Michigan Asset Protection Lawyer Blog

An Associated Press release on November 17, 2009 reported that the U.S. government could collect billions of dollars in court-ordered restitution under a new divorce decree between imprisoned former Cendant corp chairman Walter Forbes and his wife of 27 years. This is a story about a very bad asset protection planning strategy which, not surprisingly, failed in its entirety.

What Walter apparently attempted to do, in order to avoid turning over his assets to the government pursuant to the restitution order, was to transfer his assets to his wife using the pretext of a divorce settlement. He obviously knew that he could not simply give his wife the assets because such a conveyance would undoubtedly be a classic fraudulent transfer and easily overcome by his creditors...including the U.S. government in its role as a creditor due to its right to restitution. So Walter and his wife conjured up the divorce scenario as a ruse to get the assets to her as part of a property settlement.

What the article left out but what must have been implicit in the court's decision was a recognition that the property settlement was a subterfuge to mask a fraudulent transfer. The article noted that Walter sold the family's nearly $6million, 11,000 square foot Connecticut mansion to his wife for $10. According to the ruling, Caren Forbes must reconvey the mansion to her ex-husband thereby permitting his creditors to seize it. There was also the matter of the 14 acre chalet-style house in Rhode Island that is likewise going back to Walter.

The moral of this story, although there are clearly no morals to be found, is that there is no substitute for proactive and disciplined asset protection planning. While this case may generate more attention due to the high profile nature of the parties, and that it involved a convicted felon who will be imprisoned for up to 12 1/2 years, it is nonetheless useful to remind even the lawbiding among us that asset protection planning is a vital and important element of any financial and estate planning process.

Given the significant number of persons I meet with who are seeking asset protection advice, I have the unique advantage of being exposed to a variety of situations and developing unique strategies to deal with them. I also have the opportunity to negotiate with different creditors, some of which are lenders while others are often trade creditors, and observe how they respond to different asset protection structures.

There is absolutely no doubt that a person who has taken the time to create some type of asset protection structure, even one that is very simplistic, is far better positioned to deal with his or her creditors than the person who has done nothing at all. While this may be self-evident, you also need to consider the creditor's mindset. The creditor is owed money, under pressue and is faced with the spectre of having to hire legal counsel to try to get paid. The greater the obstacles faced, the more expensive the legal effort will be to collect and thus the more disposed the creditor will be to make a settlement favorable to the debtor.

There are a few simple moves that a person can make to provide a degree of asset protection. Of course, while tax factors and other issues will impact which approaches are most favorable to pursue, everyone should at least be aware of these quickies. Consider using the entireties form of ownership in states that provide for this tenancy. Interestingly, in Michigan, a husband and wife who own money market accounts through a stock broker may be more protected than if they maintain joint accounts at banks. Operate your business using a multi member limited liability company as opposed to a corporation. Your creditors will find accessing your interest in an LLC is much more difficult than levying on corporate stock. On the most simplest of levels, if one spouse is exposed to debt while the other is not, where possible assets should be titled in the name of the nondebtor spouse.

I will leave you with one key message. Awareness and sensitivity to asset protection in everything you do will serve you well. Clearly, nothing will take the place of a fully thought out and strategized plan. However, in the absence of such a plan some of the suggestions here, if properly implemented, will nonetheless enhance your protection dramatically.

Submitted by Howard B. Young

Legitimate asset protection planning is again tainted when a married couple, allegedly engaging in tax fraud, sells their fraud scheme under the guise of asset protection planning. It is a recurring theme. Schemes to hide assets offshore are frequently but incorrectly characterized as asset protection planning.

The Justice Department recently commenced a suit in the Southern District of Florida against the assumed perpetrators, Byron Denver Hatcher and his wife, Kim Reinhart, seeking to bar their presumptive criminal activities. The scheme appears to be one where the participant is advised to set up a series of trusts and corporations offshore and thereby avoid tax on the income from their lawful U.S. based businesses. It turns out that the offshore entities are mere shams and attempts to construct a subterfuge to hide the source of the income. The real business activities continue to be conducted in the U.S. and the income is clearly subject to U.S.tax.

The story is unfortunate because it links asset protection planning with a tax fraud scheme. Authentic asset protection planning does not involve hiding assets or income. To the contrary, asset protection planning is usually tax neutral with the client paying the same amount of tax he would have paid on his income had he not created the asset protection plan.

