Using Loans As An Asset Protection Planning Technique

Often a new client will contact me disclosing at our initial meeting significant pending creditor exposure. He will advise me that other lawyers told him that there is nothing they can do for him and that any strategy or structure that might be considered would likely constitute a fraudulent transfer. Therefore, not only would the creditors be able to avoid the transfer but the attorney could face ethical issues if she assisted the client with the fraudulent transfer. So, is there any asset protection available to someone in this position.

If the circumstances permit, a possible approach might be for the debtor to make a loan to a third party…often a member of his family. By doing so, the debtor converts liquid assets that would be readily available to the creditor’s collection efforts to a promissory note. The terms of the promissory note can be such that the creditor, if it executes against and becomes an assignee of the note, is willing to accept a discount from the face amount if the borrower pays cash rather than wait for the note to be paid in accordance with its terms. If this occurs, the debtor will have accomplished the seemingly impossible…getting the creditor to accept an amount less than debtor’s available liquid assets.

Sounds simple enough. But it is far from simple and the careful planner must determine if the facts will support this strategy. The Michigan asset protection lawyer knows the creditor is going to scrutinize the loan to ascertain if it is a mere subterfuge and that in fact the borrower is simply acting as the debtor’s agent. The creditor will also claim the transfer of funds in exchange for the note is a fraudulent transfer.

The lawyer needs to make it clear to his client that if the client’s goal is to simply transfer funds to a family member with an implicit understanding that the money will never be paid back and that the note will not be enforced, the transaction will not be honored and the lawyer should not participate. For this asset protection planning strategy to work, it must be legitimate.

Furthermore, the terms of the note must be arms length. To avoid the fraudulent transfer claim and, specifically, the argument that the value of the note received is less than the amount of money transferred, it is essential that the note terms comport with economic reality and impose interest at current interest rates. The note should have similar terms and conditions as those that an institutional lender might require under the same circumstances. And finally, there must be some business purpose for the loan. If the borrower has no specified use for the funds or has not sought to borrow money from other lenders within the same time period, these facts may suggest that the loan is not bona fide.