“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.

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.

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.

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.

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.

A fascinating article by Daniel J. Wakin in the November 29, 2010 New York Times reveals that even Mozart should have done some asset protection planning.

An aristocratic friend of Mozart’s sued him and won a judgment for an amount of more than two times Mozart’s annual income.  The judgment called for garnishing half of Mozart’s salary.  Mozart died shortly after the judgment was entered against him, and it appears that the creditor chose not to press Mozart’s widow for payment of his debt.  But it is clear that the judgment caused Mozart a lot of stress and financial difficulty.

The article on Mozart shows that even in the 18th century, high profile and high net worth individuals faced significant financial difficulties from legal judgments against them.  If Mozart were alive today, I am confident that he would recommend very serious attention to an asset protection plan.  And he would urge you to develop such a plan before you run into financial difficulties — not after there is a lawsuit or judgment against you.

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.

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.

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.

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.