It is remarkable how the asset protection industry has so rapidly expanded in the last couple of years. This is primarily due to two factors.
First, the "Great Recession" again reminded folks that making money is only half the equation to become wealthy, with the other half of the equation being to retain one's gains (which is what wealth preservation, commonly called "asset protection", is all about). Oh, and land in Southern California and Southern Florida is not so limited that it can never go down significantly in value, as probably a hundred thousand physicians who got into real estate deals in Temecula or the Biscayne Bay so painfully discovered.
Second, the "fiscal cliff" legislation enacted at the end of 2002 raised the individual estate tax exemption to in excess of $5 million, which overnight killed off estate tax planning for all but a few top tax planners. Thus, beginning in 2013, many estate planners started hanging out asset protection shingles, many CPA and financial planning firms started advising on asset protection issues (how they accomplish this without crossing the line into the Unauthorized Practice of Law remains an unanswered mystery), and thereby capacity (read: marketing) created increased demand -- the asset protection variation of "If you build it, they will come".
Whatever the cause, asset protection planning is no longer the exclusive domain of the small and clubby handful of planners who all knew each other, and could easily share news by passing e-mails around. Asset protection today is a significant industry all of its own, and likely employs tens-of-thousands of professionals, supporting staffers, and service providers.
Whether the quality of planning has kept up is quite another matter, as we see in some of the court opinions that came down in 2014. What is clear is that there is now a steady stream of important court opinions coming out that require serious consideration, and I can only hope that I have covered most of them below.
CREDITOR-DEBTOR LAW GENERALLY
Most of the time, creditor-debtor law is boringly mundane. But every now and then, an interesting oddity appears that relies upon some ancient Writ, such as A Wedding And The Writ Of Ne Exeat Republica (2/6). Then there are the debtors who overtly flaunt the authority of the Court and come to grief, as the debtor in Doctor Tries To Cheat Ex-Wife And Impossibility Defense Flops Again In Hissa (4/21)
BANKRUPTCY
2014 was a year for two significant rulings from the U.S. Supreme Court regarding bankruptcy issues that impact asset protection planning, the most notable being Inherited IRA Not Exempt From Creditors In Bankruptcy, Says Sotomayor (6/12). This ruling caused a flurry of activity within the asset protecting planning bar, as planners began considering how to best use trusts to protect Inherited IRA funds from the creditors of the owner's heirs.
But not to be overlook was another very important ruling where Scalia Throws Bankruptcy Surcharging To The Mat (3/6), by holding that there is no statutory authority for a bankruptcy court to take away some exempt assets of a debtor because the debtor has attempted to hide other non-exempt assets. This does not mean that the Trustee is out-of-luck in dealing with a slippery debtor, as demonstrated by Hiding Income In Company Nixes Discharges In Hiett (10/23).
What happens if there are two competing bankruptcies? This sometimes happens when a company goes bankrupt, and a fraudulent transfer lawsuit is filed against an officer for taking money out of the company -- and then who himself goes bankrupt to try to block the first action. The answer is that the first bankruptcy can go ahead, as we found out in Third Circuit Resolves Competing Bankruptcy Estates In Allen (9/28).
Moving towards the lower end of the strategy spectrum, it is lore that one can just hide cash from creditors, and there is little the creditor can do about this. "Just tell them that you lost the money at the casino!", some planners will say. Of course, bankruptcy judges hear debtors make those claims almost every day, and sometimes a decision will make its way into the reported cases, such as The ‘I Lost It At The Casino’ Defense Fails Again In Tate (5/26).
Finally, to assist planners in understanding the basics of bankruptcy as they relate to asset protection planning, see Bankruptcy Considerations In Asset Protection Planning (12/21).
ENTITIES
There was a lot of important activity in 2014 regarding charging orders. One of the most interesting was the application of Connecticut law to charging orders against a debtor's interest in out-of-state entities. This extended the growing body of case law which posits that the local law of the forum where the judgment is being enforced is applied to charging orders, and not the law of the state where the LLC (or partnership) is formed. See Connecticut Court Shanghais Out-Of-State LLCs With Charging Orders (2/27).
In bankruptcy, a court affirmed the power of a Trustee to liquidate a debtor's professional interest in an LLC, against the debtor's objection that the Trustee wasn't qualified under state law to own the interest, see Albright Relief Applied To Personal Services LLC In Re Cleveland (10/6).
What happens if a charging order is issued against an LLC or partnership, and the LLC or partnership makes a distribution directly to the debtor anyway? That question was answered in Charging Orders And The Contemptuous Partnership (1/30), where the partnership whose interest was subject to a charging order was held in contempt, and had to pay the creditor even though it had already paid the debtor.
Similarly, what if the creditor and debtor are both members of the LLC? We learned in The Charging Order Is Wear It’s At, LLC, In Intra-Member Dispute (6/21), that, unless the Operating Agreement provides to the contrary (and it should), the creditor/member is restricted to a charging order against the debtor/member.
