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One of the most difficult issues facing a Michigan asset protection lawyer is how to help a client who is already in severe financial distress with banks and other creditors breathing down her neck. We all know that any tranfers made with the intent to delay, hinder or defraud the creditor will be a fraudulent transfer subject to the remedies of the Fraudulent Transfer Act. Are there any techniques that can be used at this stage that will provide asset protection to the debtor but avoid or at least withstand a fraudulent transfer challenge. A couple of lawyers in Boston believe so and this author agrees with them.

Alexander Bove and Melissa Langa assert in their June 2009 article appearing in Trusts & Estates Magazine that a post-nuptial agreement may provide a solution. It is suggested that a debtor spouse can transfer assets to a non-debtor spouse in consideration of the non-debtor spouse entering into a post-nuptial agreement provided there is adequate consideration and the post-nuptial agreement otherwise conforms to the requirements of state law. Their premise is that marital rights accrue and gradually vest over the course of the marriage and there is no reason the couple cannot agree to formally acknowledge the existence of those rights and transfer property to reflect their actual legal interests. Perhaps it is best understood if you consider a 25 year marriage where significantly all of the assets, which were generated during the marriage, are titled in the name of the debtor spouse. It is well accepted that a long-term marriage such as this one would entitle each spouse to 1/2 of the marital estate in the event of a divorce. If such is the case, why shouldn’t they be able to effect a transfer of assets to reflect this legal reality.

Certainly an aggrieved creditor will claim the transfer was a fraudulent transfer and that it was made with the intent to defraud the creditor. However, a transfer for fair consideration is not a fraudulent transfer. Moreover, a transfer which merely reflects or confirms the existing rights of the parties in and to the property also may not be a fraudulent transfer. And so the question becomes whether these arguments will defuse an aggressive creditor. While each case is different it is fair to conclude that the post-nuptial agreement and accompanying asset transfer will certainly pose an obstacle for the creditor and an opportunity to negotiate a settlement for less than the full amount of the claim…one of the goals of asset protection planning.

Historically, the vast majority of our asset protection planning clients have been business owners, real estate developers and professionals such as doctors and corporate executives. However, a recent trend has developed in which corporations have also been looking to benefit from asset protection planning in order to better position both themselves and their owners in this volatile economic climate. In the typical situation, a corporation has substantial cash on hand. The concern is that unexpected claims can expose this asset to the company’s creditors.

Through contact with several of our sources in Delaware, including both attorneys and several Delaware trust companies, we have learned that a corporation can protect assets from creditors through a trust created under the terms of the Delaware Statutory Trust Act. A Delaware statutory trust, which is considered a separate legal entity apart from its beneficial owners and trustees, may carry on any lawful business purpose or objective.

Delaware statutory trusts have been utilized by corporations for various transactions in which they wish to limit their exposure or liability. However, the Delaware statutory trust also provides a methodology for a corporation, as the beneficial owner of the statutory trust, to insulate the assets of the statutory trust from the creditors of the corporation itself.

Physicians have historically been concerned that if a malpractice judgment is obtained against them for more than their malpractice insurance coverage, their personal assets are subject to seizure by their creditors. For sure, the asset protection industry grew and evolved from its earliest attempts to protect their doctor clients assets in the event of a catastrophic claim. Now an insurance company is offering a product which attempts to provide insurance to cover a portion of the judgment in excess of the physician’s malpractice limit. It is called aptly enough “Asset Protection Insurance.”

The policy is written to indemnify the doctor’s spouse for the spouse’s loss. You might ask, what loss does the spouse have if the doctor spouse has a nasty malpractice hit. According to the literature provided by the agent, the spouse has an “insurable interest” in the assets of the doctor and can be so indemnified. To qualify to obtain this insurance there must be a malpractice policy covering the doctor spouse and the face amount of the Asset Protection Insurance cannot exceed the limits on the malpractice insurance. Why not just purchase more malpractice insurance coverage? According to the agent it is much less expensive to buy this insurance than the added malpractice coverage. This author has spoken with and obtained sales material from the agent but has performed no further due diligence or investigation. If interested you should contact Martin Beitler at rpines@aminsure.com.

Asset protection lawyers are often asked whether social security benefits and other similar entitlements such as IRA and pension distributions, workers compensation proceeds, SSI, Railroad Retirement Benefits and so forth are protected from their creditors’ claims. The answer is both simple and complex.

In virtually all of these situations, creditors of the recipient cannot execute against, garnish, seize or levy the benefits as they are paid. In the usual case the funds are electronically transferred to the recipient’s bank account. So far so good. The funds cannot be grabbed by the creditor. However what happens after the funds hit your bank account? Can the creditor access them at such time? Perhaps, depending upon the nature of the benefit.

