Why Timing Matters
Asset protection plans gain legitimacy before courts and attorneys once they have been funded for several years. The passage of time helps demonstrate the plan was created as a legitimate effort to protect wealth from future threats -- not an attempt to avoid paying a particular claim.
However, not everyone has the foresight or ability to protect their wealth ahead of time. If a legal claim has already surfaced, there may still be certain alternatives available, though defenses are generally more difficult after a cause of action has occurred.
Understanding Fraudulent Transfers
A fraudulent transfer is an attempt to avoid paying a debt by transferring assets to another person, company, or trust. The critical distinction between a proper transfer and a fraudulent conveyance is the timing and intent behind the transaction.
Normally you are free to gift away any of your assets, but these same activities can be considered fraudulent if they are made with the intent to defraud creditors or if they leave you insolvent. Key points:
- Courts often look at surrounding circumstances to determine intent, since actual intent is difficult to prove
- A fraudulent transfer ruling means the court can void the transfer and order a return of the money or property
- Fraudulent transfers are usually a civil matter, but criminal liability can apply if actual fraud is involved
What Assets Can Be Seized?
If you are sued in an individual capacity, virtually any personal property can be used to satisfy a judgment, including:
- Cash and bank accounts
- Wages and investment accounts (including IRA accounts in some circumstances)
- Cryptocurrency
- Motor vehicles, jewelry, art, and household goods
- Business equipment and assets you gifted to your spouse
- Future commissions, royalties, tax refunds, insurance payouts, and inheritances
Federal and state laws offer some protection for qualified retirement accounts and home equity, but these protections are often inadequate. Depending on your state, the homestead exemption may protect as little as $5,000 of equity -- meaning your family home could be seized and sold at auction.
Will a Domestic Trust Work?
In most cases, no. Domestic asset protection trusts are designed to protect against future, unanticipated creditors. The case law for domestic trusts is not encouraging even when protecting against future claims. When a lawsuit has already been filed, a domestic trust would probably not provide meaningful protection.
All DAPT states have statutes of limitation on transfers -- many lasting four years. Any transfer made during that period could be clawed back to pay a claim. Even after the period expires, a U.S. judge could still decline to recognize the trust for various reasons.
What About Domestic LLCs?
Domestic LLCs generally will not provide meaningful protection against a pending or filed lawsuit. Single-member LLCs in the U.S. typically offer only minor protection against claims and lawsuits. A U.S.-based LLC would not be recommended as a tool to protect against a pending lawsuit and could potentially do more harm than good if fraudulent transfer concerns are not carefully managed.
Using an Offshore Asset Protection Trust
Offshore asset protection trusts provide the highest degree of legal protection currently available. The entire purpose is to place assets beyond the jurisdiction of U.S. courts while benefiting from more favorable laws abroad.
Key advantages even in pending litigation:
- Bringing a lawsuit against an offshore trust is significantly more costly and challenging for a plaintiff
- The existence of an offshore trust can discourage litigation from proceeding
- Even if not yet fully funded, an offshore trust can put you in a better position to negotiate a settlement
Which Offshore Jurisdictions Can Help?
- Cook Islands: Does not recognize foreign judgments. Creditors must re-litigate under Cook Islands law with a "beyond reasonable doubt" standard of proof and a one-to-two-year statute of limitations.
- Nevis: Requires a $100,000 bond before creditors can initiate litigation. Two-year statute of limitations on fraudulent transfer claims.
- Belize: Offers immediate asset protection upon funding. The fraudulent transfer statute does not apply to international trusts established in Belize, making it one of the few jurisdictions with truly immediate protection. Also immune from Mareva injunctions.
Creating an Asset Protection Trust During Litigation
An important distinction: there are generally no laws or penalties for creating an asset protection plan itself, even when a lawsuit is approaching or already filed. Fraudulent transfer rules only control the movement of assets, not the creation of trusts or other entities.
Fraudulent transfer rules can only reverse an asset protection plan if it can be proved that the transaction was created to avoid paying an existing debt or claim. The steps available after a lawsuit is filed vary from case to case and require careful legal analysis.
Should You Hide Assets?
No. Hiding assets can quickly turn a civil case into a criminal matter. If a court orders you to disclose assets, failure to do so constitutes contempt of court, which could result in a prison sentence. No attorney can recommend their client carry out an unlawful act. There is a critical difference between legally protecting assets and illegally hiding them.
Frequently Asked Questions
Is it too late to protect my assets if I have been sued?
Not necessarily. While options are more limited and defense is more difficult, there may still be legal avenues available depending on your situation. In many cases there is a gray area where legal arguments can be made on both sides. Consult an asset protection attorney as quickly as possible.
Can I create a trust after being served with a lawsuit?
Yes, creating a trust is legal even during litigation. However, any transfers of assets into the trust will be subject to heightened scrutiny for fraudulent conveyance. Working with an experienced attorney is essential to navigate these complexities.
Which offshore jurisdiction is best for urgent protection?
Belize offers the most immediate protection, as its fraudulent transfer statute does not apply to international trusts. Assets receive protection as soon as they are transferred into a properly established Belize Trust.