Clients considering asset protection planning are either under financial duress already or desire to be proactive and take steps today so that if they get into a financial crisis or encounter significant claims, a portion of their assets will be out of reach of their creditors. If the client does a little advanced research before coming into the asset protection planner's office and sees that this area is frought with tax fraud issues and IRS criminal actions, it will be no surprise that the potential client decides to cancel his appointment. The sad part is that asset protection planning and tax fraud have nothing in common and the client should not be diverted from discussing and implementing legitimate strategies because of these rogue cases.

The government suit stated that "for Hatcher and Reinhart, the term 'asset protection' is a euphemism for 'tax fraud'." Hopefully those of us in the industry will continue to work hard to debunk this connection and educate the public that asset protection is a permissible form of planning and does not involve tax evasion.

I came into the office today and noticed that overnight my fax machine had spit out a flyer addressed to Attorneys and carrying the following message: "BEFORE you accept insurance policy limits in a PI case, let us do an asset search on the driver to determine his current bank balances, his real estate holdings..." and so forth. The message was clear. Defendants cannot assume that that their judgment creditors will merely accept the maximum insurance payout. If there are assets available beyond the insurance they will go after them.

This email, obviously from some type of private investigator, demonstrates and reinforces the notion that persons with accumulated assets must consider asset protection planning as part of their estate planning and tax planning processes. I have heard too many doctors tell me that they are adequately insured and therefore can always settle within policy limits. It is simply not true and such thinking leaves them vulnerable in the event of a malpractice action.

Although perhaps more common in the case of professional malpractice, the concept is equally applicable to anyone who drives a car, operates a boat or owns a business. Being adequately insured with appropriate umbrella coverage is a must and strongly encouraged by this author. But it is not enough. Asset protection planning must be considered and, if indicated, should be implemented by an attorney with experience and background in the area.

One of the most difficult issues facing a Michigan asset protection lawyer is how to help a client who is already in severe financial distress with banks and other creditors breathing down her neck. We all know that any tranfers made with the intent to delay, hinder or defraud the creditor will be a fraudulent transfer subject to the remedies of the Fraudulent Transfer Act. Are there any techniques that can be used at this stage that will provide asset protection to the debtor but avoid or at least withstand a fraudulent transfer challenge. A couple of lawyers in Boston believe so and this author agrees with them.

Alexander Bove and Melissa Langa assert in their June 2009 article appearing in Trusts & Estates Magazine that a post-nuptial agreement may provide a solution. It is suggested that a debtor spouse can transfer assets to a non-debtor spouse in consideration of the non-debtor spouse entering into a post-nuptial agreement provided there is adequate consideration and the post-nuptial agreement otherwise conforms to the requirements of state law. Their premise is that marital rights accrue and gradually vest over the course of the marriage and there is no reason the couple cannot agree to formally acknowledge the existence of those rights and transfer property to reflect their actual legal interests. Perhaps it is best understood if you consider a 25 year marriage where significantly all of the assets, which were generated during the marriage, are titled in the name of the debtor spouse. It is well accepted that a long-term marriage such as this one would entitle each spouse to 1/2 of the marital estate in the event of a divorce. If such is the case, why shouldn't they be able to effect a transfer of assets to reflect this legal reality.

Certainly an aggrieved creditor will claim the transfer was a fraudulent transfer and that it was made with the intent to defraud the creditor. However, a transfer for fair consideration is not a fraudulent transfer. Moreover, a transfer which merely reflects or confirms the existing rights of the parties in and to the property also may not be a fraudulent transfer. And so the question becomes whether these arguments will defuse an aggressive creditor. While each case is different it is fair to conclude that the post-nuptial agreement and accompanying asset transfer will certainly pose an obstacle for the creditor and an opportunity to negotiate a settlement for less than the full amount of the claim...one of the goals of asset protection planning.

Historically, the vast majority of our asset protection planning clients have been business owners, real estate developers and professionals such as doctors and corporate executives. However, a recent trend has developed in which corporations have also been looking to benefit from asset protection planning in order to better position both themselves and their owners in this volatile economic climate. In the typical situation, a corporation has substantial cash on hand. The concern is that unexpected claims can expose this asset to the company's creditors.

Through contact with several of our sources in Delaware, including both attorneys and several Delaware trust companies, we have learned that a corporation can protect assets from creditors through a trust created under the terms of the Delaware Statutory Trust Act. A Delaware statutory trust, which is considered a separate legal entity apart from its beneficial owners and trustees, may carry on any lawful business purpose or objective.

