Asset Protection

By Author: Peter Nutter
Total Articles: 4
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Asset Protection

There are different structures used in protection rental real estate, a personal residence, a bank account, a retirement plan, etc. The debtor may need to make a distribution that would be intercepted by the charging order. While the creditor may have a difficult time enforcing its judgment in a foreign country and levying on a foreign bank account, the debtor will never have a problem withdrawing the money if the account is directly in the debtor's name. Planning is done within a statutory framework, but it is the practical implications of the planning that shape the exact nature of the structures and techniques. Irrevocable trusts that are not grantor trusts are not the answer for income-producing assets because of adverse income tax results. Creditors do not pursue the residence itself, but the equity in the residence that can be converted into money through a foreclosure sale of the residence.

If you can make an argument that causes the creditors to employ others then it will be sufficiently expensive and time consuming then the creditor may never make it to court. Having a legal right to ...
... do something does not mean having the actual ability to do so, and does not mean that the pursuit of the transferred assets would be cost effective. The identity of the creditor refers to how aggressively the creditor will pursue the debtor's assets, and how knowledgeable the creditor is about debt collection laws. When a creditor has the legal ability to challenge the protection of a foreign trust, the costs and difficulties of the challenge are usually insurmountable. Creditors not motivated by personal animosity, but by financial incentive, will always take into account the economics of their collection actions. One way to strip out the equity is by obtaining a bank loan.

If you are someone who wants real protection, a better option may be an irrevocable trust or an outright sale of the residence. The final available alternative to protect a personal residence is by contributing the residence to a qualified personal residence trust ("QPRT"). The objective is to change the creditor's economic analysis, making the pursuit so difficult and expensive, the creditor will either give up or be willing to negotiate on terms more favorable to the debtor. Did you know that a $1 million loan bearing a 7% interest rate, costs $70,000 per year. The specific structure best suited for each person will depend on the nature of the asset being protected. Given that the more favorable asset protection jurisdictions have a very short statute of limitation for bringing a fraudulent transfer action, require proof of intent beyond a reasonable doubt and require proof of debtor's insolvency, the creditor faces a daunting task.

Asset protection is based on the basic principle that any asset owned by a person (with some minor exceptions, like an ERISA-qualified retirement plan) can be reached by that person's creditor. Creditors do not want to play the waiting game, and would prefer to settle for a sum certain today, than wait for a possible distribution from an LLC or a limited partnership. An arm's-length cash sale is the best way to protect your residence (and the equity in the residence) because it is much easier to protect liquid assets than real estate. Certain state statutes require LLCs or limited partnerships to have a business purpose, and there is no business purpose in holding a personal residence in a legal entity. If the creditor can seize a sufficient percentage of the shares, the creditor will acquire control of the corporation and access to the corporation's assets. To an extent the debtor-settlor retains an interest in the trust, the trust will be deemed self-settled and will not offer the debtor any asset protection.