Asset Protection Law Journal

Asset Protection Law Journal

Helping individuals and businesses take advantage of asset protection laws

Successful Asset Protection Comes from Protecting Assets — Not Hiding Them

Posted in Asset Protection Strategies/Alternatives

A front page article that appeared on the Wednesday, April 6, 2016 New York Times provides yet another example of the thumbnaildangers of hiding assets. Successful asset protection makes use of laws that allow you to protect your assets — while keeping them in full view. Hiding assets frequently involves illegal activity; and even when legal it is a risky approach. The article by Steven Erlanger, Step
hen Castle and Rick Gladstone, titled “Airing of Hidden Wealth Stirs Inquiries and Rage” — illustrates some of the disasters that strike when “hidden” assets are suddenly not hidden anymore.

Millions of documents leaked from a single Panamanian law firm disclosed how many very wealthy people were hiding money in secretive shell companies and off-shore tax shelters. The Prime Minister of Iceland has already resigned following the disclosures. The British Prime Minister has asked for a government inquiry; and officials in France, Germany, Austria and South Korea are beginning investigations into possible money laundering and tax evasion.

There is certainly nothing wrong with trying to keep your financial affairs private. But keeping things private does not mean failing to pay applicable taxes or violating U.S. banking laws. The most effective asset protection plans are centered on taking advantage of laws that allow you to protect your assets–not hiding those assets. Privacy is of course a consideration but the key is protection.

The New York Times article provides a good reminder of how hiding assets can frequently backfire.

Business Succession Planning Is Critical For Company Founders

Posted in Asset Protection Strategies/Alternatives, Business Protection, Business Succession Planning

An article in the New York Times on March 24, 2016, emphasizes the critical need for succession planning in closely held companies. While business succession planning is important at various levels, the fallout for companies that lose a founder can be particularly bad.

The article notes that most small businesses are family owned, and those companies frequently fail to survive an unexpected death–unless a relative or other insider is trained and ready to take over immediately. A business frequently ends up getting sold for much less than it would have been worth if the owner was there.

Research by two economists—Sascha O. Becker and Hans K. Hvide–used data from Norway, which apparently keeps extensive records on companies and their founders. Their studies show that the fall-out for a closely held business was significantly worse for a company that lost a founder than for one that lost a non-founder CEO. Mr. Becker is quoted as saying that the greatest surprise for him in this study was that the negative effects of the death of a founder can continue (and in some areas even intensify) five or more years after the founder’s death.

This article in the March 24, 2016 New York Times business section is simply another reminder that the time and effort spent on succession planning will very likely be worth it in the long run. Having some sort of succession plan for your business is an integral part of any plan to ultimately protect its assets.

Trust Protectors

Posted in Asset Protection Strategies/Alternatives, Domestic Asset Protection Trusts

For hundreds of years, trusts have had three key players. The settlor is the person who establishes the trust. The trustee is the person responsible for the operation of the trust. And the beneficiary is the person (or persons) who the trust is intended to benefit. Recently, a fourth role — that of the trust protector — has become increasingly important.

Trust protectors are a very important part of an asset protection trust. They are less common in a standard estate planning trust (but are increasingly used there as well).

The settlor of the trust chooses the initial trust protector. The powers of the trust protector will be determined by the terms of the trust, and in some instances by state statutes. A trust protector may have the right to remove the trustee, amend the trust, veto distributions, and can have various other rights and responsibilities. The trust protector is essentially someone who can make sure the trust is being administered the way the settlor intended. Thus, the trust protector is literally empowered to “protect” the trust.

Carefully picking the right trust protector for a trust is just as important as picking the right trustee.


LLC Offers Flexibility For Many Business Strategies

Posted in Limited Liability Company

A recent article in the New York Times provides a reminder of how flexible and versatile limited liability companies have become.

Facebook CEO Mark Zuckerberg and his wife recently announced that they would eventually give away 99% of their shares of Facebook during their lifetimes.  When they said that they would use a company to implement this plan, most people would have expected that entity to be a non-profit corporation.  But Mr. Zuckerberg and his wife, Dr. Priscilla Chan, decided to use a Delaware limited liability company to help implement their strategy.  An LLC will provide more flexibility for investing in for-profit social enterprises and also for supporting certain political activities.

The key point is that when the Facebook CEO and his wife wanted a flexible business entity–they chose a limited liability company.

LLCs are not the only option for new business ventures.  But they are often a good choice.  Keep in mind that state LLC statutes can have significant variations.  Mr. Zuckerberg and his wife chose a Delaware LLC; and I am certain their advisors made that choice after a careful analysis of many different factors.  But even for those with far less net worth than Facebook’s owner — a limited liability company is frequently a good choice for a new business related activity. 

LLC Provides Better Asset Protection Than an S Corp

Posted in Limited Liability Company

S Corporations and LLCs are both “pass through” entities for federal income tax purposes.  That is, owners are taxed on dividends/distributions; but the entity itself is not subject to federal income tax.  And, as I mentioned in previous posts –on March 26, 2014, July 2, 2009 and June 3, 2009 –both an S Corp and an LLC protect owners from the debts of the entity.

But with respect to an owner’s personal debts–there is a big difference between a corporation and a limited liability company.  If a creditor obtains a judgment against you, the creditor can generally get your S Corporation stock fairly easily.  That creditor, however, can usually only get a charging order against your LLC interest.

