On Ambulance Chasing and Asset Protection

As anyone who rides public transportation or watches late-night TV can attest, our society is a litigious one. We've all seen the ads: Have you or someone you love been injured? Call 800 SUE-THEM. As amusing as they might be on the surface, the ads speak to a serious issue for estate planners: the need to protect client assets from claims that could result from lawsuits. Here are seven characteristics

As anyone who rides public transportation or watches late-night TV can attest, our society is a litigious one.

We've all seen the ads: “Have you or someone you love been injured? Call 800 SUE-THEM.” As amusing as they might be on the surface, the ads speak to a serious issue for estate planners: the need to protect client assets from claims that could result from lawsuits.

Here are seven characteristics of an effective asset-protection program, all of which should be part of an integrated estate plan:

  1. Organized Assets

    A prerequisite of asset protection is the organization of a client's assets to minimize unforeseen creditors' ability to garnish those assets. Good asset-protection planning discourages lawsuits or, at the very least, encourages settlements for less than the claim. For clients who already have claims against them, asset-protection planning can be difficult or impossible because of state “fraudulent conveyance” statutes. These statutes provide that if an individual attempts to transfer assets out of his or her name with the intent to hinder or defraud a creditor, or, if the transfer causes the individual to become insolvent, a court can “undo” the transfer, thereby enabling the creditor to reach the transferred asset.

  2. Liability Insurance

    Adequate insurance is the first line of defense in asset-protection planning. Therefore, it is critical that the client have his or her insurance reviewed by an expert. The goal is to transfer the liability exposure to the insurance company. Sometimes, however, insurance will not cover a particular claim or the policy limits are too low to satisfy the judgment. This is why it is important to have an asset-protection plan in place as a second line of defense.

  3. Good Tailoring

    There are no cookie-cutter solutions for asset-protection planning. If a strategy sounds too good to be true, it probably is, and the client should avoid it. True asset-protection planning is more of an art than a science and involves the appropriate application of available asset-protection strategies tailored to the client's particular needs and integrated with the client's estate plan. The plan should have the flexibility to change with the client's circumstances.

  4. Optimized Exemption Planning

    Under state law, certain types of assets are exempt from creditors' claims, even if the assets remain in the client's name. Depending on the particular state involved, exempt assets can include the client's personal residence, retirement accounts (some types are also exempt because of federal pension laws) and even life insurance policies. The size of creditor exemptions varies widely among the states. For example, Florida allows an unlimited exemption for the value of the individual's personal residence, while the exemption for a personal residence for a New York resident is only $10,000 for a single person.

  5. Proper Asset Titling

    Generally, if a client does not own an asset, his creditors will be unable to reach the asset unless the creditor can show that the client's transfer of the asset violated a state fraudulent conveyance statute. Transfers that are shown to have estate-planning purposes, such as equalizing an estate between a husband and wife, are less likely to be treated as fraudulent conveyances than transfers without a separate estate-planning purpose.

  6. Locating and Using Protected Entities

    One particularly useful asset-protection strategy involves the use of limited partnerships and limited liability companies to hold a portion of a client's assets. Even if a creditor is successful in obtaining a judgment against a limited partner or member, the creditor should not be able to access the assets of the partnership or LLC to satisfy the claim. The creditor should only be entitled to a charging order giving the creditor the right to receive the distributions that the debtor would have been entitled to. If no distributions are made, the creditor gets nothing. This acts as an incentive for the creditor to settle the claim at less than the amount of the judgment. One caveat: Some experts believe that single member LLCs may not provide the same degree of protection as an LLC with multiple members.

  7. Trusts

    Domestic Irrevocable Trusts can be effective mechanisms for asset-protection planning. Such trusts fall into two broad categories — third-party spendthrift trusts and self-settled trusts. The former do not include the grantor as one of the beneficiaries. The spendthrift aspects of the trust give the trustee discretion regarding when and if distributions are made. This makes a spendthrift trust an extremely effective vehicle for family members with potential creditor problems, including divorce. Self-settled trusts are irrevocable trusts where the grantor is one of the beneficiaries. A trustee who is not the grantor has full discretion as to whether to make distributions. Historically, courts have allowed creditors to access funds in a self-settled trust. In recent years, however, several states have adopted statutes allowing creditor protection for self-settled trusts.

Perhaps the most effective asset-protection strategies involve offshore trusts. Offshore self-settled trusts established in places like the Cook Islands and Nevis using a local financial institution as a trustee have proven extremely effective as asset-protection vehicles. These offshore havens do not respect U.S. judgments and creditors must prove their case all over again in local courts applying very debtor-favorable statutes. There is a new line of defense, however, with offshore trusts containing so-called duress clauses (prohibiting any repatriation of the assets even upon the grantor's request). U.S. courts have been willing to hold the debtor in criminal contempt and haul him or her off to jail until the debts are paid.

Asset-protection planning is most successful when a combination of the approaches discussed above (along with others) are used. No strategy can be said to “bulletproof” a client from creditors' claims. However, the layering of a number of strategies, as part of the client's overall estate plan, may present a creditor with sufficient hurdles that the creditor may be willing to settle for a fraction of the original claim.

Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish