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I recently met with a client whose husband passed away while owing substantial credit card and student loan debts. At the time of her husband’s death, my client and her husband had a moderate amount of cash and securities, all of which were held jointly. In Michigan, joint ownership of these types of assets by a husband and wife creates a tenancy by the entireties. The simple question my client had for me was this, “Am I responsible for paying the separate debts of my husband with this property?”
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I suppose the first question is whether creditors can reach IRA’s owned by the participant or the participant’s spouse when rolled over. Statutes in many states specificly exempt IRA’s from creditor attachment,levy and sale. In Michigan, the statute is very clear that outside of bankruptcy the IRA is exempt from the creditor’s reach. Another statute exempts IRA’s when the debtor takes advantage of the state exemption in a bankruptcy filing. Nonetheless there are examples of cases where IRA’s have been successfully attacked.
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This blog site focuses primarily on sophisticated issues in the asset protection arena. I address new developments, strategies and legal issues. However, I have never used this blog to discuss the fear, anxiety and depression that many new clients exhibit when I first meet them and how attorneys should deal with this.
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While the new Michigan Trust Code is effective April 1, 2010, it will apply to trusts created on, after or before the effective date. Thus, with limited exceptions, after April 1, 2010, all Michigan trusts will be subject to the new provisions.

We often use trusts as part of an overall strategy to provide asset protection for our clients. For example, assume we have a husband and wife and the wife has significant debts and/or contingent liabilities. We will typically have the husband create a discretionary spendthrift trust so that, upon the husband’s death, the debtor wife will be the beneficiary of a trust fund which will be outside the reach of creditors. Similarly, the wealthy parents of a debtor child will not want to simply leave the debtor child’s share to him outright knowing the inheritance may very well be grabbed by the child’s creditors. Instead the well advised couple will set up a discretionary spendthrift trust for the child.

Until the final rules were resolved, lawyers had questions regarding the differences between support and discretionary trusts and how spendthrift provisions are applied. This was particularly troublesome in planning for asset protection and being able to provide assurances to your client that their child’s creditors could not reach the assets of the trust they created. With the passage of the new Michigan Trust Code, certainty reigns.

The rule is simple. No creditor (other than the IRS) can seize your social security benefits for payment of debts. But does this mean your benefits are asset protected in all events? The good news is that for the most part your benefits are protected. A notice of levy served on the government to intercept the payments will be given no effect. However, what are the creditor’s rights if the benefits are direct deposited into a bank account? Social Security law states that the benefits cannot be reached by creditors…which is interpreted to mean the creditor cannot access the funds even after they are deposited in the recipient’s bank account. To insure maximum creditor protection, dedicate the bank account solely for receipt of social security benefits and do not commingle assets.

Unfortunately, there is a hidden danger lurking. Creditors will routinely garnish bank accounts as part of their collection procedure having no knowledge of whether the bank account contains social security benefits. When the account holder is given notice of the garnishment and advises the bank that the account consists solely of social security benefits, the bank will not turn over the assets. Indeed, if this was the end of it the system would appear to work. However, it is not the end…far from it. When the banks receive the garnishment order they immediately freeze the account.The bank often charges a processing fee for freezing the account as well as overdraft fees on checks that are bounced because the funds are frozen. The episode can add up to hundreds of dollars being taken by the bank even though the garnishment itself is ineffective.

The good news is that the US Treasury is promulgating rules to limit the fees a bank can charge under the circumstances described. Also, the banks will now be obligated to investigate whether the account has been the recipient of social security benefits within the last 45 days and, if so, will be prohibited from freezing the entire account. Perhaps something like $2,200 will remain available to the accountholder to pay her bills. While the rules will certainly improve things for debtors receiving social security, it remains an imperfect system when garnishments are ordered.

I am meeting more and more clients who are in the business of acquiring, repairing and renting out single family homes. Usually these clients specialize in either inner city properties, midlevel or highend. They learn their markets well and do not invest outside their comfort zone. I have found them to be hardworking, knowledgeable about their business and street savvy in that they have figured out how to minimize the risk of tenant defaults. They are generally successful. Even in this harsh economic environment most are thriving. I attribute this to 3 primary factors: (1) they were not highly leveraged and the cash flow easily covers operating income and debt service, (2) intense management and (3) their tenant application review procedures weed out the weaker applicants. Typically they have not engaged in any asset protection planning.

These clients come to see me because they know that without the proper structure, one catastrophic fire resulting in severe personal injuries can wipe out their entire empire. But they also know that as they have accumulated wealth they have become more vulnerable to other creditors…ones not necessarily related to the operation of the business. So they want to protect their assets from internal disasters as well as external unrelated creditor claims.

One of the recommended approaches is to segregate groups of houses aggregating to a certain value and have each group owned by a limited liability company. Depending on the extent of the client’s holdings perhaps the client ends up with 5 limited liability companies each owning 5 or 6 properties. The 5 LLC’s are all owned 100% by a multimember LLC, often owned by husband and wife, which has the strongest possible language in its operating agreement to protect against creditors including a trustee in bankruptcy. The operating LLC’s are all single member LLC’s but the parent LLC must be multimember otherwise the creditor protection sought, i.e., creditors being limited to a charging order remedy, may not be available.

