What Are Potential Obstacles During the Process?

The number one obstacle occurs when people try to do these plans at the last minute. There are laws called fraudulent conveyance laws that prevent that. If people are served with a lawsuit or worried they’re going to get involved in a lawsuit, they tend to begin giving things away. The basic thought is, “If I give my house to my son and I get sued, then hey, I can’t lose my house. I don’t own it.”

However, this plan is not going to work. A fraudulent conveyance is any transfer that’s done to defraud, hinder, or frustrate an existing or future creditor.   Obviously, the fraudulent conveyance rules are applied towards existing creditors, but also to future unknown creditors.

Fortunately, there are statutes of limitations on these things if you make a transfer into some sort of a structure or make a gift of some asset to somebody, to a trust, to a corporation, or to a limited partnership. If you do this and four years pass before you’re sued, this won’t trigger the fraudulent conveyance statute.

This is why we always say that you must do the asset protection at least 4 years in advance. If you start transferring things, and a lawsuit arises within that 4-year time limit, that conveyance, that transfer will be set aside. The judge is just going to say, “No, we are going to force that person to give back the asset.” At this point, there will be additional legal expenses.

If I Was Going Through a Divorce, What Asset Protection Strategies Could I Utilize?

Divorce is tough. Hopefully, if you have a prenuptial agreement ahead of time, this will protect you. After all, divorce will happen to about 50 percent of all married people.

The number one strategy that I tell people is this, “If you’re thinking about getting married, and if you own a business or if you’re a professional, do a prenuptial. After you’re already married, there are post-marital agreements. Those are valid in California, and they’re much more difficult to do.

Obviously, there is no real incentive for the other party to do a post-marital agreement. However, if the marriage is stable, sometimes post-marital agreements are used to protect the spouse who is in the more dangerous profession. I don’t particularly like this technique, however, because there is that great risk of getting a divorce.

Aside from this, you must look at creating a barrier between your business liability and your personal liability. This is where corporations and limited liability companies enter into the equation. If you’re operating a business, you’re foolish if you don’t incorporate. This is why corporations exist: to provide liability protection to the owners of the business. Why wouldn’t you take advantage of that? Once you have a business, and it’s incorporated, you must maintain the formalities of a corporation.

Let’s say you don’t do this properly, and somebody sues the business. They find out that you don’t maintain separate records and books, and that you don’t file taxes separately for the corporation. They’re going to “pierce that corporate veil”, and the judge will allow them to get to your personal assets.

Thusly, we go through a methodology. We look at insurance, statutory exemptions, business potential liability, and some advanced techniques.  Although I said that most trusts don’t usually work, certain trusts do work. The most common of those is a qualified personal residence trust, (“QPRT”). These are very traditional, very acceptable estate planning trusts that have been used for decades to obtain a discount on the gift of your personal residence. The beautiful thing about them is that they work from both an estate planning perspective and an asset protection perspective for your home.

You create this irrevocable trust, and you then transfer your home into it. This trust will go for a number of years. After 20 or 30 years, it will transfer to your children as a sort of gift. During the 20 or 30 years that this trust is in place, you have the right to live in your home. However, you don’t really own it completely anymore. At the end of that trust, your children will own it.

The children will be the remainder beneficiaries of that trust, and you merely have the right to occupy the property during the 20 or 30-year term of the trust. If you do get sued, and if somebody gets a judgment against you, it’s very hard to collect that judgment against the house, because you really only have the right to live there, and this is worth much less to the creditor. You’re put in a much better position to negotiate a favorable settlement.

There are trusts that are called Asset Protection Trusts. There are domestic asset protection trusts and foreign asset protection trusts. The domestic asset protection trusts are valid only in about 13 states. The familiar ones are Delaware, Alaska, Nevada, Wyoming, and Ohio. Several jurisdictions really focus on these, but if you’re a California resident, it’s difficult to utilize those trusts. This is because the assets must be located in those states, and the trustee must be located in those states. Domestic asset protection trusts are not really useful, and generally, the case law generally rules against them. However, these might be useful in discouraging frivolous lawsuits, so I won’t discount them completely.

Unfortunately, I practice in California, and we do not have asset protection trusts on our statutes. The foreign asset protect trusts probably work a little better, but they are very expensive to set up and maintain on a yearly basis. They are only effective if you’re willing to risk either being put in jail for contempt for not repatriating the assets that are located in those foreign jurisdictions or if you’re willing to move to those other jurisdictions. If you live here, and the asset is in the Cayman Islands or the Island of Mann offshore, the judge can rule that you must bring that asset back. If you don’t, they can hold you in contempt and throw you in jail.

There are several cases in which this has happened. People have stayed in jail for 8, 9, or 10 years, because the judge felt they should somehow get the money back from those foreign jurisdictions. Thusly, I’m not a big fan of asset protection trusts. However, they do work to discourage frivolous lawsuits.

For more information on Obstacles In Asset Protection, a free initial consultation is your next best step. Get the information and legal answers you’re seeking by calling (949) 660-0007 today.

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