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Initial Lines of Defense Against Creditors

  • First: Insurance
  • Second: Exempt Property (some home equity, retirement plans, life insurance,
    annuities, etc.)
  • Third: Property Agreements (between spouses)

Planning Beyond the Initial Lines of Defense

  • First: Revocable Living Trust
  • Second: Irrevocable Trusts to transfer assets, retain income stream, etc.
    • ILIT (Irrevocable Life Insurance Trust)
    • CRT (Charitable Remainder Trust)
    • QPRT (Qualified Principal Residence Trust)
    • GRAT (Grantor Retained Annuity Trust)
  • Third: Corporations
  • Fourth: FLP (Family Limited Partnerships)
  • Fifth: LLC (Limited Liability Companies)
  • Sixth: Business Succession Planning
  • Seventh: Personal Asset Protection Trusts

Need to Address Issues/Limitations

  • Fraudulent Conveyance Statutes
  • Bankruptcy Limitations
  • Federal and State Criminal Violations

Inside versus Outside Creditors

  • Inside creditors are those creditors whose claim is directed against the business operation or real estate which is operated and owned inside a business entity.
  • Outside creditors are those creditors whose claims arise outside the purview of the business entity and are generally asserted against the business or real estate owner personally.

Protecting Against Inside Debts or Claims

  • With respect to Operating Businesses:
    • C Corporations
    • S Corporations
    • Limited Liability Companies
  • With respect to Rental Residential Real Estate
    • Insurance
    • LLCs or FLPs

Marital Property Planning

  • Consider possibility of transmuting separate property or jointly held interest of professional spouse into separate property of non-working spouse

Segregate Business Assets

  • Real estate should be held in LLC and leased to professional practice or business
  • Equipment can be held in LLC and leased to professional practice or business
  • Separate liability protected entity for different business or practice functions and operations

The Charging Order

  • Creditors of a partner or LLC member cannot reach partnership assets or seize partnership interest or LLC interest
  • Limited to a court order "charging" the interest with the debt
  • If distributions are made with respect to the charged interest, they must be made to the creditor
  • Creditor gets only economic rights to distributions, not voting rights or other non-economic rights

Domestic Asset Protection Trusts

  • The general rule in most states is that creditors can reach the interest of the Trustor (the maker of the trust) of domestic self settled trusts
  • Recently, several states have adopted legislation somewhat similar to various offshore jurisdictions that provide by statute various degrees of asset protection for a Trustor's interest as a beneficiary in a self settled trust
  • If properly set up and maintained, the Domestic Asset Protection Trust will be a significant barrier to creditors and will afford significant leverage to the debtor with respect to its negotiations with the creditor. This is especially true if the assets of the trust that need to be protected are domiciled in a state which is the domiciliary of the Asset Protect Trust.

Foreign Asset Protection Trusts

  • A Foreign Asset Protection Trust is a trust that is set up in an offshore jurisdiction which has enabling trust legislation providing for substantial protection against creditors of the trustor
  • One of the greatest advantages of the Foreign Asset Protection is the fact that by its very nature any legal attack against its assets are transferred abroad to a different legal system
  • A foreign Trustee is necessary for the efficacy of the Foreign Asset Protection Trust
  • The biggest advantage in utilizing the Foreign Asset Protection Trust is that assets can be placed offshore beyond the jurisdiction of the U.S. courts


Select the Appropriate Tools

  • The tools discussed in this memo should be evaluated as to your specific situation. If your exposure to claims is small, adequate insurance, and a homestead declaration may be sufficient. As your exposure increases, you may wish to consider making asset transfers before a claim arises. At the highest level of exposure, you may be willing to transfer a significant portion of your assets to one or more foreign-situs trusts. You must evaluate the price you must pay for each tool (in terms of money and potential loss of control) against the anticipated protection.

No Guarantee

  • There is no guarantee that any particular shield will be absolutely bullet-proof. Because of the ever-changing nature of laws, what works today may not work tomorrow. Even so, having assets owned by business entities and irrevocable trusts will provide more protection than simply holding assets in one's own name, and limited partnerships, limited-liability companies, Nevada self-settled spendthrift trusts, and offshore trusts, when properly utilized, can provide a significant barrier against attacks through litigation.