified.  It is silly not to protect your assets within the bounds of applicable laws.

But lawsuits are not the only reason for asset protection planning.  Totally unexpected catastrophes -- anything from natural disasters, a stock market crash, or other economic crisis -- can also suddenly expose many of your assets to creditors.  For example, a catastrophic loss of real estate or other property that is not covered by insurance could suddenly put all your other assets at risk.  Asset protection planning -- done in advance of such a catastrophe -- could insulate your other assets from the reach of creditors.

The recent events in Japan -- an earthquake, followed by a tsunami, followed by nuclear power plant disasters, followed by all the economic fallout from these unanticipated disasters -- remind us that everything can change in a moment.  You generally cannot lawfully transfer assets once disaster strikes.  Such a transfer would usually be a voidable fraudulent conveyance.

It is difficult to focus on disaster planning when no particular disaster is staring you in the face.  But that is exactly the right time for the most flexible and effective asset protection planning. 

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Following up on my posts of January 26, 2011 and July 21, 2010 -- I want to emphasize again that not all trusts provide asset protection.

A so-called revocable "living trust" (often designed for probate avoidance) can protect beneficiaries of that trust from claims of creditors.  For example, you can protect assets that you place in trust for the benefit of your children from claims of their creditors.

But in order to protect your own assets from your own creditors -- the trust you set up has to be irrevocable.  You have to give up a certain amount of control over the assets you place in such a trust or they will simply be deemed the equivalent of your own personal assets.  As common sense would indicate -- if a trust you set up is completely revocable, a court could simply order you to revoke it.  And your judgment creditors could then take steps to seize those assets.

So the bottom line is what common sense would indicate:  if you retain complete control over assets in a trust, then the assets are not going to be insulated from claims of your creditors.

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Does a Roth IRA provide better creditor protection than a traditional IRA?  The answer is yes.  This is because with a traditional IRA, you have to begin taking mandatory required distributions (MRD's) starting in the year you reach age 70 1/2.  These distributions can become a potential target for creditors.  You are not required to take any funds out of a Roth IRA.

Even though a Roth IRA may be a little better for asset protection purposes, you certainly do not want to convert a traditional IRA into a Roth IRA solely for this reason.  Tax considerations will likely be your main focus.  In a traditional IRA, you make contributions in pre-tax dollars, but you must pay tax when you withdraw the funds.  With a Roth IRA, you make contributions in after-tax dollars, and there is no tax when you withdraw the funds.  Converting a traditional IRA to a Roth IRA could result in a significant tax bill.  Such a conversion may or may not be a good idea, depending on your individual situation.

As I have emphasized many times before, a solid asset protection plan can only be developed by focusing on all your assets and liabilities.  Funds in any kind of IRA are going to be a lot better from an asset protection standpoint than funds in an individual investment account.  The Roth IRA simply has an advantage in that there is no requirement to withdraw any funds.

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“Avoiding probate” has become almost an obsession with many Americans. In some states, this can be a good idea, to the extent reasonably possible. But “probate avoidance” is usually not my biggest concern for a client.

It is very important to remember that a trust designed to avoid probate may provide absolutely no asset protection. A so-called revocable grantor trust (a very common estate planning vehicle) often provides no protection from creditors. Put another way -- just because your assets are in some sort of trust, it does not mean they are necessarily protected from creditors. Only certain types of trusts will provide creditor protection.

Many trust arrangements do protect assets from creditors. Some states allow Domestic Asset Protection Trusts. Irrevocable life insurance trusts as well as trusts with an independent trustee will also generally provide protection from creditors.

This does not mean that a trust designed to avoid probate is a bad idea. In may circumstances it could be an excellent idea. I am simply emphasizing that I often run across people who think that the trust arrangement which they have is designed for asset protection, when it frequently is not.  Periodically reviewing your estate planning documents from an asset protection standpoint can provde to be very valuable.

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Believe it or not -- banks, hedge funds and private investors are now funding lawsuits.  They are pumping staggering amounts of money into medical malpractice claims, class actions against companies, and even divorce fights!  According to a front page New York Times article by Binyamin Appelbaum, total investments in lawsuits at any given time now exceed $1 billion!

