Asset Protection Planning

No matter how frivolous a lawsuit may appear, juries sometimes bring back large verdicts that are based more on emotion than law. None of us want everything we have worked for and saved to be exposed to the capriciousness of a jury that has no stake in the outcome. We also know that some of the people you love the most may need protection from themselves. They may lack the maturity to handle a large inheritance. They may be in an unstable marriage. They may have a drug or alcohol dependency.

All of this helps explain why, even in the South and Midwest, asset protection planning is such a rapidly growing area of the law and why it is so important for you to have a plan expertly tailored to protect you and the people you care about. Asset protection planning is now an essential component of asset planning and asset management. This is particularly true if you are in a profession that is subject to an unusually high number of lawsuits or a high-risk business.

This law provides that a creditor cannot levy on a partner’s interest or a member’s interest. The creditor rights are limited to a legal device called a “Charging Order” which limits the creditor to taking only the distributions that are made to the partner or member.

While these entities do not provide perfect protection, the charging order is a significant impediment to the collection of a judgment. In fact, it is significant enough that it results in a reasonable settlement of the claim even before the lawsuit is filed.

We sometimes use these entities as a stand-alone solution. In other situations, we combine them with one of the trust structures we discuss on this page. This allows our client to transfer the economic interest while retaining the ability to manage the assets.

Since 1997, with the adoption of legislation in Alaska, several U.S. states have adopted legislation allowing an individual to create a trust for his or her own benefit [generally referred to as a “self-settled” trust]. Traditionally, a self-settled trust had no asset protection in any state in the United States. That is no longer the case. Fifteen states have now passed legislation providing creditor protection to a grantor/beneficiary of an asset protection trust. These states include Alaska, Delaware, Nevada, Rhode Island, Utah, Wyoming, Virginia, South Dakota, Hawaii, Missouri, New Hampshire, Ohio, Oklahoma, Tennessee, and Mississippi. We believe this pattern of recent legislation indicates a strong trend in the U.S. for providing Asset Protection for individuals establishing self-settled trusts in these jurisdictions.

Questions remain, however, because the courts have had few opportunities to issue rulings in cases arising under this legislation. Depending on the timeline involved with respect to when the claim has arisen, these trusts can be (and should be) considered in appropriate circumstances, but only by an asset protection attorney who understands all of the ramifications. For Arkansas residents, these issues should be carefully analyzed by an Arkansas asset protection attorney because there are several issues and opportunities that impact the decision to create a self-settled trust.

One issue that impacts Arkansas residents is the availability of certain statutory exceptions or exemptions available under Arkansas’ 1874 Constitution. Arkansas has a comparatively generous homestead exemption, for example.

An asset protection trust is usually structured to be:

The benefits of a self-settled domestic asset protection trust include:

While a domestic self-settled asset protection trust provides significant compelling benefits, and is the best option for clients in many situations, it is not always the best asset protection option. It does require the appointment of a trustee in the chosen jurisdiction, and that trustee is generally a corporate fiduciary that will charge a fee that ranges from $3000 to $6000 each year, and often more if more than routine work is required. Sometimes, a Third Party Asset Protection Trust is a better choice.

Almost every state has long-established “spendthrift” statutes that have been tested many times over many decades, so the law governing these trusts is generally clear. Due to this clarity, the Third Party Asset Protection Trust is an ideal solution when the facts are appropriate. A Third Party Asset Protection Trust is a trust formed by one person for the benefit of another person. For example, a parent could create a Third Party Asset Protection Trust for the benefit of a child. Or one spouse could create a Third Party Asset Protection Trust for the benefit of a spouse. In the latter situation, if the marriage is solid, the couple will generally understand that distributions that are made to the spouse will be shared with the spouse creating the trust. The spouse may also serve as the Trustee or as the Cotrustee of the trust, which generally eliminates the need to pay a corporate Trustee to fill that role.

One concern many clients have is that their spouse might become incapacitated or predecease them and thereby cause them to lose any opportunity to have the benefit of the assets in the trust. To address that circumstance, we will generally name a trust protector (usually a trusted friend or the attorney) who will be empowered to name the grantor of the trust as an additional beneficiary. Should that need arise, the trust protector or the trustee of the Third Party Asset Protection Trust will need to follow a procedure to “re-situs” the trust in one of the jurisdictions, either in the United States or offshore, that has adopted legislation permitting self-settled trusts.

For well over a century, individuals in the U.S. have utilized foreign self-settled trusts to protect their assets. Many offshore jurisdictions have enabling legislation or favorable court decisions that provide creditor protection for self-settled trusts. In several offshore jurisdictions, asset protection is the local industry, so these jurisdictions have a huge stake in the trusts created in their jurisdiction working as promised. The real attraction to an Offshore Asset Protection Trust is that the assets in the trust are truly beyond the jurisdiction of an American court. Creditors that obtain a judgment against a client are required to re-litigate their claim in the offshore jurisdiction, and the litigation environment in those jurisdictions is far less creditor-friendly than is the case in courts in the United States. For example, contingency fees to plaintiff’s attorneys are not generally allowed. However, the Offshore Asset Protection Trust model is more costly to establish and maintain than the Third Party Asset Protection Trust or the Domestic Asset Protection Trust.

According to this law, a debtor cannot transfer assets if the principal reason for the transfer is to hinder or deter creditors from gaining access to assets. If a court concludes that a debtor engaged in actions with the intention of “delaying, hindering, or defrauding” creditors, then the court may set those transfers aside. Normally, in order for the transfer to be classified as fraudulent, the transfer involved, when considered along with the potential amount of the creditor claim, has to make the transferor insolvent. Also, transfers made on an arm’s-length basis for fair market value are not considered fraudulent transfers.

The consequences of the Fraudulent Transfer Law make it imperative that the business owner or professional implement asset protection strategies before a creditor claim arises. Once the facts occur which give rise to the creditor claim, planning is significantly more difficult and the available options are far fewer. However, the experience in our law firm has shown that there are always steps that can be taken that can provide some measure of benefit even if those actions are taken after the claim has arisen.