Perhaps the most important case of the year in this area was Denman Creates Confusion For Bankrupt Debtor's Interest In LLC (12/19), where a Bankruptcy Court held that the Operating Agreement of a Tennessee LLC was not an "agreement" for purposes of Bankruptcy Code 365, such that the Trustee could take all the good (the debtor/member's rights) without any of the bad (the debtor/member's obligations). This opinion will likely generate substantial controversy well into 2015.
Some promoters hold Wyoming LLCs out as having special protections. But in Single-Member LLC's Veil Pierced In Greenhunter (12/1), the Wyoming Supreme Court held that a company could not use an LLC that was little more than a shell to cheat creditors, despite Wyoming's liberal pro-debtor LLC statute.
Before leaving LLCs, it should be mentioned that the Uniform Law Commission has enabled a drafting committee (to which Yours Truly is an American Bar Association Advisor) to propose a new Uniform Series of Unincorporated Business Entities (a/k/a the Uniform Series LLC Act). This proposed uniform legislation (scheduled for completion by July, 2016) creates many difficult issues, as at The Series LLC And The Plight Of Unsecured Creditors (6/15).
Finally, it is rare that corporations generate much new law, for the simple reason that they have been around seemingly forever. Substantial and well-established case law has developed for corporations, and it seems there are almost no unanswered issues -- until a case like Florida Says No Turnover Orders Against Foreign Assets In Sargent (4/12), comes along with a remarkable ruling that basically said that the Florida courts cannot take action against a Florida debtor to force the repatriation of an offshore corporation's assets. Ironically, this pro-debtor decision has received its greatest criticism from the Florida asset protection bar, for the reason that it makes asset protection too easy in the Sunshine State, since a debtor could just secret money in an offshore corporation and thumb her nose at creditors there -- between Florida's uber-liberal exemptions and the Sargent opinion, it would be difficult to see how a Florida resident could not obtain substantial asset protection in Florida for a couple of thousand bucks (at least so long as Sargent stands).
ETHICS
In a couple of professional ethics opinions, Attorney Suspended For Violating Attachment Order In Benson (6/18), and Iowa Attorney Narrowly Dodges Bar Complaint For Murderer's Fraudulent Transfers (3/31), we again saw that when an attorney attempts to aid a client in financial distress, the attorney has stepped out onto the ethical thin ice and put their bar card in jeopardy.
FRAUDULENT, ER, VOIDABLE TRANSFERS
Just as 2005 is remembered for the pro-creditors reforms to the Bankruptcy Code, 2014 will be remember as the year that the Uniform Law Commission adopted its first revisions to the Uniform Fraudulent Transfer Act, now retitled the Uniform Voidable Transaction Act (UVTA).
The name change was not a mere formality, but was meant to correct many cases where courts have wrongly focused on the fraud letters "f-r-a-u-d" to reach crazy results in creditor-debtor cases that didn't involve any misrepresentation, see The Uniform Voidable Transaction Act – What’s With The Name Change? (7/18). But the UVTA didn't start out with that intention, but with the more modest goal described in The Uniform Voidable Transaction Act and Conflict of Laws (7/22). Along the way, the UVTA likewise corrected some procedural litigation issues, see The Uniform Voidable Transaction Act And The Shifting Of Burdens (7/27). Finally, to address the proliferation of Series LLC acts among the states, rules were adopted for this purpose, see The Uniform Voidable Transaction Act – New Section 11 and Series LLCs (8/31).
The flood of fraudulent transfer cases following the Great Recession continued into 2014, though finally towards the end of the year showing signs of easing up. In Attorney's Time Slips Slip Up Post-Judgment Attempts To Defraud Creditors In Frankel (1/18), we saw that once again the mere mention of the phrase "asset protection" can have disastrous results for debtors and transferees, even in debtor-friendly Florida. We also saw the California courts continuing to hand out punitive damage awards like candy in fraudulent transfer cases, as in The $867 Dispute Becomes An $883,654 Judgment In Ravet (1/22).
Meanwhile, debtors kept trying inventive ways to defeat creditors, and the creditors kept successfully using the fraudulent transfer laws to pierce these schemes, for instance Dilution Of Corporate Stock As A Fraudulent Transfer In Antonello (10/9).
We also saw a number of useful opinions that considered the issue of reasonably equivalent value, such as in Living Expenses Of No Utility To Creditors In Schlussel (10/26) and Positive Health Of The Fraudulent Transferee's Good Faith Defense (11/18).
Finally, planners are often faced with questions from their clients: "I have creditors, so can I still make gifts?" The general rules for when debtors can and cannot make gifts are described in The Insolvent Debtor - Are Charity And Family Gifts Still Possible? (11/1).
