Mr. Wilhite was convicted of mail fraud and aiding and abetting in violation of federal law. He was also a delinquent taxpayer with an outstanding federal income tax liability and, at the time of certain alleged fraudulent transfers, he was being investigated for the federal crimes he ultimately pled to. During the time period Mr. Wilhite would be considered a “debtor” under Colorado’s UFTA, his wife, Mrs. Wilhite, formed several companies establishing herself as sole owner while Mr. Wilhite was the person essentially controlling and operating the companies.

This case is instructive on so many levels. Every asset protection lawyer should read both the District Court decision and the 10th Circuit’s appellate decision for elucidation of multiple concepts of particular relevance to asset protection community. For example, when a debtor and debtor’s spouse come into your office for the initial meeting, it is not unusual for the debtor to suggest that because of debtor’s outstanding liabilities the debtor’s spouse should form a new company owned 100% by the non-debtor spouse but which will be run by debtor spouse in debtor’s capacity as an employee. Indeed, this brilliant strategy is then shortly followed by the suggestion that the debtor spouse be paid a very modest salary to minimize the amount that could be garnished by the debtor’s creditors.

The Wilhite case addresses the non-debtor spouse’s ownership of a limited liability company run predominantly by the debtor. After analyzing the facts, the District Court determined that Mrs. Wilhite was acting as Mr. Wilhite’s nominee and Mr. Wilhite owned an equitable interest in the company. Interestingly, the conclusion was not as easy to reach as it might first seem because Mrs. Wilhite was not only the owner of record but also performed meaningful services for the company. Nonetheless, when weighing all of the facts including extensive testimony by the company’s employees, it was clear that Mr. Wilhite was viewed as the owner and decision-maker.

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The debtor in this bankruptcy case was a resident of Florida and claimed an exemption for his IRA under Florida’s set of exemptions. Under normal circumstances the trustee would not object to the exemption claimed and the IRA would indeed not be included as an asset of the bankruptcy estate.

However, the debtor engaged in a series of prohibited transactions with his IRA. He had the IRA purchase a condominium in Puerto Rico which he impermissibly stayed in for no viable IRA-related purpose. Additionally, the debtor and his wife purchased two used automobiles with IRA funds. The IRA paid for thousands of dollars in repairs for the vehicles and the wife drove one of the vehicles extensively. These acts of self-dealing constitute prohibited transactions under the Internal Revenue Code. The debtor did not contest this finding.

The Eleventh Circuit Court, upon review of the decisions of the Bankruptcy Court and the District Court to which an appeal was taken, sustained the determination that the debtor could not exempt the IRA from inclusion in the bankruptcy estate. However, the Eleventh Circuit based its decision on the fact that the IRA was not maintained in accordance with the IRA’s plan or governing instrument…a requirement of Florida’s exemption statute. It found that the governing instrument signed by the debtor specifically stated: “I acknowledge that I have not and will not engage in any prohibited transactions within my retirement account or its asset holdings.” Further, in bold the governing instrument stated: “A prohibited transaction is a transaction between a plan and a disqualified person that is prohibited by law.” There was no ambiguity in the exemption requirements. The debtor’s engagement in prohibited transactions was a direct violation of the governing instrument and therefore the debtor’s claim of exemption had to fail.

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Michigan enacted the Qualified Dispositions in Trust Act (the “Act”) effective March 8, 2017 becoming the 17th state to enact asset protection trust legislation. A more general description of the Act was provided in an earlier blog. The purpose of this blog is to point out how the drafters of this legislation very deliberately included provisions geared to blocking creditors’ access to assets held in a Michigan Asset Protection Trust (hereafter “MAPT”). Continue Reading

A 2016 Supreme Court case, Husky International v. Ritz, holds that if a debtor makes a fraudulent transfer, even if several years prior to filing the petition, any debt related to such fraudulent transfer will be nondischargeable. Section 523(a)(2)(A) of the Bankruptcy Code denies a debtor’s discharge of any debt obtained by false pretenses, false representations or actual fraud. There had been a split among the Circuits over whether “actual fraud” (e.g., a fraudulent transfer) required that a false representation be made to the creditor before a discharge would be denied. The Court in Husky concludes that as an exception to discharge, it is not necessary for the debtor to have incurred the debt based on a deception or fraud perpetrated on the creditor; instead, a fraudulent transfer involving no contact with the creditor is sufficient to give rise to the exception. Continue Reading

For those of us attorneys who have devoted substantial time to and assisted clients with asset protection planning over the years it is welcome news that Michigan has adopted the Qualified Dispositions in Trust Act, effective February 5, 2017. Continue Reading

The Seventh Circuit Court of Appeals has sustained a Bankruptcy Court decision holding that annuities qualifying for income tax deferral under Section 72 of the Internal Revenue Code (“IRC”) are exempt assets and therefore cannot be executed upon by the debtor’s judgment creditors. Continue Reading

One of the inevitable problems facing suspects in a criminal proceeding is the availability of funds to pay for a legal defense. Frequently, applicable laws authorize government seizure of defendants’ assets which effectively impoverishes them. Obtaining private counsel then becomes problematic. However, the Supreme Court recently decided in Luis v. United States that criminal defendants should be allowed to use untainted assets; that is, assets unrelated to their alleged crimes, to pay for their criminal defense. Continue Reading

We have become so used to it that we no longer give it any thought. There is no requirement under Michigan law (as well as most other states’ laws) to disclose the beneficial owners of limited liability companies and corporations. Lawyers, formation agents and business owners routinely sign Articles of Organization as organizers and Articles of Incorporation as incorporators but are under no obligation to disclose their relationship to the entity being formed nor the entities’ beneficial owners. In many cases, such signers never become a beneficial owner or have any active involvement in the entity. Will this regime of anonymity end if H.R. 4450, the Incorporation Transparency and Law Enforcement Assistance Act (the “Bill”), is enacted? Continue Reading

It is not surprising that in the world of asset protection planning we have written extensively about charging orders. This is the collection remedy employed by creditors against debtors owning a membership interest in a limited liability company or a partnership interest in a partnership. These laws are fairly consistent throughout the United States and provide, in the case of a member of an LLC, that a court of competent jurisdiction may charge the member’s interest with payment of the unsatisfied amount of the judgment plus interest. The charging order works in this fashion. Assume the LLC has 3 members each owning 1/3 of the company and Member A has a judgment against him for $10,000. The LLC is making a $6,000 distribution ($2,000 to each member). If there is a charging order in effect against Member A’s interest, his $2,000 distribution must be paid directly to the creditor. Future distributions due Member A will likewise be paid directly to the creditor until the judgment is paid in full. Continue Reading

There is the understandable perception that by establishing a trust for your beneficiary which contains substantial restrictions on distributions and gives a trustee discretion to determine the timing and amount of distributions that creditors of the beneficiary cannot access trust assets. However, in the recent Arizona case of Duckett v. Enomoto, the IRS was able to attach a federal tax lien to assets held in a discretionary support trust. Continue Reading

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