As Mr. Appelbaum puts it, "Lawsuit lending is a child of the sub-prime revolution, the mainstream embrace of high risk lending at high interest rates..."  According to his article in The New York Times, Massachusetts in 1997 became the first state to allow lawsuit lending.  In 2000, the American Bar Association eliminated rules prohibiting the practice.

Some of those financing other people's lawsuits are private "investors", but even banks and financial institutions are getting into the act.  Another article in yesterday's New York Times emphasizes that lawsuit lending is currently subject to very few government regulations.

It seems to me that "lawsuit lending" needs far greater scrutiny by bar associations and governmental authorities.  There will be situations in which this practice might be appropriate, but there will be many more when it is not.

This much is very clear: lawsuit lending creates an even greater need for asset protection planning.  We already live in a highly litigious society.  Now, it seems some plaintiffs will be able to get third parties to fund their litigation.  This will not only facilitate the filing of more lawsuits, but it will also give plaintiffs resources to attempt to collect on judgments.

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In the United States, forming an LLC in a particular state (such as Delaware) can provide significantly better asset protection advantages than forming that LLC in certain other states.  The same holds true for offshore LLCs.  Nevis is currently one of the best offshore jurisdictions for a limited liability company.

Forming a limited liability company in Nevis (a small island in the Caribbean) is relatively easy and can generally be done fairly quickly (usually within 4 to 5 working days).  The Nevis Limited Liability Company Ordinance of 1995 makes the structure of a Nevis LLC extremely flexible.  It is essentially a matter of contract among the members.  Nevis LLCs offer their members full privacy, as there is no public filing requirement regarding the identity of members.

Legal judgments obtained against a Nevis LLC in any foreign jurisdiction must be domesticated in Nevis.  This can prove to be expensive and time consuming; and Nevis attorneys are not allowed to work on a contingency basis.  A member's interest in a Nevis LLC has "charging order" protection similar to that offered by many states in the United States.  Currently, no taxes are imposed on assets or income of a Nevis LLC as long as those assets and income originate outside of Nevis.

Many considerations are involved in a decision to form an offshore limited liability company.  If a decision is made that an offshore LLC is appropriate, Nevis is currently a good location to form such an entity.

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I have discussed the Florida Supreme Court's decision in Olmstead in other posts on December 20, 2010, September 22, 2010 and August 2, 2010.  In addition to severely weakening the asset protection advantage of a single member LLC in Florida, the decision unfortunately calls into question the effectiveness of multi-member LLCs in that state.

There are various alternatives for those who are currently members of a Florida multi member LLC.  You can consider converting the LLC into a different form of entity (such as a limited partnership); change the management structure from a member managed form to a so-called manager-managed form; create non-voting interests for certain owners; or re-form the LLC in a state that has well settled charging protection law (such as Delaware, Wyoming, Nevada or Texas).  It may also be reasonable to wait and see if the Florida courts or the legislature clarify the situation with respect to multi-member LLCs.

In any event, it is critical to get the right professional help before making any changes your Florida LLC (or any other LLC).  Changing the ownership structure, management structure, or state of formation of an LLC can have tax and other considerations that may need attention.

For Florida attorneys, I recommend an excellent article in the Florida Bar Journal, Volume 84 (December 2010).  The authors provide a thorough review of the impact of Olmstead on multi-member Florida LLCs.

The Olmstead decision provides a stark reminder of two very important points:

1. Asset protection law varies significantly from state to state; and
2. Asset protection laws are constantly changing, both through statutory changes and court decisions.

Having a competent professional assist you with your asset protection planning is vitally important.  It is also important to have any asset protection plan reviewed periodically because the law in this area is evolving very rapidly.

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On June 24, 2010, the Florida Supreme Court ruled in Olmstead v. Federal Trade Commission that a charging order is not the exclusive remedy for a judgment creditor against a debtor's single member LLC interest.  This means that in Florida, a judgment creditor can essentially seize a debtor's single member LLC interest and gain full control of the LLC.  This was obviously a big blow to the usefulness of single member LLCs -- especially in Florida.

Some commentators are acting like all single member LLCs are now essentially useless.  But this is simply not the case.  First of all, charging order protection for single member LLCs is still available in other states.  For example, earlier this year Wyoming law was specifically amended to provide that for a single member LLC formed in that state, a charging order is the exclusive remedy of a judgment creditor.  Several other states offer the same protection.