Delaware statutory trusts have been utilized by corporations for various transactions in which they wish to limit their exposure or liability. However, the Delaware statutory trust also provides a methodology for a corporation, as the beneficial owner of the statutory trust, to insulate the assets of the statutory trust from the creditors of the corporation itself.

The underlying functions and operations of Delaware statutory trusts allow for substantial flexibility for both corporations and their owners. As with all high level corporate and asset protection planning, the key to any plan utilizing a Delaware statutory trust will be in the establishment of a fundamentally sound and practical approach that meets the needs and accomplishes the objectives of the parties. The ability to incorporate a Delaware statutory trust into the asset protection planning process provides exciting opportunities for corporations with assets that may be in need of protection.

Physicians have historically been concerned that if a malpractice judgment is obtained against them for more than their malpractice insurance coverage, their personal assets are subject to seizure by their creditors. For sure, the asset protection industry grew and evolved from its earliest attempts to protect their doctor clients assets in the event of a catastrophic claim. Now an insurance company is offering a product which attempts to provide insurance to cover a portion of the judgment in excess of the physician's malpractice limit. It is called aptly enough "Asset Protection Insurance."

The policy is written to indemnify the doctor's spouse for the spouse's loss. You might ask, what loss does the spouse have if the doctor spouse has a nasty malpractice hit. According to the literature provided by the agent, the spouse has an "insurable interest" in the assets of the doctor and can be so indemnified. To qualify to obtain this insurance there must be a malpractice policy covering the doctor spouse and the face amount of the Asset Protection Insurance cannot exceed the limits on the malpractice insurance. Why not just purchase more malpractice insurance coverage? According to the agent it is much less expensive to buy this insurance than the added malpractice coverage. This author has spoken with and obtained sales material from the agent but has performed no further due diligence or investigation. If interested you should contact Martin Beitler at rpines@aminsure.com.

Asset protection lawyers are often asked whether social security benefits and other similar entitlements such as IRA and pension distributions, workers compensation proceeds, SSI, Railroad Retirement Benefits and so forth are protected from their creditors' claims. The answer is both simple and complex.

In virtually all of these situations, creditors of the recipient cannot execute against, garnish, seize or levy the benefits as they are paid. In the usual case the funds are electronically transferred to the recipient's bank account. So far so good. The funds cannot be grabbed by the creditor. However what happens after the funds hit your bank account? Can the creditor access them at such time? Perhaps, depending upon the nature of the benefit.

Social security benefits, if paid into the recipient's separate account, cannot be reached by creditors even after the money is received. Pension plan benefits on the other hand can be reached by creditors after it hits the recipient's account. The reasoning behind the distinction is that the Social security law specifically states that the moneys paid to recipients cannot be reached by creditors. Pension law says that the right to receive the benefit is protected from creditors but not the actual monies received. Michigan court rules on garnishment have recently been changed to give banks guidance on how to handle garnishments from accounts holding social security and similar payments. The objective is to protect the recipients from having their deposited social security payments taken by their creditors. A key to protecting the funds--there should be a separate segregated account created solely for your social security benefits. Nothing else should go in it and the account should be in the name of the recipient only.

This title is taken from a recent Wall Street Journal article about a hedge-fund mogul who is facing civil charges brought by the SEC for defrauding investors of $300 million. He has been reduced to representing himself because the judge in the case refused to free up money to allow him to hire a lawyer. There is always a conflict between prosecutors seeking to block the use of defendant's funds which they claim were illegally obtained and the defendant's use of the funds to hire counsel. However the US Supreme Court has ruled that funds in the possession of a defendant, frozen because they were illegally obtained and as a result defendant is prevented from hiring a lawyer of his choice, does not violate the Sixth Amendment's right to counsel. What does all of this have to do with asset protection planning? Had the defendant established a domestic asset protection trust in conformance with the law of Delaware, Alaska, Rhode Island or one of the other states that have adopted self-settled trust legislation, funds would be available to pay for lawyers as well as all living expenses. Now this article is not intended to suggest that criminals about to embark upon illegal activity should be afforded the opportunity to use these types of trusts or that lawyers should assist them. Instead I am thinking about persons in high profile positions, CEO's, bank presidents, and other financial industry higher-ups, many of whom may face claims because of the current lynch mob mentality, but who acted in good faith and without any criminal intent. They too risk their assets being frozen by some zealous prosecutor and an unsympathetic judge. It is this group of people and other industry leaders that should be vigilant in protecting their personal assets and in providing a nest egg free from creditor claims so that if and when the climate changes for them and somehow, unexpectedly, they find themselves the victim they will not be left penniless and without resources to fight.

