We often use trusts as part of an overall strategy to provide asset protection for our clients. For example, assume we have a husband and wife and the wife has significant debts and/or contingent liabilities. We will typically have the husband create a discretionary spendthrift trust so that, upon the husband's death, the debtor wife will be the beneficiary of a trust fund which will be outside the reach of creditors. Similarly, the wealthy parents of a debtor child will not want to simply leave the debtor child's share to him outright knowing the inheritance may very well be grabbed by the child's creditors. Instead the well advised couple will set up a discretionary spendthrift trust for the child.

Until the final rules were resolved, lawyers had questions regarding the differences between support and discretionary trusts and how spendthrift provisions are applied. This was particularly troublesome in planning for asset protection and being able to provide assurances to your client that their child's creditors could not reach the assets of the trust they created. With the passage of the new Michigan Trust Code, certainty reigns.

Best practices for this asset protection strategy is for the debtor beneficiary to be a beneficiary of a discretionary trust rather than a support trust. Even though a support trust has some protections; i.e., the interest of the beneficiary is not subject to the enforcement of a judgment, the beneficiary's creditors can reach the income or principal after there has been a direct distribution to the beneficiary (but then only to the extent that income or principal is not necessary for the health, education support or maintenance of the beneficiary). One issue of concern is that the support trust requires the trustee to distribute funds for support. This provides an opportunity for creditors to reach those funds upon receipt by the debtor beneficiary. Another problem with support trusts is that there are several additional opportunities for creditors to access the trust. In the case of support and spendtrhift provisions (but notably not discretionary trust provisions) the interest of the beneficiary in the trust can be reached to pay (i) child or spousal support awarded by a court, (ii) a judgment creditor who has provided services that relates to the preservation of the beneficiary's trust interest and (iii) an enforceable claim by a state or the United States.

The discretionary trust is a much tighter structure for asset protection. With this type of trust, the trustee is not obligated to make a distribution to the beneficiary and trust property is not subject to the reach of the beneficiary's creditors. Thus, the trustee has the ability to carefully plan distributions to avoid creditor problems in many cases paying expenses of the debtor beneficiary directly.

The new Michigan Trust Code specifically recognizes spendthrift trust provisions. It restrains both voluntary and involuntary transfers and is not subject to enforcement of a judgment until actually distributed. This continues long-standing law in Michigan on spendthrift trusts.

Unfortunately, there is a hidden danger lurking. Creditors will routinely garnish bank accounts as part of their collection procedure having no knowledge of whether the bank account contains social security benefits. When the account holder is given notice of the garnishment and advises the bank that the account consists solely of social security benefits, the bank will not turn over the assets. Indeed, if this was the end of it the system would appear to work. However, it is not the end...far from it. When the banks receive the garnishment order they immediately freeze the account.The bank often charges a processing fee for freezing the account as well as overdraft fees on checks that are bounced because the funds are frozen. The episode can add up to hundreds of dollars being taken by the bank even though the garnishment itself is ineffective.

The good news is that the US Treasury is promulgating rules to limit the fees a bank can charge under the circumstances described. Also, the banks will now be obligated to investigate whether the account has been the recipient of social security benefits within the last 45 days and, if so, will be prohibited from freezing the entire account. Perhaps something like $2,200 will remain available to the accountholder to pay her bills. While the rules will certainly improve things for debtors receiving social security, it remains an imperfect system when garnishments are ordered.

These clients come to see me because they know that without the proper structure, one catastrophic fire resulting in severe personal injuries can wipe out their entire empire. But they also know that as they have accumulated wealth they have become more vulnerable to other creditors...ones not necessarily related to the operation of the business. So they want to protect their assets from internal disasters as well as external unrelated creditor claims.

One of the recommended approaches is to segregate groups of houses aggregating to a certain value and have each group owned by a limited liability company. Depending on the extent of the client's holdings perhaps the client ends up with 5 limited liability companies each owning 5 or 6 properties. The 5 LLC's are all owned 100% by a multimember LLC, often owned by husband and wife, which has the strongest possible language in its operating agreement to protect against creditors including a trustee in bankruptcy. The operating LLC's are all single member LLC's but the parent LLC must be multimember otherwise the creditor protection sought, i.e., creditors being limited to a charging order remedy, may not be available.

If the client's assets are large enough, we suggest that the client consider a domestic asset protection trust to be the owner of the parent LLC. We believe these DAPT's have enormous power as an asset protection vehicle while, at the same time, retain the flexibility to allow our clients to continue to manage their properties as they have in the past. It can also be structured in a way to give our clients the comfort that they will be able to access the assets contributed to the trust when needed.

Many of you bloggers are very entrepreneurial and will want to implement structures that appear advantageous for your business.. While the above structures may sound fairly straightforward, they can be quite complex from a legal documentation standpoint. You are strongly advised to retain an experienced asset protection/business lawyer to answer your questions and help you with the legal work involved.

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.

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

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.

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.

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.

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.

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.

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.

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!!