Even in Florida, a single member LLC may still be an acceptable part of an overall asset protection plan.  Such an LLC still provides limited liability protection for the owner from a judgment against the LLC itself.  So heavily mortgaged real estate held in a single member LLC may still not raise a big concern from an asset protection standpoint.

It is obvious that a single member LLC formed in certain states will offer significantly better protection than a single member LLC formed in many other states.  Multi member LLCs generally offer better asset protection than single member LLCs.  But each situation has to be analyzed on its own.  Asset protection must be integrated with various personal, business, tax and estate planning considerations.

The Florida Supreme Court decision in Olmstead was definitely a blow to the usefulness of single member LLCs.  But a single member LLC (especially one formed in certain states other than Florida) can still be a valuable component of a viable asset protection plan.

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If you own a business through a corporation or limited liability company, you should not be personally liable for the company debts.  That is one of the reasons you set up a corporation or a limited liability company in the first place.  It is a different story if you sign a personal guaranty for a bank loan or other company obligation.  Then you obviously become responsible for that debt.

A business owner would normally assume that he/she is not personally liable for payment of credit cards that are taken out in the name of the company.  They should be a corporate (and not a personal) debt.  However, the fine print on many credit card applications tries to make the owners of the business personally liable for the company credit cards.  This is often hidden in the fine print of an extremely lengthy corporate credit card application.  I have recently had several instances in which a major credit card company attempted to hold one of my closely held business owners personally liable for a corporate debt based on some obscure clause in a credit card application.  The credit card debt of some companies can be very high, especially if a number of different employees use the corporate credit cards.

A major goal of any asset protection plan for a family business owner is to make sure the owner is not personally liable for company debts.  In working toward this goal, it might be prudent to review the terms of the corporate credit card account to be sure it does not attempt to impose personal liability on the owner.

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If you and your spouse (or you and anyone else) have a joint credit card account, then both of you are fully liable for all the credit card debt.  Many couples open a joint account for convenience.  But keep in mind that if your spouse or partner runs up a huge credit card bill, you are personally liable for all that debt.  I am certainly not suggesting that a joint credit card account is always a bad idea.  My wife and I have one.  But the joint liability is something to be aware of when you open an account.  From an asset protection standpoint, it will generally be best to avoid having two parties liable for any significant debt when you only need to have one responsible party.

Credit cards are not going to be the principal focus of your asset protection plan.  But in many instances they should be considered -- and they are often overlooked.

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Pet trusts are becoming more and more common.  As noted on the ASPCA website, a pet trust is a legally sanctioned arrangement that provides for the care and maintenance of one or more pets in the event of their owner's disability or death.  As also noted by the ASPCA, such a trust may take effect during a person's lifetime or after their death.

The Uniform Probate Code was amended in 1990 to allow states to provide for pet trusts.  Forty-four states have now enacted pet trust laws.

There are a number of important considerations in setting up a pet trust.  One of the most important is choice of the trustee (which is a critically important consideration in all trust arrangements).

The law in this area is developing rapidly.  For further reading, I recommend material prepared by Professor Gerry W. Beyer of Texas Tech University School of Law.  While this material is designed for attorneys, the Introduction and other parts of Professor Beyer's article have a lot of fascinating non-technical information.  For example, he discusses Leona Helmsley's $12 million bequest to her pet.  He also notes that singer Dusty Springfield's Will made extensive provisions for her cat, Nicholas, including that he be fed imported baby food and listen to her recordings each night at bedtime.  Professor Beyer reports that more than one out of ten people now include their pets in their estate planning.

A pet trust is not going to be the key component of your asset protection plan.  But since more and more Americans are establishing pet trusts, it is important to consider them in connection with asset protection planning.  If your pet is very important to you (which is likely to be the case), you could leave some extra funds to one of your children and ask them to care for your pet in the event of your death.  But if your son or daughter has creditor problems, those funds could be lost.  Segregating a reasonable amount of funds in a separate trust for the care of a pet would protect those assets -- and make it far more likely that they will be there if needed.

