Asset protection planning attorneys need to be vigilant that strategies they are recommending do not violate the Michigan Fraudulent Transfer Act ("Act"). In Bentley Terrace Dillard Family Trust v. Schlussel, the Michigan Court of Appeals provided and detailed and well-reasoned opinion and concluded that a debtor lawyer's transfer of assets to his wife for the ostensible purpose of paying ordinary household expenses was a fraudulent transfer.
Garnishment of Social Security Benefits from Recipient's Bank Account vs. Garnishment of Retiree's Pension Benefits from Retiree's Bank Account
As an asset protection planning attorney, it is interesting how often other attorneys ask me about the exposure of their clients' social security and pension monies to creditors' claims. The frequency is probably directly correlated to the fact that social security benefits and pension benefits are ubiquitous and so the question comes up all the time. While the law is clear on the debtors' and creditors' rights in these situations, unless the attorney practices in the asset protection planning arena, he or she may not be aware of the specific rules. Therefore, a brief summary may be helpful to the readers of my blog.
Trustee in Bankruptcy Shot Down on Attempt to Reach Traditionally Protected Individual Retirement Annuity
The bankruptcy case of Running v. Miller (In re Miller) is one of those cases where the Trustee in bankruptcy, in a zealous effort to grab the debtor's assets, ignores the Internal Revenue Code ("Tax Code"), common practice and common sense. Here, the debtor filed a Chapter 7 bankruptcy case and scheduled an individual retirement annuity as exempt under 522(b)(3)(C) of the Bankruptcy Code. If an individual retirement annuity meets the Tax Code 408(b) definition, the annuity is not part of the bankruptcy estate and is exempt from creditor claims.
Asset protection planning attorneys are often asked about protections that are available for qualified retirement plans and whether retirement plan assets are subject to claims of creditors. As a general rule the account of a participant in a qualified retirement plan, such as a profit sharing plan or 401(k) plan, is exempt from creditor claims with limited exceptions. For example, a spouse in a divorce can seek a qualified domestic relations order to reach the participant spouse's interest in the account and the IRS can access the account for unpaid taxes. But typically banks and judgment creditors cannot reach the debtor's interest in a qualified plan.
A 2013 Bankruptcy Case has now identified a set of circumstances where the general rule is not applicable and where the debtor's interest in the plan is fully accessible by his general creditors (Daniels v. Agin, 736 F.3d 70 (2013)).
As an asset protection planning attorney who practices in Michigan and Ohio, I am well aware that this area of the law is very fluid. Recent cases remind us that the law changes from time to time and that there are frequent exceptions to the general rules.
In the world of commercial finance, it is not unusual to encounter a lender who automatically seeks the guaranty of the applicant's spouse. If a default subsequently ensues, the lender will pursue the guarantor spouse for payment of the principal obligor's debt. Typically the paperwork is in order and the lender's form of guaranty is quite thorough. What possible defense can be raised by the guarantor spouse to avoid liability?
In the world of asset protection planning there are times when it is advantageous to hold a personal residence in a limited liability company. Generally, such a situation would be applicable where there is a client who wishes to protect a valuable asset from future unknown creditors, the conveyance to the LLC is not a fraudulent transfer, the desire to obtain creditor protection trumps the loss of any property tax benefit otherwise available to a principal residence, and the client accepts certain complexities that go along with the transaction. For example, the client will need to enter into a lease with the LLC upon arms length terms in order to avoid the LLC being deemed the alter ego of the client which would likely nullify any creditor protection benefits.
Asset Protection Lawyers Too Frequently and Unnecessarily Refuse Representation of Clients with Existing Claims
As an asset protection planning attorney with many years of experience, I am frequently asked to speak at seminars on the topic. In these lectures, I spend a fair amount of time discussing ethical issues and the risks to the lawyer of representing debtors desperate to protect assets from their creditors' claims. In my experience, many of these clients arrive at a first meeting with very strong ideas of what they would want to do ..... occasionally this involves either making fraudulent transfers or hiding assets. In those instances where the client's initial intent is to violate the Fraudulent Transfer Act or engage in other fraudulent or illegal activity, the lawyer is correct to be concerned that he or she will somehow run afoul of ethical or legal boundaries. As a result, a number of lawyers who claim to be asset protection lawyers flatly refuse to accept such engagements. I believe this is a poor decision for at least two reasons; namely, it deprives the potential client of much needed representation at a very vulnerable time and it is completely unnecessary because a well-schooled asset protection lawyer should know the boundaries and be comfortable as to what can and cannot be done.
