Asset Protection Part 2
By: Christopher L. Rogan, Esq.
In the July edition of FJY's QuarterlyNewsletter, asset protection was defined and the need for asset protection bythose of modest wealth - not just high rollers and bankrupt deadbeats - wasdiscussed. Despite claims to thecontrary, asset protection strategies can not guarantee that all of one'sproperty will be completely removed from the reach of creditors. Rather, the goal of asset protection isto create as much distance as is reasonably (and legally) possible betweenone's assets and his or her creditors or potential creditors. The importance of timing in structuringand implementing an asset protection plan was also addressed. We will now explore several offundamental considerations of effective asset protection.
Appropriate asset protectionplanning depends on a number of factors, including marital status, the natureand extent of the individual's assets, financial and legal exposure and risktolerance and estate and tax planning needs and goals.
The first step is to ensure thatassets are titled and liabilities incurred so as to minimize or eliminateexposure to creditors' claims. For(happily) married couples, this typically means that assets should be heldjointly and liabilities should be incurred individually. In states that recognize the Tenants bythe Entireties form of ownership (commonly referred to as "T by E" or "T/E"), spousesshould title and hold as many assets as possible as T by E. It is generally understood that realestate - including homes, vacation properties, rental units and otherinvestment properties - may be held as Tenants by the Entireties property. However, many states now allow personalproperty, such as bank accounts, automobiles, antiques and other valuable collections,as well as stock and other intangible assets, to be owned and protected as T byE property. Assets so titled are generallynot subject to claims of individualcreditors of either spouse. Hence,a judgment creditor with a claim against only one spouse is not able to reachor attach the marital home, bank accounts or any other T by E assets. Tenants by the Entireties propertiescan, however, be reached by joint creditors, and (not surprisingly) theIRS, even when the tax liability is that of only one spouse.
As with all aspects of assetprotection, timing is everything when titling or re-titling properties andshould be accomplished before assetprotection is deemed "necessary." Transfers of property from one spouse to both (by re-titling as T by E),are subject to the fraudulent conveyance rules and potential avoidance ifundertaken after a particular liability is incurred. However, even if the timing is less than ideal and there-titling does not create a bullet-proof shield, it may provide the some protectionand the time necessary to negotiate a settlement of a claim, to the extent suchever becomes necessary. At thesame time, a clearly fraudulent transfer can serve as a basis for the denial ofa discharge in a subsequent bankruptcy, and should therefore be carefullyconsidered.
Unintended liabilities, such asthose arising out of auto accidents or other personal injury claims, aregenerally unanticipated and, therefore, difficult to plan for or around. Contract and other businessobligations, on the other hand, can and should be more carefully structured soas to prevent joint liability wherever possible. For example, a spouse who is not involved in the operationor management of the business should not be included on bank loans, vendorguarantees or other liabilities of the business. In addition, while the equityof the business may (and in most cases should) be held jointly by both spouses,the businessperson's spouse should not serve as an officer or director of thebusiness. Likewise, personal debtsand obligations, such as credit cards, auto loans, etc., should be incurred inthe individual spouse's name where joint credit is not absolutely required.
For those in business, assetprotection initially focuses on the need to separate business debts andobligations from one's personal assets and portfolio. Establishing a corporation or limited liability company isthe first and most critical component of ensuring that such separation isaccomplished. By incorporating orforming an LLC, a separate legal entity is created - an entity capable oftransacting business, incurring debt, suing and being sued, all independentfrom the company's owners. Principals (including shareholders, officers and directors) of aproperly formed and maintained company are generally not liable for the debtsand obligations of the company (as opposed to partners in a general partnershipand sole proprietors who are personally liable for the debts of the business). However, the protection offered by acorporation or LLC can be undermined through the execution of personalguarantees and through other conduct that allows creditors of the company to "piercethe corporate veil" and pursue the principals directly. The protection can also be lost if thecorporate standing of the entity is not properly maintained, or the companyconducts business in a state other than the state(s) in which it is organizedor authorized to transact business.
Asset protection must also takeinto consideration various other aspects of an individual's personal and legalsituation, including tax, estate planning and matrimonial goals. While it may be possible to satisfy allcompeting objectives, more often than not, the individual will be required to identifypriorities that will then inform the asset protection, tax and estate plans andthe interrelationship between such plans. In other words, the individual will need to decide whether assetsprotection is more or less important than his or her estate planning goalsand/or the minimization of tax liabilities. For example, from an estate planning perspective, it may notbe the most advantageous approach for a couple to hold all assets as Tenants bythe Entireties, especially where trusts have been established and must befunded in a particular manner to maximize estate tax exemptions. Although in Virginia, T by E propertymay be conveyed into a revocable trust for estate planning purposes and stillmaintain the T by E status and protection, as discussed above, the property isnot exempt from the claims of jointcreditors. To the extent thecouple wishes to achieve a greater level of asset protection, they could conveythe property into an irrevocable family trust. However, with the increased levelof protection comes a significant loss of control over the transferred assetand may affect other estate planning goals and tax attributes.
Finally, asset protection, likeestate and tax planning, can not be effectively accomplished through theapplication of a one-size-fits-all formula. Instead, whether you are a high-roller or a bankruptdeadbeat, or gratefully find yourself somewhere in between, asset protection issomething that should be carefully considered and tailored to your personalsituation and needs. And, just aswith the best estate and tax plans, asset protection plans should be reviewedand updated as appropriate to account for changes in one's life and goals andapplicable law.
Christopher L. Rogan, Esq. is an attorney with the law firm of CampbellMiller Zimmerman, P.C., located in Leesburg, Virginia. The information provided in thisarticle is general in nature and is not intended nor provided as legal adviceand should not be relied upon as such or utilized as a substitute forprofessional service and advice in specific situations.