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Experts: Timing is critical when looking at asset protection

May 20 2015

Article written for:  BizJournals.com

Effective asset protection requires the strategic use of several legal components. These include the transfer of assets to protective structures (such as limited liability companies and trusts), proper allocation of legally protected assets, insurance and proper titling of assets to maximize legal exemptions from claims. Proper structuring insulates assets against claims from future, unknown creditors.

Timing is critical — this cannot be overstated. An effective plan must be implemented before clouds form. Existing and expected liabilities are not avoidable. Reactionary transfers — made to avoid liability — may be reversed and could entwine others in litigation, including recipients and professional advisers.

Take, for example, one client who owned and operated several successful franchises in Florida. Despite his financial success, animosity existed for several years between the franchisor and franchisee, culminating in non-renewal of the franchise agreements. A disagreement over termination and final accounting ultimately led to a lawsuit in the franchisor’s home state where the court entered a judgment against the client for over $1.6 million. Personal planning initiated prior to the lawsuit proved effective and the judgment was settled for less than 10 cents to the dollar.

How is this possible? For one, the client owned very few assets in his own name. He was married and most personal assets were properly titled to maximize the benefits of marital ownership. His several real estate holdings were generally owned in protective structures such as multimember LLCs with various partners, sometimes in a parent-subsidiary relationship.

Cash and other liquid assets were held in entities designed to make maximum use of business entity laws in the state of formation. Business operations were structured to make best use of income exemptions. The end result is that the client owned very little personal assets available to satisfy the judgment. Nothing was hidden from the creditor. In fact, settlement talks picked up steam after we disclosed the client’s organizational chart to the creditor’s attorney. With no exposed assets, the creditor’s recovery was limited to whatever the client was willing to offer to resolve the matter. Effective asset protection planning promotes favorable settlements.

Consider the result if the client had waited until the beginning of the lawsuit or after entry of the judgment to engage in asset protection planning. Most states’ laws permit creditors to reach otherwise protected assets which are the subject of a “fraudulent transfer.” These laws permit suit against both the debtor and the recipient of the transfer and empower creditors to reach assets intended to be transferred outside their grasp. Some states may even allow claims against third-party professionals involved in the transfer.

There have been cases in Florida, for example, where banks, financial advisers and lawyers have been sued in connection with a fraudulent transfer. Regardless of the end result, being named in a lawsuit is never a good thing.

In our case study, had the client waited until being sued to initiate planning, any protective transfers or re-titling of assets may have exposed the client and others involved to a separate fraudulent transfer lawsuit to unwind the transfer. Business partners, the client’s spouse, attorneys and any other professional advisers involved in the transfer also may have been dragged into the lawsuit.

Creditors can prove a fraudulent transfer by showing actual or constructive intent to hinder collection.

If a client seeks asset protection advice or involves a financial adviser in a potentially fraudulent transfer, the adviser must understand the limits and potential pitfalls. Asset protection involves several legal and financial components which, if not properly negotiated, can have potentially devastating legal ramifications. When a client seeks asset protection, always consider the implications of fraudulent transfers.
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Gary & Eric

Co Authors 
Gary Forster & Eric C. Boughman

Gary is the author of two books. In 2013, he wrote Asset Protection for Professionals, Entrepreneurs and Investors, a guide to asset protection strategies for clients and their financial advisors, now in its second edition. This year Gary finished the first edition of The U.S. Estate and Gift Tax and the Non-Citizen. This new book explains how resident and non-resident foreign nationals are impacted by the U.S. Estate and Gift Tax.

Eric also volunteers as a Guardian ad Litem with the Orange County Legal Aid Society. He is rated AV – Preeminent by Martindale-Hubbell and regularly publishes articles and makes presentations in the areas of asset protection and real estate law.

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