Hardly a week goes without a call from somebody in distress, wanting an immediate consultation on asset protection. The most typical scenario involves somebody who has signed a personal guarantee, and are now worried about the guarantee being called. Or, they might have been involved in an auto accident, or a patient might be threatening to sue them for malpractice.
Sadly, I have to tell most of these folks that, at least from an asset protection viewpoint, as clients they are Dead On Arrival (D.O.A.). Their problem is that the fraudulent transfer laws operate off the concept of a "claim", which is broadly defined in Section 1 of the Uniform Fraudulent Transfer Act (UFTA) as:
(3) "Claim" means a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed,undisputed, legal, equitable, secured, or unsecured.
In other words, a "claim" is something that gives rise to liability, even if it has not matured into a demand letter, lawsuit, or a judgment. A "claim" arises under the UFTA when the auto accident happens, not when the plaintiff's attorney threatens a lawsuit. Similarly a "claim" arises under the UFTA when somebody signs a personal guarantee, not when the guarantee is finally called.
Asset Protection is pre-claim planning for those who are concerned that someday they might become liable to creditors unknown for claims unknown -- what are known as "future unknown creditors".
Asset Protection is not about protecting the assets of somebody who already has a claim pending; that is known as "defrauding creditors" unless a reserve is set aside to pay existing creditors. Typically, such a reserve will be based on the reasonable evaluation of litigation counsel as to the outside amount of the claim.
Stiffing creditors has nothing to do with legitimate Asset Protection, and vice versa. To the contrary, proper Asset Protection is most appropriately done when the client knows that he or she has no outstanding claims, i.e., the skies are perfectly clear of creditors. Asset Protection is all about avoiding fraudulent transfers, not designing and implementing them.
Unfortunately, there is no shortage of attorneys out there who are ready to improperly assist their clients with post-claim planning, not realizing (or apathetic to the fact) that they can make matters worse for clients, who if caught in a fraudulent transfer can be denied a discharge in bankruptcy, end up paying the creditor's attorneys fees to unwind the fraudulent transfer, have their exempt assets surcharged, etc., almost always without warning their clients of these potential downsides.
But the point is that when one is evaluating a client for asset protection planning, a determination must be made whether the client has any known claims or not. If so, and if the client is not able or willing to post a reserve against the claim, then asset protection planning should not go forward -- the client should wait until the skies are clear to begin planning.
General rules being generally inapplicable, the exception to post-claim planning involves exemption planning. Even if a client has a claim, the client can normally engage in exemption planning by doing such things as paying down mortgages (thus increasing the amount of equity in the property that would be protected by homestead), and the like -- with the caution that some states have "fraudulent conversion" laws that remedy the conversion of a non-exempt asset such as cash into an exempt asset, and some types of post-claim transfers into exempt plans may still be fraudulent transfers.
But more often than not, clients with significant claims are DOA when it comes to asset protection planning, and a planner's duty is to advise the clients of that and not to cherry-coat it, or make things worse by assisting the client with fraudulent transfers to try to defeat the creditor.
This article at http://onforb.es/WBVO8p and http://goo.gl/9VXFj
