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.
When meeting new clients with creditor problems, there may be a strong desire to help the client and perhaps stretch just a bit to assist the client in preserving some of the client’s assets. However, the lawyer needs to be iron-willed and forceful in advising clients about the law. In these instances, it is critical for the attorney to send a letter or memorandum to the client confirming what the lawyer advised at the meeting. This will avoid the client later claiming that he or she was advised by the lawyer to take a certain action when indeed the advice was just the opposite. The writing should be clear and unequivocal that proposed gifts, other transfers, sales at below market value prices and other actions discussed at the meeting that the lawyer has determined will constitute fraudulent transfers should not be made. Indeed, the lawyer should categorically state in the writing, and follow through by deed, without exception, that he or she will not participate, draft, advise or assist in any transaction that the lawyer has determined to be improper under the law.
Now that the lawyer has told the client what the client cannot do and what the lawyer will not do, what advice can the lawyer give to help the seriously indebted client? The simple fact is that there are many planning opportunities available to help this type of client without any need to contemplate any improprieties. Some are simple, others a bit more complex, but the main point of this blog is to alert both clients and asset protection lawyers that there is usually some approach available – which is totally legal and ethical – to enhance the client’s position. Remember, as an asset protection planner you are rarely if ever able to eliminate the client’s problem; instead, your role is to put the client in the strongest position possible under the prevailing conditions. If as a result of your advice the client’s leverage in dealing with his or her creditors is better off that it was before the client met with you, then you have added value.
Let’s discuss some obvious asset protection planning opportunities that have no fraudulent transfer concerns. If debtor husband is the beneficiary of wife’s estate, change wife’s estate plan so that the husband will not inherit wife’s assets if she predeceases him ….. which would make additional assets available for the creditors of the husband ….. and instead have wife set up a discretionary spendthrift trust for husband. If the same husband and wife own property by the entireties in a state where the creditors of one of the entireties owners cannot access the entireties property, consider transferring the entireties property to the non-debtor spouse. Why, you might ask, would the client need to transfer the property to the non-debtor spouse if the property is already protected? Answer: to avoid the risk of the non-debtor spouse dying first and the previously protected entireties property now passing, instantaneously at the spouse’s death, to the debtor spouse where his creditors can readily access the property. In Michigan, case law makes it clear that the transfer of entireties property from the debtor spouse to the non-debtor spouse is not a fraudulent transfer.
All other assets that might unexpectedly pass to the debtor spouse should be assessed and addressed. For example, life insurance proceeds, retirement plan and IRA accounts, items that will be treated as income in respect of a decedent, should be reviewed and analyzed to determine the proper beneficiary designation. Often times, because of creditor problems, the traditional notions with respect to planning for these types of assets have to be reconsidered in light of the creditor situation.
If an inheritance is expected then, to the extent feasible, the debtor client should try to facilitate a discussion with his or her parents in order to ensure that proper planning is also carried out at the parents’ level.
In conclusion, there is no reason to abandon the financially impaired client out of fear. There is no reason to establish a rigid rule where the law firm will never undertake the representation of these clients because of the perceived risks. All that is necessary is a thorough understanding and appreciation of the risks and a recognition that as an attorney you will abide by all of the rules and ethics of the profession.