So when deciding what kind of entity is best for your needs–keep in mind that a limited liability company will generally be preferable from an asset protection standpoint.

Consider Protecting Your Family’s Assets with a Dynasty Trust

Posted in Estate Planning

A “dynasty trust” is a trust that is structured to preserve assets for multiple generations.  Assets continue to be held in trust (rather than being distributed directly to beneficiaries).  This is not a vehicle to protect your assets from your own personal creditors; but it protects the assets once they pass to a beneficiary.

For example, let’s say you plan to leave your daughter $1 million when you die.  That money immediately becomes available to most of her creditors as soon as she receives it.  So if there are any judgments against your daughter or she otherwise has any financial issues, your assets could go to pay her creditors.

But if upon your death you leave her the $1 million in a properly structured dynasty trust, those funds can pretty much be available to her but will generally be protected from her creditors.  While she could not automatically protect her own assets from her own creditors, you are allowed to protect the assets that you give her from her creditors.

This is obviously a simplified description of a trust that must be carefully structured.  But if you hope to leave a significant amount of assets to your children or other beneficiaries, you should talk to your estate planning attorney about leaving those assets in a trust (perhaps a dynasty trust) to protect them from your beneficiary’s creditors. 

Nevis Is Good Choice For Offshore LLC

Posted in Limited Liability Company

Nevis (a small island in the Caribbean) is currently a good choice for an offshore limited liability company. 

Nevis recently amended its LLC Ordinance to better limit fraudulent transfer claims, and also to make it more difficult to enforce foreign judgments.  Nevis also now requires an LLC creditor to post a large bond to secure potential liability for litigation costs.  These and other changes present further obstacles to creditors trying to collect against a Nevis LLC or its owners.

Keep in mind that assets of a Nevis LLC do not necessarily have to be held in Nevis.

An offshore LLC is certainly not always the right choice for a U.S. citizen who is seeking better asset protection.  But it is one of many asset protection alternatives that could be appropriate under the right circumstances.

Ohio Appeals Court Says LLC Must Identify Its Members

Posted in Limited Liability Company

Some states require public disclosure about LLC owners/managers/officers and others do not.  Ohio is one of the states that requires no such public disclosure. 

But keep in mind that ultimately, a creditor can always discover who the owners and managers are.  Once a lawsuit is filed, the identity of the members, managers and/or officers will almost always be a discoverable item.  A court can ultimately order that disclosure if requested to do so by the plaintiff.  There is no absolute right to keep ownership/management information confidential. 

This was recently confirmed by an Ohio appeals court.  In Block Communications, Inc. v. Pounds, (Ohio App. 6 Dist.) 2015-Ohio-2679, the Court ruled that Ohio LLC law neither expressly nor implicitly creates a protectable interest in preserving the confidentiality of members’ identities.  In other words, Ohio law does not require disclosure about Members when Articles of Organization are filed with the Ohio Secretary of State; but identity of the Members can be obtained through a valid lawsuit.

This is a reminder that asset protection does not involve hiding assets and other information.  While confidentiality plays a part in asset protection, its main goal is to legitimately protect assets from the reach of creditors – – even when creditors know exactly where the assets are and how they are held.

Majority of Public Companies Continue To Incorporate In Delaware

Posted in Asset Protection Strategies/Alternatives

A front page article by Liz Hoffman in Monday’s Wall Street Journal noted that some companies are convinced Delaware is less of a corporate haven than it used to be.  Some companies feel the state has become less hospitable toward business (for example, by not doing enough to curb ever-growing shareholder litigation).  Nevertheless, Delaware remains by far the first choice of incorporation for large companies.  It is the legal home for more than half the public companies in the United States.

This is a good reminder that laws and court systems can vary quite a bit from state to state. 

Large public companies have traditionally taken advantage of what they consider to be favorable Delaware law.  Asset protection planning – – for both companies and individuals – – also needs to carefully take into account differences in state laws.  In the past, I frequently advised clients to set up asset protection trusts and/or LLCs in Delaware.  Now, Ohio is an excellent choice for both.  Asset protection attorneys must diligently follow changes in state laws to better assist clients with choosing the most suitable asset protection strategies.  Differences in state laws can be very relevant to individuals and smaller companies as well as large public corporations. 

UVTA Includes Important Provisions About “Insolvency”

Posted in Fraudulent Conveyances

Your ability to transfer assets for asset protection purposes depends to a great extent on whether or not you are “insolvent” at the time of a transfer.  Insolvency is generally defined in terms of your ability to pay your debts as they become due. 

The Uniform Voidable Transactions Act (“UVTA”) – – a uniform law which will likely be followed by many states – – has two important provisions dealing with insolvency. 

Section 2(b) of the UVTA states that a debtor that is generally not paying debts as they become due other than as a result of a bona fide dispute, is presumed to be insolvent.  Excluding a bona fide dispute from the insolvency calculation is helpful.  In the event that you are refusing to pay a creditor for a good reason, you should not be deemed “insolvent”. 

The UVTA, however, places a burden on the debtor to essentially prove solvency at the time of a transfer.  In other words, if you are moving some assets for asset protection purposes, you must be able to show that you are solvent at the time of the transfer. 

This is another reminder that the best time to transfer assets for better protection is when you are clearly solvent and before you have any significant creditor issues.