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The Florida Supreme Court recently ruled that a charging order is not the only remedy for creditors of LLC owners. My blog post of August 2, 2010 outlines the Florida Supreme Court decision. While the decision applied to a single member LLC, it could apply to multi-member Florida LLC’s as well. For the time being, Florida LLC owners – particularly single member LLC owners – must consider alternatives for protecting assets (such as a Florida limited liability partnership or reorganizing the LLC in another state such as Delaware).

It is important to keep in mind, however, that Florida is still a very debtor-friendly state. Florida has a virtually unlimited homestead exemption, and its statutes and case law are generally favorable to debtors from an asset protection standpoint.

For example, a Florida appellate court recently ruled that certain trust assets were beyond the reach of a beneficiary’s creditor, even though the trustee had improperly allowed the beneficiary to manage the trust assets. The court in Miller v. Kresser noted that the trustee had clearly abdicated his responsibilities, but nevertheless upheld the so-called spendthrift provisions of the trust. 

So despite the recent decision of the Florida Supreme Court in Olmstead v. FTC, Florida is still generally a very good jurisdiction with respect to asset protection.

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Trusts are not only for the rich.  Anyone with minor children (and even children in their 20's) should consider a trust for their family.

If any property passes to a child under your will, from a bank account "payable on death" or otherwise, the child will generally get all of that money at age 18.  The same holds true if you have named a child under a life insurance policy, IRA or other retirement account.  Even if money is held in a Uniform Gift to Minors Account, the child gets everything at age 18.

Some people are very responsible and financially sophisticated at that age.  But let's face it -- many are not.  A lot of teenagers and twenty-somethings would rather party than manage their investment portfolio.

Many parents do not think about how much their children could inherit at age 18.  While most Americans are strapped for cash and living paycheck to paycheck, the value of their estates (including house, life insurance, retirement accounts, etc.) could be substantial.

By creating a trust, funds can be held by a trustee and used to pay education, housing and other expenses.  Any remaining balance can be distributed at a later age.

While I deal with many more complex asset protection vehicles, a fairly simple family trust arrangement can prove to be a huge benefit.  It can greatly increase the odds that your hard-earned money will not be wasted away in the event of your death.

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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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There is an increasing interest in asset protection among both individuals and businesses.   But many people are still not exactly sure what "asset protection planning" is.

Asset protection planning is simply the process of lawfully protecting your personal and/or business assets from creditors.  It involves taking advantage of laws and legal doctrines that were actually designed to help you protect your assets.

"Asset protection" sometimes has a bad connotation due in part to illegal offshore tax haven schemes and other questionable planning techniques.  Many asset protection strategies, however, are ethical and highly advisable.  An analogy can be drawn to tax planning.  Some schemes that are called "tax planning" are nothing more than illegal and fraudulent evasions of taxes.  Legitimate tax planning, however, is essential for both businesses and individuals.  Similarly, legitimate asset protection planning is important for businesses and individuals, especially in our litigious society.

Asset protection planning makes use of laws that were designed to enable organizations and individuals to protect their assets.  There are numerous asset protection alternatives for individuals, including maximizing contributions to IRA's and qualified retirement plans; using various forms of trusts (including domestic asset protection trusts, irrevocable life insurance trusts, dynasty trusts, and qualified personal residence trusts); retitling various assets; utilizing limited liability companies to protect real estate and other investments; and using life insurance in certain instances.  There are also a variety of strategies for lawfully protecting assets of your business, including using separate entities for certain business functions; using limited liability companies; using insurance as protection; and various other strategies.  There are many alternatives that are perfectly lawful and appropriate.  Fraudulent conveyance statutes and other laws are designed to prevent abuses, but there are a wide variety of asset protection strategies that can generally be employed to protect your personal and/or business assets.  For a more in-depth discussion of asset protection strategies that might be appropriate for you or your business, you can refer to an article I wrote recently that outlines some of the options.

Current economic conditions, recent high profile business failures, the recent waive of foreclosures, rising bankruptcy filings, and the seemingly endless number of lawsuits filed in the United States each year all illustrate the need for reasonable asset protection strategies.  In this environment, businesses and individuals should have no hesitation whatsoever in taking steps to lawfully protect their assets.

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A couple recent inquiries from readers of this blog (as well as some recent client questions) reminded me of the critical role of the attorney in the asset protection planning process.

