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

A recent decision by the United States Bankruptcy Court for the District of Alaska (In Re: Thomas Mortensen, Case No. A09-00565-DMD) is clearly worth reading -- for a discussion of fraudulent conveyances, Alaska asset protection trusts, applicable statutes of limitations, and a variety of other asset protection topics.  I will likely comment on this recent case in several different posts, but here is a quick initial summary.

U.S. Bankruptcy Judge Donald MacDonald IV held that a transfer by Thomas Mortensen of real estate into an Alaska asset protection trust was a fraudulent conveyance.  The Judge found that there was persuasive evidence of an intent to hinder, delay and defraud present and future creditors. The Bankruptcy Judge voided the transfer of real estate to the trust as a fraudulent conveyance.

There are numerous lessons to be taken from this court decision and here are just two of them --

• Transferring assets when you are insolvent is likely to constitute a fraudulent conveyance.  While Mortensen was found to be solvent at the time of the real estate transfer, his own testimony from a child support action was used against him in the bankruptcy proceeding. In a child support proceeding against his ex-wife, Mortensen took the position that his divorce had thrown him into heavy debt.  This is simply a reminder that whatever you say in one court case can obviously be used against you in another!
• Think carefully about choosing the trustee of a trust.  Mortensen named his brother and a personal friend as trustees of his Alaska asset protection trust, and named his mother as a "trust protector."  All of these individuals were named as defendants by the Chapter 7 Bankruptcy Trustee in his adversary action against Mortensen.  While it is perfectly appropriate in many instances to name family members as trustees or trust protectors, you need to consider that these individuals can sometimes be dragged into litigation.

Many court decisions are difficult to read, but the Mortensen case is fairly easy to follow.  It is useful reading for anyone interested in some of the more technical aspects of fraudulent conveyances and other asset protection issues.

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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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Any trust that can help protect your assets from creditors requires that you surrender at least some control over those assets. This goes for an offshore trust; a so-called "domestic asset protection trust"; an irrevocable life insurance trust; and any other trust that gives you creditor protection. If you think about it, this is just common sense. If you retain full control over the assets in a trust, than a judge could order you to hand those assets over to a creditor who has a judgment against you. This is why a revocable grantor trust (frequently used for probate avoidance) provides no creditor protection. Such a trust may be useful to avoid probate, provide asset management, and for other purposes. But it is not going to protect your assets from a judgment creditor.

Surrendering some control of your assets is not necessarily bad, as long as you are willing to do so. But each situation has to be analyzed separately. And, you must be very careful about who you are giving some control to. While this is a broad generalization, it should come as no surprise that the more control you give up, the better creditor protection you get. But surrendering control has its own risks, which should be considered very carefully.

Legitimate asset protection includes a balancing of risks and possible rewards. Always keep in mind that if a particular arrangement looks too good to be true, it probably is. 

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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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