TRUSTS
2014 was a landmark year for asset protection trusts, mainly because an offshore trust for the first time actually won in exactly the way that it was theorized that such a trust should win, see Foreign Asset Protection Trust Scores A Victory In Bellinger (5/31). Granted, the creditor's attorney make a lot of mistakes and tried to get contempt to quickly. Granted, the failures of offshore trusts versus the successes of offshore trusts in the reported court cases are still something on the order of 1:10. Still, a win is a win, and Bellinger will likely create some renewed interest in offshore trusts.
While Bellinger was a good decision for the settlor/beneficiary of offshore trusts, the offshore trust companies weren't having as good a year, see AsiaTrust Gets Hauled Into The California Courts (2/25)
As for the on-shore counterpart of offshore trusts, being the Domestic Asset Protection Trust, at least 2014 wasn't a bad year, as the two previous years had been (when Mortensen and Huber were decided). Here, let me quote Gideon Rothschild's year-end summary on the topic:
Yet, perhaps the one most sought after development continues to elude me-that of the court's acceptance of self-settled trusts. Since 1997, when Alaska became the first state to enact asset protection trust legislation, I've yet to read a court decision that respects these laws when there's no evidence of a "voidable transfer" . . ..
Another bad sign for DAPTs came in the area of Dynasty Trusts, see Delaware Anti-Suit Injunction Nixed As To Dynasty Trust In Kloiber (8/18).
The Bankruptcy Courts continued in 2014 to expand the application of Bankruptcy Code section 548(e), which takes aim at all self-settled trusts, see Trust Beneficiary Checkmated By Bankruptcy Code 548(e) In Castellano (8/11).
But even ordinary, plain-Jane trusts had their share of difficulties in 2014. Of these, the most notable was Power of Appointment Causes Bankruptcy Estate Inclusion in Behan (8/23), which should make any planner seriously re-think their how their spendthrift provisions and trust termination provisions are drafted.
One of the most interesting trust cases of 2014 did not involve an asset protection trust, but rather a Mexican land trust, in a bankruptcy case that reads like the script of a B-movie, see Collection South Of The Border Against Seashore Village Held In Fideicomiso Trust (7/2).
SCAMS
If anything is constant in the planning world, it is the fact of scams, and 2014 was no different. Those utterly worthless $5,000 kits pitched mostly to naive physicians? Still selling, as described at The Asset Protection Kit Scam Continues To Lure Suckers (5/3). But there are more sophisticated scams out there that seek even bigger dollars from more wealthy clients: Beware The Estate Planning Aggregators And Their Planning Blueprints (11/12).
New industries create new opportunities for wealth creation, and among scam artists too. Everybody wants to get in on the "new green", but caution is advised, see Weed Investments Go Up In Smoke, Says SEC (9/17). Bitcoin has been around for a few years now, but a currency that doesn't physically exist presents a very tempting target for fraud artists, as at Bitcoin Savings & Trust Comes Up $40 Million Short On The Trust Part (9/24).
On the offshore tax shelter front, 2014 saw a tide of cases involving offshore banks that were variously either coming clean and giving up their client lists, entering into deferred prosecution agreements and paying big fines, and occasionally being indicted. One offshore financial firm that made big business by selling sophisticated deals to wealthy Americanos came clean: SwissPartner’s Offshore Life Insurance Deal Finally Falls To Earth (5/16).
CAPTIVE INSURANCE
While individuals largely use trusts and LLCs for asset protection planning, significant companies now facilitate their enterprise risk management primarily through the use of captive insurance arrangements. Thus, any asset protection summary would be incomplete if it omitted key developments in that field.
Two things happened with captives in 2014. First, a large corporate captive continued the industry's long winning streak against the IRS in Rent-A-Center Creates A Captive Insurance Legacy In Tax Court (2/21), wherein a solid majority U.S. Tax Court admitted that it will no longer attempt to follow the "economic family theory", which the IRS itself abandoned in 2002.
Second, the IRS started carrying through with its 2013 indications that it would start to focus on smaller captive arrangements that fulfill no true risk management function, but instead are little more than thinly-disguised tax shelters. The IRS's actions were important enough to require no less than four articles this year, being IRS Noose Starting To Tighten On Sham Risk Pools (3/17), The IRS Discloses The 953(d)+ Trapdoor For Offshore Captives (3/27), Life Insurance and the 831(b)+ Captive Insurance Company – Wait For The Test Case Before Signing Up (4/20), and -- most importantly -- IRS Launches Promoter Audits Of Captive Managers Suspected Of Abusive Practices (9/18).
MISCELLANEOUS
Some good year-end advice that is just as appropriate now as it was last year: It's Time To Change Your Passwords And Here's How (1/5).
Finally, I was very saddened to hear that Barry Engel has been battling cancer. For all you newbies to asset protection planning, Barry Engel is and always had been the one true Father of Asset Protection who single-handedly started the industry in the late 1980s. As a cancer survivor myself, my very best wishes go out to Barry and his family in this difficult time.
This article at http://onforb.es/1y98nwn and http://goo.gl/P0LufP