You will frequently benefit by getting input from multiple advisors -- such as your investment advisor, accountant, tax preparer, maybe even certain friends and family members.  Only an attorney, however, should ultimately render asset protection advice.  This is because once you have retained an attorney, your discussions with the attorney will be privileged.  The attorney-client privilege is a very strong one and is designed to facilitate open and honest discussions between you and your lawyer.  Correspondence and discussions with your investment advisor and most other professionals will generally not be privileged.  A reputable asset protection attorney will obviously not tolerate discussion about improper or unlawful activities.  It is nevertheless extremely important that you be able to speak freely and openly with your attorney about your particular situation and goals.  Again, input from other advisors is desirable.  But engaging in asset protection planning without the benefit of a trusted attorney is a big mistake.

Another reason that an attorney is so critical to the asset protection process is that only an attorney can lawfully draft certain documents.  For instance, while a financial advisor may have good advice with respect to certain provisions of a will or trust agreement, your financial advisor is not supposed to be drafting those documents.  In fact, that kind of drafting may constitute unauthorized practice of law.  Even putting aside the possible illegality of such action, it just does not make any sense.  I have had a couple instances recently in which I was presented with trust agreement provisions that had been prepared without the help of an attorney.  The poor drafting lead to all kinds of problems.

The failure of many individuals and organizations to engage in asset protection planning costs far more in the long run than the planning itself would have cost.  A team approach to asset protection planning is frequently advisable as long as a lawyer is a key team member.  Asset protection planning without the help of an attorney, however, is likely to be an accident waiting to happen.

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I am frequently asked isolated questions about asset protection planning.  Should I consider forming a domestic asset protection trust?  Do you think I should consolidate some of my real estate holdings in a limited liability company?  Should my husband and I transfer joint interest in our residence to my name alone?  Etc., etc.

None of these questions can be answered in isolation.  They are like pieces of a puzzle that must ultimately be brought together in an overall asset protection strategy.

In order to give meaningful advice, an asset protection attorney must obtain information from you about a variety of matters, including the following:

• Your net worth.  While certainly not determinative, net worth affects asset protection planning.  If your net worth is $200,000, an offshore trust is far less likely to be a meaningful strategy than if your net worth is $20 million.
• Your specific assets and liabilities.  Protecting real estate may involve different considerations than sheltering marketable securities.  Your attorney must have at least a general idea of your specific holdings.
• Risk.  Are you in an occupation where you face an increased chance of lawsuits (such as a medical doctor or a small business owner)?  While any individual of a business can potentially benefit from asset protection planning, some businesses and individuals need planning more than others.
• Fees and expenses.  Various asset protection alternatives have different costs.  Offshore trusts are a lot more expensive to set up and maintain than most domestic asset protection alternatives.  And more expensive alternatives are not always the best choice. 
• Family situation.  Your marital status, whether or not you have any children, and other personal and family considerations can impact asset protection alternatives.
• The area in which you live.  Florida and Texas have great homestead exemptions.  Ohio on the other hand has a very low homestead exemption.  State laws definitely impact asset protection planning.
• Whether you have any current creditor problems.  Once there is a judgment against you, or even a lawsuit filed against you, your alternatives become far more limited.  Fraudulent transfer statutes may prohibit moving assets to avoid paying known creditor claims.

While much of the foregoing may seem obvious, I find that many clients do not initially understand why I want to have a good overview of their personal and financial situation before making any specific asset protection recommendations.  Various asset protection alternatives are like pieces of a puzzle -- they must fit together into an overall strategy in order to be effective.