Social security benefits, if paid into the recipient’s separate account, cannot be reached by creditors even after the money is received. Pension plan benefits on the other hand can be reached by creditors after it hits the recipient’s account. The reasoning behind the distinction is that the Social security law specifically states that the moneys paid to recipients cannot be reached by creditors. Pension law says that the right to receive the benefit is protected from creditors but not the actual monies received. Michigan court rules on garnishment have recently been changed to give banks guidance on how to handle garnishments from accounts holding social security and similar payments. The objective is to protect the recipients from having their deposited social security payments taken by their creditors. A key to protecting the funds–there should be a separate segregated account created solely for your social security benefits. Nothing else should go in it and the account should be in the name of the recipient only.

This title is taken from a recent Wall Street Journal article about a hedge-fund mogul who is facing civil charges brought by the SEC for defrauding investors of $300 million. He has been reduced to representing himself because the judge in the case refused to free up money to allow him to hire a lawyer. There is always a conflict between prosecutors seeking to block the use of defendant’s funds which they claim were illegally obtained and the defendant’s use of the funds to hire counsel. However the US Supreme Court has ruled that funds in the possession of a defendant, frozen because they were illegally obtained and as a result defendant is prevented from hiring a lawyer of his choice, does not violate the Sixth Amendment’s right to counsel. What does all of this have to do with asset protection planning? Had the defendant established a domestic asset protection trust in conformance with the law of Delaware, Alaska, Rhode Island or one of the other states that have adopted self-settled trust legislation, funds would be available to pay for lawyers as well as all living expenses. Now this article is not intended to suggest that criminals about to embark upon illegal activity should be afforded the opportunity to use these types of trusts or that lawyers should assist them. Instead I am thinking about persons in high profile positions, CEO’s, bank presidents, and other financial industry higher-ups, many of whom may face claims because of the current lynch mob mentality, but who acted in good faith and without any criminal intent. They too risk their assets being frozen by some zealous prosecutor and an unsympathetic judge. It is this group of people and other industry leaders that should be vigilant in protecting their personal assets and in providing a nest egg free from creditor claims so that if and when the climate changes for them and somehow, unexpectedly, they find themselves the victim they will not be left penniless and without resources to fight.

In this era of failed real estate projects, defaulting loans and creditors pursuing guaranties, a frequent inquiry is about the rights of creditors to reach a joint federal income tax refund due the debtor and his or her spouse. This is a very critical issue since so many debtors generated large net operating losses in 2008 which they can now carry back to prior years. Because these debtors paid substantial taxes in those prior years a refund, often substantial, is due the debtor and his spouse. The law will differ depending upon the debtor’s state of residency but in Michigan once a joint federal income tax refund check is issued to husband and wife it will constitute an “evidence of indebtedness” and be protected from the creditors of just one spouse the same as entireties property. MCL557.151; Probert, 482 Mich. 858 (2008). But this is not the end of the story. What if the creditor garnishes the IRS prior to the IRS issuing the check–that is the garnishment is served after the return is filed and while it is being processed but prior to check issuance? In the case of Jahn v. Regan, 584 F. Supp. 399 (E.D.Mich. 1984), a tax overpayment that had not ripened into a refund check was not considered to fall within the ambit of MCL557.151 and therefore the debtor’s interest in the overpayment was reachable by his separate creditors. Strategies exist to protect against this possibility but practitioners need to be aware of the issues and plan accordingly.

We read so much about sophisticated asset protection planning strategies….offshore trusts, domestic asset protection trusts, limited liability company charging orders and so forth. Just read my blog, I’m as guilty as the next about discussing these items. But sometimes the issue facing our client is very mundane and in your face–namely, how do I protect the items in my home. Here we are talking about household items, keepsakes, memorabilia, jewelry, art and the like. Few people know the rules. Still fewer advise their clients properly. Let’s say you are at the stage where all planning to shift ownership has been completed and for whatever reason title to the tangible property in the home remains in the debtor. What do you tell your client when the collection man commeth? In Michigan us asset protection planners have a great answer. We should be telling our clients not to let the Sheriff in. Even with a proper Writ of Execution, in Michigan according to our Supreme Court, an officer seeking a judgment debtor’s property for purpose of making a levy has no right to force an entrance through the outer door to the debtor’s home. However, once he is lawfully admitted to the home he can use reasonable force to get through the inner doors and take what property is subject to the levy. SO MAKE SURE YOUR DEBTOR CLIENT UNDERSTANDS–DO NOT VOLUNTARILY LET THE SHERIFF IN. IF HE FORCES HIS WAY IN IT WILL BE UNLAWFUL AND HE WILL NEED TO RETURN YOUR GOODS.

