At times, some people become so overly focused on asset protection that they practically throw the baby out with the bathwater to achieve the perceived goal of asset protection. It is a perceived goal rather than an actual goal because so many of the so-called asset protection vehicles don’t really protect anything. Many are just window dressing designed to give a false sense of security to people. They sound good on paper or when presented in a nice notebook, but they’re not foolproof in protecting assets from creditors–not even close.
Let’s walk through a few examples below to illustrate the point
Personal Residence LLCs. For some reason there has been an increase in people selling the idea of putting your personal residence into a limited liability company (call an LLC) and then giving the LLC a crazy name not associated with your own name. The idea is that once the home is in the LLC it’s protected from creditors. And because of the crazy name it cannot be found by creditors. But does this work?
No. As a litigation attorney, part of my job is to find assets. An LLC must be filed with the California Secretary of State’s office. Even if the LLC is not created here in California, it must file with California if it owns property or does business in this State. If I were to see someone living in a home owned by an LLC, all I would need to do is request a single paper from the Secretary of State and they would tell me who the owners of the LLC are, who the officers are, and the addresses of the LLC. All this info leads back to the home and I would then know the LLC is a sham–protection undone. Also, this scheme deprives the home owner of their home interest mortgage deduction from the IRS.
Changing Title to Assets. It seems a common knee-jerk reaction to have one spouse receive notice of a lawsuit and begin transferring all assets into his or her spouse’s name. Does this transfer protect the assets from a spouse’s creditor? Absolutely not. Especially if the transfer occurred AFTER notice of a lawsuit was received because it would then be a “fraudulent transfer.” We have laws that preclude the transfer of assets in the attempt to avoid a known creditor. And notice of a lawsuit is a known creditor, therefore the transfer can be undone and the asset attached by the creditor.
Off-Shore Trusts. Offshore havens such as the Cayman Islands, have historically had laws that made it all but impossible for a creditor to obtain assets located in that jurisdiction. A person looking to protect assets would place his money with a local trust company and the trust terms would not permit him to receive his own assets when under the threat of a lawsuit. And since the trust company was outside the U.S., there was no legal process that courts here in the U.S. could use to force payment from the offshore trust. The down side? Offshore trusts are not as great as they used to be. After 9/11, the U.S. government became very aggressive against offshore havens like the Cayman Islands because they were trying to root out money used for terrorism. The U.S. passed new laws requiring citizens to report any offshore transfer of money and they worked with foreign jurisdictions to obtain the open transfer of information regarding money transfers.
Finally, while a U.S. Court may not be able to force a foreign jurisdiction to act, they can make life miserable for the U.S. citizen living here, going so far as to impose jail time for not cooperating in obtaining offshore monies.
These are but a few examples of bad asset planning. Is there any good asset planning? Yes, but it typically involves planning for children and grandchildren where assets are passed onto them in a trust with creditor protection provisions.