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Whether you are a physician in private practice or working for a hospital or other health care organization, you should consider some basic steps to protect your assets.  Here are a few suggestions:

1. Maximize contributions to IRA's and other qualified plans.  Assets in IRA's and qualified employee benefit plans are generally awarded special protection from creditors.  Many plans (including 401(k)'s) are also protected in bankruptcy because they are not considered part of a bankruptcy estate.  The Bankruptcy Abuse and Protection Act of 2005 limits the IRA exemption in bankruptcy to $1,000,000 adjusted for inflation.
2. Consider some life insurance strategies.  In many states death benefits from life insurance, as well as the cash value of a life insurance policy, are exempt in whole or in part from claims of creditors of the insured.  In Ohio, for example, under Ohio Revised Code Section 3911.10, insurance death proceeds are exempt by statute if paid to the spouse, children or certain other designated beneficiaries.
3. Consider various trust arrangements.  Not all trusts provide asset protection, but some do.  For example, irrevocable life insurance trusts (ILITs) can be a great estate planning tool and can also provide significant asset protection.  If the ILIT is formed properly creditors of both the person who set up the ILIT and the beneficiary should have no rights in either the cash value or the death benefits of the insurance. 
4. Split assets between spouses.  Simply dividing assets between spouses may offer some protection.  As I have explained in another post, holding property as joint tenants is generally not the best strategy from an asset protection standpoint.
5. Focus on your principal residence.  Some states (Florida and Texas in particular) provide special protection for your principal residence against claims of creditors.  Ohio, however, provides a so-called homestead exemption of only $20,200 pursuant to Ohio Revised Code Section 2329.66.  Strategies for protecting your home from creditor claims therefore vary from state to state.

Many of these considerations are applicable to anyone who has accumulated assets that are worth protecting.  Since physicians (especially those in certain specialties) are far more at risk than many other people, they generally have a greater need to focus on asset protection.

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A couple weeks ago I posted some general observations about asset protection planning for physicians.  While a doctor should be taking steps to protect his or her own personal assets, physicians in a private medical practice should be taking additional steps to protect the private practice itself.  Here are some items worth thinking about:

     1. Consider using multiple entities to reduce liability and possibly gain some tax benefits.

·       Use one entity for the medical practice itself.

·       Use a separate entity to hold real estate and then lease the real estate to the practice group.

·       Use another entity to hold and lease medical equipment to the practice group.

·       Depending on the size of the practice, a management holding company might be advisable in connection with the various entities.

·       Patents and any other intellectual property should also never be owned directly by the medical practice.

·       Separate entities should generally be limited liability companies because they generally provide the best asset protection and they provide flow-through tax treatment.

Formation of additional entities can obviously involve start up costs, as well as some additional costs for on-going operations. The size of a medical practice (both in terms of the number of physicians and in terms of revenue) will influence how many separate entities may be appropriate.

     2. Consider different alternatives with respect to your accounts receivable.  

·       Some private medical practices (and other health care organizations) use a separate billing company. 

·       It is sometimes advisable to pledge accounts receivable in connection with a bank loan, since a judgment creditor will be in a second (and less appealing) position to the bank.

     3.  Make sure that an agreement is in place among members of the medical group covering what happens if a physician dies, becomes disabled, retires, or otherwise leaves the practice. Despite all the concerns about malpractice liability, more physician groups experience problems in this area than with a malpractice claim that exceeds insurance limits.

All of the foregoing are of course just general observations. Each situation must be analyzed on its own. But in any event, a medical practice should periodically review its structure and operations from an asset protection standpoint.

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There are many asset protection strategies, and the more expensive and complex ones are not always the best.  I like the comment made by Jay Adkisson (a nationally recognized asset protection planner) in the May 11, 2009 issue of Forbes Magazine.  He basically says the best ways are the old ways.

While that is a big generalization, there is a lot of truth in it.  Offshore trusts, so called "domestic asset protection trusts" (permitted by statute in states like Alaska and Nevada) and other more exotic asset protection techniques may all have their place --  given the right circumstances.  But for most executives, small business owners, physicians, and others in need of asset protection, more traditional devices should be considered first.  Simply dividing certain assets between spouses may be helpful.  Many  traditional trust arrangements, including an irrevocable life insurance trust (ILIT), can often provide significant protection.  So can one or more limited liability companies.  They are easy to set up and provide excellent protection when properly utilized.   Using a family limited liability company in conjunction with a revocable trust can be a relatively inexpensive way to protect assets, and potentially provide significant estate tax savings.

I advise clients to focus initially on traditional, relatively less expensive asset protection strategies.  If those appear inadequate, then consider other alternatives.  But do not start with the assumption that you need an offshore trust in order to reasonably protect your assets.  Many more ordinary arrangements may provide all the protection you reasonably need -- without many of the drawbacks of more complex arrangements.

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