My good friend and a great collection lawyer, Gary Nitzkin (Michigan Collection Lawyer Blawg), sometimes shares his secrets with me. He will send the Sheriff to the home of an unknowing debtor who will let the Sheriff in. Once inside the Sheriff begins gathering the debtor’s prized personal possessions. Before long the Sheriff is on the phone to Gary explaining that the debtor is ready to pay. But this need not happen if you-DON’T LET THE SHERIFF IN!!

Asset protection planners and their Michigan clients have just been given a new gift. For many years the Michigan law provided that certain types of designated personal property, for instance stocks and bonds (and now brokerage accounts per applicable case law), if held as tenants by the entireties, is subject to the protections afforded like ownership of real estate. Therefore, if a husband and wife owns IBM stock as entireties property the creditors of only the wife cannot reach her interest in the stock. Similar rules apply to real estate owned in the entireties in Michigan. The problem was how to make sure such personal property was titled in the entireties and not jointly. Most banks and brokerage houses make it difficult to open an account in the entireties…they would tell our clients that joint ownership means the same thing. Now the Supreme Court of Michigan in Zavradinos, 482 Mich. 858 (2008), has decided that there is a statutory presumption that certain specified personal property held as joint tenants by a husband and wife is deemed property held by the entireties and protected from the creditors of one spouse…even if the account is followed by the designation “JTWROS.”

Anyone with modest knowledge about entireties property knows, and this should include all asset protection planners, that the creditors of only one of the spouses cannot reach their entireties property. There are exceptions of course. Fraudulently transferring property into the T/E format doesn’t work and the IRS can reach the debtor’s interest in T/E property. But for the most part the technique works. Divorce and death though can be hazardous in more ways than one.

So here is today’s news. We can now be comfortable that outside of bankruptcy a debtor spouse can convey his or her interest in T/E property to the non-debtor spouse without such transfer constituting a fraudulent transfer. Estes v. Titus, 481 Mich. 573 (2008). What’s odd is why this is even an issue. Common sense tells us if the debtor spouse’s interest in T/E property is exempt from the reach of his creditors how could his transfer of that interest to his wife ever constitute a fraudulent transfer. Such conclusion is clearly the result of the “no harm-no foul” analysis.

A different rule seems to apply in bankruptcy where the “no harm no foul” analysis has previously been rejected. In Matter of Wickstrom, 113 B.R. 339 (1990), the Court decided in what this author believes is a very strained analysis that a trustee is not prohibited from seeking to recover, as a preferential transfer or a fraudulent conveyance (now a fraudulent transfer), transfers of entireties property owned by a debtor and nondebtor married couple to a third party. Perhaps Wickstrom would be decided differently today in light of Estes if the Bankruptcy Court looks to State law as it is required to do.

Clients who have substantial debts, but where bankruptcy won’t help, are always asking me how they can start a new business, generate income and try to rebuild wealth when all such efforts will inevitably inure to their creditors. No one wants to work for nothing and surely there is little incentive to commit to a new business venture only to know that the fruits of your labor will benefit your creditors rather than your family. Such clients inevitably suggest that their spouse or adult children will form a new entity and client will work for such entity at ridiculously low compensation levels. In this manner they figure, any income will be retained by the new entity which has no obligation to client’s creditors. But nothing is this simple. Indeed, the creditors will claim that the entity is a sham and the mere alter ego, nominee or agent of the client. Their argument will be based upon the fact that the new entity was minimally capitalized, that the owner had little or no experience in the business, that client was really the sole motivating force in generating the income and that the lack of paying fair compensation to the client is indicative of the sham nature of the entire transaction. Indeed, I believe the creditors win this argument hands down every time. So what does one do to create a defensible structure given these concerns? Essentially they must do the opposite of what the example above describes. The entity should be adequately capitalized. It should not be a “one person show” with the sole worker being debtor client. Instead, there should be multiple employees and the enterprise must be run as a real business. Owner should be active to greatest extent possible. Courts will look to the background, expertise and experience of owner to see if the structure makes sense so owner should play to her strengths. Her role should be geared to her background and capabilities. Also, don’t pay client menial wages–they have to be defensible and reasonable. With these guidelines client and his family will have a reasonable shot at building a business that will not be vulnerable to his creditors. Good Luck!!

CAVEAT-THE FOREGOING IS A DISCUSSION OF ISSUES ONLY AND NOT INTENDED AS LEGAL ADVICE. NO ONE SHOULD RELY ON THE FOREGOING WITHOUT SEEKING LEGAL ADVICE FROM A LICENSED ATTORNEY.