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Asset Protection Update

Please listen to this weekend’s (2/5/11) Blueprint for Wealth on 1500AM and 820AM at 10:30am to hear me discuss 2010 developments in asset protection planning. Specifically, I will tell you about Hawaii’s new asset protection statute passed in June 2010, how living QTIP trusts may serve as excellent asset protection vehicles (especially under recently passed Florida legislation), why inherited IRA’s may afford asset protection to the beneficiaries, how charging order protection may not apply to single member LLC’s, and a recent case applicable to offshore trusts.

Hawaii joins 11 other states (including, Delaware, Alaska, Nevada and Missouri) to provide protection for self-settled trusts. A “self-settled trust” is a trust you create with your own assets for your own benefit. Most states do not allow these trusts to escape the claims of your creditors.  But the Hawaii statute provides some protection.  The problem with Hawaii’s new law is that it does not cover some of the most important assets that we may want to place into a self-settled trust, such as real estate or limited partnership interests. It also includes a much longer list of creditors that are exempt from the protections afforded by the statute.  Moreover, you as the settlor must sign an affidavit that no more than 25% of your net worth is being transferred to the asset protection trust.  Even though Hawaii’s statute is not as flexible as other states’ statutes, it does help defeat the argument creditors constantly raise that such trusts are against public policy.  After all, if more states enact asset protection trust legislation, the old “public policy” against such trusts will be history.

Florida recently passed legislation that favors lifetime QTIP trusts.  A qualified terminable interest property (QTIP) trust enables you to place assets in trust for the benefit of your spouse under the watchful eyes of an independent trustee.  These trusts qualify for the unlimited marital deduction from gift and estate tax, and provide significant asset protection benefits as well.  Like Arizona, Delaware and Michigan, the Florida statute protects the QTIP trust assets from the claims of your creditors and those of your spouse.  What’s not to like?

On previous shows, I have discussed how inherited IRA’s may be subject to the claims of creditors of the IRA designated beneficiaries.  I also noted that a few recent cases seem to be reversing this trend. In Re Chilton and Nessa are two cases of note.  The rationale is that the IRA still contains “retirement assets” that are intended to be protected from bankruptcy and creditors’ claims generally.  We will keep a watchful eye for further developments in this area.

Florida did not give us all good news in 2010.  In the Olmstead case, the Florida Supreme Court held that a member of a single-member limited liability company (LLC) could not claim the protection of the charging order remedy in a bankruptcy action.  In other words, if a creditor gets a charging order against an LLC member, the creditor usually has to wait for the LLC to distribute income or assets to the member before the creditor can satisfy its judgment against the member.  That’s not very good for the creditors, but great for the LLC members. The Florida court said that the creditor in bankruptcy was not limited by the charging order remedy and allowed the creditor of the member of a single member LLC to go after the LLC’s assets.  This holding creates uncertainty for owners of single member LLC’s in other jurisdictions.

Last but not least, Jamie Solow tried unsuccessfully to shield assets he held with his wife from the Securities Exchange Commission’s disgorgement order in a case that went all the way to the 11th Circuit Court of Appeals.  Basically, Jamie was found to have violated federal securities law and the court issued an order requiring him to disgorge $6 million in ill-gotten profits.  Four days after the order was issued, Jamie transferred assets to his wife who promptly transferred the assets offshore to a Cook Islands trust.  He also placed a $5 million mortgage on his house, in Florida, and deposited the proceeds into a Cook Islands bank CD.  The court found that the transfers were in contempt of the disgorgement order and sent Jamie to jail until the money was paid.  Lesson learned: the U.S. Government has new enforcement weapons to enforce its laws.  The lesson should extend to violation of tax laws, money laundering and other questionable or unlawful activities.

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