Asset protection plans work best when they are established well ahead of time before the possibility of a legal threat appears on the horizon. After your asset protection plan has been funded for several years, it gains legitimacy before the courts and attorneys. The passage of time helps demonstrate that the asset protection plan was created in a legitimate effort to protect your wealth from future legal threats and not an effort to avoid paying a particular claim you were anticipating. However, not everyone has the foresight or the ability to protect their wealth ahead of time. But is there anything that can be done once a legal claim has reared its ugly head? In many cases, there are still certain asset protection alternatives available even if a lawsuit has already occurred. Due to the unfortunate timing, the situation is generally made more difficult as far as defense goes. Once a cause of action has occurred or a lawsuit is expected we must be mindful of the possibility that any transfers of assets made to entities such as trusts, or limited liability companies could be undone by a court.
A fraudulent transfer is an effort to avoid paying a debt by transferring assets to another person or company. Assets are usually transferred to family members, limited liability companies, or trusts. The difference between a proper transfer and a fraudulent conveyance is all about the timing of the transaction. While normally you would be free to gift any of your assets away, these same activities can be considered a fraudulent conveyance if they are made with the intent to defraud creditors or if they left you insolvent and thus unable to pay any claims. If you create an asset protection plan after receiving a lawsuit, any asset transfers made to your trust or other legal entity could prove problematic. Since it is difficult to prove the actual intent behind a transaction, courts often look at the circumstances to determine what can be considered proper. A ruling of fraudulent transfer means the court can render the transfer void and order a return of the transferred money or property. Fraudulent transfers are usually only a civil matter, but they can also carry criminal liability if the court determines that there was actual fraud involved.
If a lawsuit was filed against a specific business entity owned by you such as a corporation or limited liability company, that ordinarily means only the business assets are placed at risk. On the other hand, if you are being sued in an individual capacity then there is a good chance most of your wealth could be unprotected. Once a judgment is obtained, a creditor can seize almost any personal property to satisfy the obligation. Personal property includes:
With very few exceptions, virtually any funds held in banks or brokerage accounts, vehicles, investment real estate, and even your home could be at risk. Property records and vehicle registration information are publicly available, while your social security number can be used to locate bank or brokerage accounts belonging to you. Even assets you do not currently own could be used to satisfy creditors, such as future commissions, royalties, tax refunds, insurance payouts, and inheritances. Federal and state laws offer some degree of protection for assets held in qualified retirement account as well as for some of the equity in your primary home. Unfortunately, these legal protections are often highly inadequate. Depending on where you live, your state’s laws may only provide as little as $5,000 of equity as a homestead exemption. That means your family home could be seized, sold at auction, and the proceeds used to pay any claims or creditors. You could only be entitled to $5,000 as your “protected” home equity amount, hardly a source of comfort.
Unfortunately, getting legal protection can be hardest when you need it most. There comes a time after a lawsuit is filed when any financial transactions or asset transfers can be highly scrutinized and discouraged. This does not mean that all is lost. In some cases, the answer of what alternatives can still be allowed is not black and white. Depending on what your situation is, there might still be certain legal avenues available. It is certainly still recommended to consult an attorney as quickly as possible.
A domestic asset protection trust is generally used as a legal solution to help prevent liability from future, unanticipated creditors. Sadly, domestic trusts are not very powerful asset protection tools and the case law for domestic trusts is not very encouraging, even when protecting against future claims. In the case where a lawsuit has been filed, a domestic trust would probably not be able to provide much protection, if any. All U.S. states that recognize domestic asset protection trusts have enacted statutes of limitation regulating transfers to these trusts, many can last as long as four years. That means that any transfer made to the trust in the last four years could be potentially clawed back to pay a claim. Even after this time has elapsed, a U.S. judge could still fail to recognize the integrity of the trust structure for a number of different reasons. For anyone looking for a high degree of legal protection, a domestic asset protection trust will not be appropriate.
Much like domestic trusts, a domestic limited liability company will not provide much protection against a lawsuit that is rapidly approaching or that has already been filed. In general, domestic LLCs that are solely owned by one person provide only a minor degree of legal protection against claims and lawsuits. LLCs generally only provide legal protection against future claims and lawsuits when there is more than one member. At any rate, an LLC based in the U.S. would not be recommended as a tool to protect against a pending lawsuit and could potentially do more harm than good if fraudulent transfer matters are not carefully avoided. Fortunately, LLCs can also be established in offshore jurisdictions where they are more protected from U.S. based courts and judgments.
Offshore Asset Protection Trusts can provide the highest degree of legal protection currently available. The entire purpose of offshore asset protection is to avoid the jurisdiction of U.S. courts and instead benefit from more favorable laws and courts abroad. Bringing a lawsuit against an offshore trust is a costlier and much more challenging case for a plaintiff, so it can discourage litigation from going forward. As with any other asset protection solution, it is best to establish these well ahead of any potential liability. In order to fully take advantage of an offshore trust, it is important to move as much wealth as possible outside of the U.S. and into safe havens such as Switzerland. However, if a lawsuit has already been filed, an offshore trust could potentially put you in a better position to negotiate a settlement even if the trust is not yet fully funded.
International trusts established in countries such as the Cook Islands, Nevis, or Belize have the best asset protection laws for defendants. While these countries still have fraudulent transfer / conveyance statutes of one or two years, they have a higher burden of proof required than courts in the United States. In addition, the plaintiff must prove that the trust was established to defraud themself, instead of just creditors in general. Trusts established in the Central American nation of Belize receive immediate asset protection upon funding a trust. Since the country decided to exclude the application of its fraudulent transfer statute to international trusts established in Belize, it is one of the few countries in the world that offers immediate asset protection. Provided the trust was created for a lawful purpose, the courts in Belize will not consider claims of fraudulent conveyance. The Supreme Court in Belize has also ruled that the asset protection trust statutes in the country supersede a petition for a Mareva injunction. That means trust funds could potentially be used to pay for a legal defense without the risk of being made unavailable in the middle of litigation. This makes Belize an excellent option for anyone looking to get their asset protection plan running as soon as possible.
Hiding assets can quickly turn a civil case respondent into a criminal defendant. If a court orders you to disclose your assets, failure to do so can constitute contempt of court, which could ultimately result in a prison sentence. No attorney can recommend their client to carry out an unlawful act. If you tell your defense attorney that you are planning to lie about your assets, they may be forced to withdraw from your case due to the ethical regulations that attorneys must follow.
Setting up an asset protection plan is legal and effective. Even when a lawsuit is approaching or already filed, it is important to note there are generally no laws or penalties for creating an asset protection plan. Remember that fraudulent transaction laws discussed above only control the movement of assets and not the creation of asset protection trusts or other entities. Fraudulent transfer rules can be used to reverse an asset protection plan only if it can be proved that the transaction was created to avoid paying an existing debt or claim. The steps which can be taken after a lawsuit is filed will change from case to case and will require a legal analysis of that situation. The good news is it may not be too late to find some much needed legal protection. In many cases, there is a gray area of uncertainty where legal arguments can be made on both sides.
Hopefully you are reading this article because you are concerned about protecting your future and not because you have already been served with a lawsuit. Whatever the case might be, Blake Harris Law can help you evaluate your situation and explore your options even if you have already become involved in a lawsuit. We work with clients across the U.S. to help protect individuals and families from disputes and litigation. An asset protection attorney can help you create a plan that protects your assets from lawsuits. Schedule a consultation online or give us a call at 833-Ask-Blake to learn more about how our asset protection firm can help keep your assets protected from lawsuits.