Today, with the proliferation of books, articles and seminars focused on asset protection planning, there is scarcely a lawyer about who does not know that limited liability companies have some built in asset protection planning features. Even to the uninitiated, there is a vague understanding of creditors not being able to seize a member's interest and some awareness of the charging order remedy.
Those of us who practice in the asset protection planning and tax arenas are already familiar with the Craft case where the Supreme Court determined that a delinquent taxpayer's entireties interest constitutes an interest in property to which the Federal tax lien applied irrespective of Michigan law to the contrary. This decision led to the forced sale of the property even though one of the tenants by the entireties had no tax liability. Notwithstanding Craft, there remained some limited comfort that a District Court may exercise reasoned discretion to deny an IRS motion to sell entireties property in order to protect the interests of innocent third parties.
Any practicing attorney engaged in asset protection planning is advised to read the latest decision in the Evseroff saga, U.S. v. Evseroff, No. 00-CV-06029 (E.D.N.Y., April 30, 2012). It is useful because it analyzes in some depth a variety of issues germane to the asset protection attorney. Evseroff is essentially a collection case. The U.S. Government is seeking to collect from a trust created by Jacob Evseroff some $700,000 of unpaid taxes. In finding that the assets of the trust can be seized by the Government to pay Jacob's taxes, the court addresses in considerable depth (i) fraudulent transfer law and the legal distinction between actual and constructive fraud, (ii) the concept of solvency in the context of a fraudulent transfer analysis, (iii) factors that demonstrate intent to hinder, delay or defraud creditors, (iv) burden of proof issues and (v) alter ego and nominee theories. The case is certainly instructive on what not to do.
This blog generally contains serious reviews of various asset protection topics, including recent developments in the laws of Michigan and other states that are applicable to asset protection and strategies that debtors might consider to shield assets from their creditors. However, every once in awhile I will come upon an unusual, and in this case, a deeply disturbing story, which has little practical effect but which is very telling about the lengths people will go in order to protect their assets. Enter John Goodman, founder of the International Polo Club of Palm Beach.
An extraordinary decision by the Michigan Court of Appeals should place asset protection planning at the forefront on the minds of all individuals who have outstanding nonrecourse guarantees of commercial loans. As a result of the decision handed down by the Court in the case of Wells Fargo Bank v. Cherryland Mall Limited Partnership, David Schostak and Schostak Brothers & Co. (December 27, 2011), real estate investors/developers employing nonrecourse commercial mortgage-backed securities ("CMBS") loans now find themselves personally liable for any deficiency if the loan defaults. You are undoubtedly wondering: if these are nonrecourse loans how can the loan guarantors become liable for the unpaid debt?
Clients frequently seek advice as to whether they can disclaim an inheritance in order to avoid the inherited property being reached by their creditors. The issue faced by the asset protection planner is whether a disclaimer, made with the intent to hinder, delay or defraud creditors, can be viewed as a fraudulent transfer.
I recently began settlement and workout negotiations with a bank for a client where the debt on a piece of commercial real estate is $4million and the current value is $2million. The client was referred to me by another attorney who was aware of my asset protection planning experience and wanted to learn if there was still time to implement any asset protection planning in order to minimize the client's exposure to the bank. The client is married, and the specific nature of his situation enabled me to position his assets in a way that makes them unreachable by the bank. After this initial phase of the client's planning, I was asked to conduct the settlement and workout negotiations. As it turned out, the asset protection planning, as the initial phase in the process, provided my client with very valuable leverage in our negotiations with the bank. Despite the bank pressuring my client to access funds which the bank could not reach, with the objective of my client using those funds to pay a discounted lump sum settlement, we were able to negotiate a much steeper discount because of the structure we had implemented for the client.