An Associated Press release on November 17, 2009 reported that the U.S. government could collect billions of dollars in court-ordered restitution under a new divorce decree between imprisoned former Cendant corp chairman Walter Forbes and his wife of 27 years. This is a story about a very bad asset protection planning strategy which, not surprisingly, failed in its entirety.

What Walter apparently attempted to do, in order to avoid turning over his assets to the government pursuant to the restitution order, was to transfer his assets to his wife using the pretext of a divorce settlement. He obviously knew that he could not simply give his wife the assets because such a conveyance would undoubtedly be a classic fraudulent transfer and easily overcome by his creditors…including the U.S. government in its role as a creditor due to its right to restitution. So Walter and his wife conjured up the divorce scenario as a ruse to get the assets to her as part of a property settlement.

What the article left out but what must have been implicit in the court’s decision was a recognition that the property settlement was a subterfuge to mask a fraudulent transfer. The article noted that Walter sold the family’s nearly $6million, 11,000 square foot Connecticut mansion to his wife for $10. According to the ruling, Caren Forbes must reconvey the mansion to her ex-husband thereby permitting his creditors to seize it. There was also the matter of the 14 acre chalet-style house in Rhode Island that is likewise going back to Walter.

Given the significant number of persons I meet with who are seeking asset protection advice, I have the unique advantage of being exposed to a variety of situations and developing unique strategies to deal with them. I also have the opportunity to negotiate with different creditors, some of which are lenders while others are often trade creditors, and observe how they respond to different asset protection structures.

There is absolutely no doubt that a person who has taken the time to create some type of asset protection structure, even one that is very simplistic, is far better positioned to deal with his or her creditors than the person who has done nothing at all. While this may be self-evident, you also need to consider the creditor’s mindset. The creditor is owed money, under pressue and is faced with the spectre of having to hire legal counsel to try to get paid. The greater the obstacles faced, the more expensive the legal effort will be to collect and thus the more disposed the creditor will be to make a settlement favorable to the debtor.

There are a few simple moves that a person can make to provide a degree of asset protection. Of course, while tax factors and other issues will impact which approaches are most favorable to pursue, everyone should at least be aware of these quickies. Consider using the entireties form of ownership in states that provide for this tenancy. Interestingly, in Michigan, a husband and wife who own money market accounts through a stock broker may be more protected than if they maintain joint accounts at banks. Operate your business using a multi member limited liability company as opposed to a corporation. Your creditors will find accessing your interest in an LLC is much more difficult than levying on corporate stock. On the most simplest of levels, if one spouse is exposed to debt while the other is not, where possible assets should be titled in the name of the nondebtor spouse.

Legitimate asset protection planning is again tainted when a married couple, allegedly engaging in tax fraud, sells their fraud scheme under the guise of asset protection planning. It is a recurring theme. Schemes to hide assets offshore are frequently but incorrectly characterized as asset protection planning.

The Justice Department recently commenced a suit in the Southern District of Florida against the assumed perpetrators, Byron Denver Hatcher and his wife, Kim Reinhart, seeking to bar their presumptive criminal activities. The scheme appears to be one where the participant is advised to set up a series of trusts and corporations offshore and thereby avoid tax on the income from their lawful U.S. based businesses. It turns out that the offshore entities are mere shams and attempts to construct a subterfuge to hide the source of the income. The real business activities continue to be conducted in the U.S. and the income is clearly subject to U.S.tax.

The story is unfortunate because it links asset protection planning with a tax fraud scheme. Authentic asset protection planning does not involve hiding assets or income. To the contrary, asset protection planning is usually tax neutral with the client paying the same amount of tax he would have paid on his income had he not created the asset protection plan.

I came into the office today and noticed that overnight my fax machine had spit out a flyer addressed to Attorneys and carrying the following message: “BEFORE you accept insurance policy limits in a PI case, let us do an asset search on the driver to determine his current bank balances, his real estate holdings…” and so forth. The message was clear. Defendants cannot assume that that their judgment creditors will merely accept the maximum insurance payout. If there are assets available beyond the insurance they will go after them.

This email, obviously from some type of private investigator, demonstrates and reinforces the notion that persons with accumulated assets must consider asset protection planning as part of their estate planning and tax planning processes. I have heard too many doctors tell me that they are adequately insured and therefore can always settle within policy limits. It is simply not true and such thinking leaves them vulnerable in the event of a malpractice action.

Although perhaps more common in the case of professional malpractice, the concept is equally applicable to anyone who drives a car, operates a boat or owns a business. Being adequately insured with appropriate umbrella coverage is a must and strongly encouraged by this author. But it is not enough. Asset protection planning must be considered and, if indicated, should be implemented by an attorney with experience and background in the area.