In this era of failed real estate projects, defaulting loans and creditors pursuing guaranties, a frequent inquiry is about the rights of creditors to reach a joint federal income tax refund due the debtor and his or her spouse. This is a very critical issue since so many debtors generated large net operating losses in 2008 which they can now carry back to prior years. Because these debtors paid substantial taxes in those prior years a refund, often substantial, is due the debtor and his spouse. The law will differ depending upon the debtor's state of residency but in Michigan once a joint federal income tax refund check is issued to husband and wife it will constitute an "evidence of indebtedness" and be protected from the creditors of just one spouse the same as entireties property. MCL557.151; Probert, 482 Mich. 858 (2008). But this is not the end of the story. What if the creditor garnishes the IRS prior to the IRS issuing the check--that is the garnishment is served after the return is filed and while it is being processed but prior to check issuance? In the case of Jahn v. Regan, 584 F. Supp. 399 (E.D.Mich. 1984), a tax overpayment that had not ripened into a refund check was not considered to fall within the ambit of MCL557.151 and therefore the debtor's interest in the overpayment was reachable by his separate creditors. Strategies exist to protect against this possibility but practitioners need to be aware of the issues and plan accordingly.

We read so much about sophisticated asset protection planning strategies....offshore trusts, domestic asset protection trusts, limited liability company charging orders and so forth. Just read my blog, I'm as guilty as the next about discussing these items. But sometimes the issue facing our client is very mundane and in your face--namely, how do I protect the items in my home. Here we are talking about household items, keepsakes, memorabilia, jewelry, art and the like. Few people know the rules. Still fewer advise their clients properly. Let's say you are at the stage where all planning to shift ownership has been completed and for whatever reason title to the tangible property in the home remains in the debtor. What do you tell your client when the collection man commeth? In Michigan us asset protection planners have a great answer. We should be telling our clients not to let the Sheriff in. Even with a proper Writ of Execution, in Michigan according to our Supreme Court, an officer seeking a judgment debtor's property for purpose of making a levy has no right to force an entrance through the outer door to the debtor's home. However, once he is lawfully admitted to the home he can use reasonable force to get through the inner doors and take what property is subject to the levy. SO MAKE SURE YOUR DEBTOR CLIENT UNDERSTANDS--DO NOT VOLUNTARILY LET THE SHERIFF IN. IF HE FORCES HIS WAY IN IT WILL BE UNLAWFUL AND HE WILL NEED TO RETURN YOUR GOODS.

My good friend and a great collection lawyer, Gary Nitzkin (Michigan Collection Lawyer Blawg), sometimes shares his secrets with me. He will send the Sheriff to the home of an unknowing debtor who will let the Sheriff in. Once inside the Sheriff begins gathering the debtor's prized personal possessions. Before long the Sheriff is on the phone to Gary explaining that the debtor is ready to pay. But this need not happen if you-DON'T LET THE SHERIFF IN!!

Asset protection planners and their Michigan clients have just been given a new gift. For many years the Michigan law provided that certain types of designated personal property, for instance stocks and bonds (and now brokerage accounts per applicable case law), if held as tenants by the entireties, is subject to the protections afforded like ownership of real estate. Therefore, if a husband and wife owns IBM stock as entireties property the creditors of only the wife cannot reach her interest in the stock. Similar rules apply to real estate owned in the entireties in Michigan. The problem was how to make sure such personal property was titled in the entireties and not jointly. Most banks and brokerage houses make it difficult to open an account in the entireties...they would tell our clients that joint ownership means the same thing. Now the Supreme Court of Michigan in Zavradinos, 482 Mich. 858 (2008), has decided that there is a statutory presumption that certain specified personal property held as joint tenants by a husband and wife is deemed property held by the entireties and protected from the creditors of one spouse...even if the account is followed by the designation "JTWROS."

Anyone with modest knowledge about entireties property knows, and this should include all asset protection planners, that the creditors of only one of the spouses cannot reach their entireties property. There are exceptions of course. Fraudulently transferring property into the T/E format doesn't work and the IRS can reach the debtor's interest in T/E property. But for the most part the technique works. Divorce and death though can be hazardous in more ways than one.

