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What You Should Know About Asset Protection

by Charles Phillip Castellon on Jan. 05, 2016

Bankruptcy & Debt Collection Bankruptcy & Debt  Credit & Debt Consumer Rights  Consumer Protection 

Summary: A review of basic asset protection considerations in Florida and how to legally and ethically shield assets from potential creditor claims


What You Should Know About Asset Protection

By Charles P. Castellon, Esq.

CPC Law

© 2015, All Rights Reserved.

Much has been written about the legal concept of asset protection.  In some circles, asset protection has developed a seedy reputation of unethical or illegal activities including off-shore trusts and Swiss bank accounts.  Though some will always engage in unsavory practices, asset protection should be a sensible, legal and ethical component of every investor’s wealth-building game plan.

Before discussing what asset protection is, it’s helpful to focus on what it’s not.  It’s not about illegally hiding assets from anyone with a legal right to know what you have.  It’s also not about tax evasion.  In summary, asset protection is about properly structuring and titling assets in a way to best secure them against anyone trying to take them.  The best use of asset protection strategies is preemptive action.  For reasons more fully discussed below, the timing of the implementation of asset protection strategies is critical.  Trying to shelter assets in reaction to bad things happening, such as a lawsuit, is much less effective and less likely to be upheld in court than protection arranged during times of peace and quiet.

As every good investor wants to do business in compliance with the law, the legal concept of “fraudulent conveyance” is important to understand.  Fraudulent conveyance refers to the act of moving or restructuring assets solely for the purpose of avoiding or hindering creditor claims.  Generally speaking, if an owner of any asset sells, restructures, re-titles or changes access to the asset for a legitimate reason other than preventing a creditor from getting it, such maneuvers are likely to be upheld in a court challenge. 

It’s worth noting that the term does not imply criminal activity even though the word “fraud” is found in the phrase.  Although it is possible that criminal fraud may be committed in the process of hiding assets or falsely responding to questions about assets, a fraudulent conveyance case is usually a civil matter.  Typically, the creditor will learn that a debtor used to own one or more assets the creditor could’ve pursued, but no longer has the asset(s).  The burden would then be on the creditor to establish in legal proceedings that the debtor engaged in the activities affecting the assets for the sole purpose of thwarting the creditor’s claim.  The likely worst-case scenario for the debtor would be the invalidation of the prior asset transfers and restoring title to the debtor so the creditor can seize the asset.  According to that scenario, there may be little for the debtor to lose in attempting transfers that could later be deemed fraudulent conveyances, as the debtor would simply be put back at “square one,” where he started.  There could, however, be the possibility of liability to innocent third-party buyers of assets.

As any challenge of the movement of assets would rely on the intent of the owner, a logical question would be how does the court determine the legality of these acts?  The answer is found in the court’s review of the totality of the circumstances surrounding the asset transfers.  A helpful tool in this inquiry is known as “badges of fraud.”  These are mainly common-sense indicators in the surrounding circumstances that shed light on the intent of the debtor.  They include, among others, whether the transfer is to an insider, the amount of money exchanged in relation to fair market value, whether the debtor renders himself insolvent as a result of the transfers and other factors. 

Perhaps the most important factor is the timing of the transfer.  This is why preemptive, rather than reactive action is best.  For example, if the owner of asset shelters it while he lacks any care in the world, including no outstanding debts, claims, lawsuits or judgments in existence, it’s much more likely these moves will be held valid.  If, on the other hand, a debtor signs a quit claim deed to his brother in law the day after a judgment is entered, the court will treat it with much greater suspicion and more likely over turn it.  Nice try.

There are many methods available for protecting assets.  For real estate, a Florida land trust is a very effective asset protection tool.  In essence, the land trust creates a shelter of privacy and anonymity whereby the true “owner” in control of the property will not be a public record.  This is mainly a deterrent effect.  Before any potential plaintiff and her attorney would consider filing a lawsuit, the concept of “pockets” comes into play.  It’s not worthwhile to sue a judgment-proof defendant without assets to take away.  Real estate is perhaps the only common asset for which there is an easily accessible public record of ownership along with an estimate of value. 

In a land trust, the record owner of the property is the trust, either an individual or entity such as a corporate trust company.  The true de facto owner in control is the beneficiary, who may similarly be any number of individuals or entities.  The two documents comprising the land trust are the trust deed and trust agreement.  The trust deed is recorded and creates a public record of ownership in the name of the trustee.  The trust agreement, by contrast, is a private document containing the identity of the beneficiary.  The land trust is an under-utilized and economical vehicle for holding title to investment properties (though a homestead property may be owned through a land trust, it’s not recommended due to the strong homestead legal protections already in place in Florida).

Other asset protection options available include the use of corporate entities (especially limited liability companies), personal property trusts, marital property and whole and universal life insurance policies and annuities, which protect both the cash value and income streams from creditor claims. 

Asset protection is not just for the rich and crooked, as a common stereotype would imply.  All thoughtful investors should carefully consider their exposure to claims in our litigious society and asset protection strategies are invaluable in that regard.

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