It began coming into prominence in the late 1980s, with the advent and the marketing of offshore asset protection trusts. Depending on the creditor's intelligence and aggressiveness, timing, the debtor's risk-tolerance and other factors, the strategies discussed in this article may significantly tilt the economic equation in the debtor's favor. From a creditor's perspective, a successful fraudulent transfer challenge gives the creditor the legal right to pursue the transferred assets. Practitioners should keep in mind not only the underlying substantive law, but the obstacles presented to the creditor by the practical implications of asset protection planning. QPRTs are frequently used in estate planning and should be familiar to most estate planning attorneys. The focus of all asset protection planning is to remove the debtor from legal ownership of assets, while retaining the debtor's control over and beneficial enjoyment of the assets.
The debtor frequently remains in control of the entity and can defer distributions, the creditor has no way of enforcing the judgment against the debtor's LLC or limited partnership interest or the assets owned by these entities. Having a legal right to do something does not mean having the actual ability to do so, and does not mean that the pursuit of the transferred assets would be cost effective. Assets may be transferred into irrevocable trusts, sold for cash or on installment basis or encumbered. An alternative to an outright sale is the sale and leaseback of the residence to a friendly third-party on a deferred installment note. The charging order limitation limits a creditor's remedy to a lien against the distributions from the entity, without conferring on the creditor any voting or management rights. The final available alternative to protect a personal residence is by contributing the residence to a qualified personal residence trust ("QPRT").
A creditor may be able to make a successful legal argument that a given structure should not stand, and thus be able to retrieve the debtor's assets. The debtor has two asset protection choices:
(i) do nothing and stand to lose all assets when the plaintiff becomes a creditor, or
(ii) engage in some asset protection planning. Many debtors believe that simply moving money to an offshore bank account will serve as sufficient protection from creditors. Creditors do not want to play the waiting game, and would prefer to settle for a sum certain today, than wait for a possible distribution from an LLC or a limited partnership.
The three most important factors are:
(i) the identity of the creditor pursuing the client,
(ii) the nature of the assets that will be pursued by the creditor, and
(iii) the extent to which the debtor is willing to go to protect his assets. Given that the more favorable asset protection jurisdictions have a very short statute of limitation for bringing a fraudulent transfer action, require proof of intent beyond a reasonable doubt and require proof of debtor's insolvency, the creditor faces a daunting task.
If you are someone who wants real protection, a better option may be an irrevocable trust or an outright sale of the residence. A creditor's sole remedy would be to bring a fraudulent transfer action against the trustee of the foreign trust, and attempt to show that the settlement of the trust by the debtor constituted a fraudulent transfer. There is no "magic bullet" asset protection strategy; different structures are used to protect different types of assets. The specific structure best suited for each person will depend on the nature of the asset being protected. Practitioners should also consider the income tax consequences of the sale, and possible property tax consequences on the transfer of ownership. To an extent the debtor-settlor retains an interest in the trust, the trust will be deemed self-settled and will not offer the debtor any asset protection.
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