So here is today's news. We can now be comfortable that outside of bankruptcy a debtor spouse can convey his or her interest in T/E property to the non-debtor spouse without such transfer constituting a fraudulent transfer. Estes v. Titus, 481 Mich. 573 (2008). What's odd is why this is even an issue. Common sense tells us if the debtor spouse's interest in T/E property is exempt from the reach of his creditors how could his transfer of that interest to his wife ever constitute a fraudulent transfer. Such conclusion is clearly the result of the "no harm-no foul" analysis.

A different rule seems to apply in bankruptcy where the "no harm no foul" analysis has previously been rejected. In Matter of Wickstrom, 113 B.R. 339 (1990), the Court decided in what this author believes is a very strained analysis that a trustee is not prohibited from seeking to recover, as a preferential transfer or a fraudulent conveyance (now a fraudulent transfer), transfers of entireties property owned by a debtor and nondebtor married couple to a third party. Perhaps Wickstrom would be decided differently today in light of Estes if the Bankruptcy Court looks to State law as it is required to do.

Clients who have substantial debts, but where bankruptcy won't help, are always asking me how they can start a new business, generate income and try to rebuild wealth when all such efforts will inevitably inure to their creditors. No one wants to work for nothing and surely there is little incentive to commit to a new business venture only to know that the fruits of your labor will benefit your creditors rather than your family. Such clients inevitably suggest that their spouse or adult children will form a new entity and client will work for such entity at ridiculously low compensation levels. In this manner they figure, any income will be retained by the new entity which has no obligation to client's creditors. But nothing is this simple. Indeed, the creditors will claim that the entity is a sham and the mere alter ego, nominee or agent of the client. Their argument will be based upon the fact that the new entity was minimally capitalized, that the owner had little or no experience in the business, that client was really the sole motivating force in generating the income and that the lack of paying fair compensation to the client is indicative of the sham nature of the entire transaction. Indeed, I believe the creditors win this argument hands down every time. So what does one do to create a defensible structure given these concerns? Essentially they must do the opposite of what the example above describes. The entity should be adequately capitalized. It should not be a "one person show" with the sole worker being debtor client. Instead, there should be multiple employees and the enterprise must be run as a real business. Owner should be active to greatest extent possible. Courts will look to the background, expertise and experience of owner to see if the structure makes sense so owner should play to her strengths. Her role should be geared to her background and capabilities. Also, don't pay client menial wages--they have to be defensible and reasonable. With these guidelines client and his family will have a reasonable shot at building a business that will not be vulnerable to his creditors. Good Luck!!

CAVEAT-THE FOREGOING IS A DISCUSSION OF ISSUES ONLY AND NOT INTENDED AS LEGAL ADVICE. NO ONE SHOULD RELY ON THE FOREGOING WITHOUT SEEKING LEGAL ADVICE FROM A LICENSED ATTORNEY.

Asset protection planning literature and seminars deal overwhelmingly with discussions about fraudulent transfers, offshore trusts, charging orders and the like but fail to identify some of the easiest but most effective tools within the asset protection planner's workshop. I am always amazed how the most simple, obvious and effective approaches are ignored. For instance, if we have a debtor client who is hopelessly in debt but for which bankruptcy, for one reason or another, is not a solution, we know there will be judgments outstanding for many years. So what should we be telling our clients? How about having wealthy parents change their estate plans so that upon their death, assets don't go to debtor child but instead are held in a discretionary spendthrift trust for debtor child. How about making sure the beneficiary of the life insurance policy on life of debtor's wife is changed from husband to her trust which has discretionary spendthrift language for husband. How about making sure that the buy sell life insurance policies on the lives of debtor and his partner are reviewed to insure that the amount of death benefit currently provided for still makes sense given the general demise of the business. More importantly, since we don't want unexpected death of partner to result in debtor partner receiving insurance proceeds which will be grabbed by creditors, why not have just a portion of the proceeds used to buy out decedent's interest and balance paid to an irrevocable trust with debtor partner as discretionary beneficiary. I often discuss these ideas with colleague Gary Nitzken, a highly esteemed Michigan collection attorney - www.michigancollectionlawblog.com - and he just wishes I would go away. He points out to me that in addition to aggressively pursuing all opportunities to collect, he also knows how to wait in the wings until an event such as a death results in assets coming into the hands of debtors. My strategies simply undercut his opportunities.