Trusts viable option to protect assets

As we mentioned last month, the best way to protect assets that have accumulated over a lifetime has a great deal to do with the perceived threats.

Sometimes, the techniques available to protect assets from one partyare inconsistent with those needed to fend off claims from a catastrophicevent from consuming all of the funds and property that a family owns.

Keep in mind when reading, however, that risks vary from state to stateand local statutes must be considered before instituting any actual planning.

Planning early is critical

In the law, there is a huge difference between asset protection planningand hiding assets from parties legitimately entitled to look to those assetsfor satisfaction of a judgment.

By planning in advance, properly drafted documents and ownership transferscan make a person's property difficult or impossible to get to.

If a creditor or governmental agency later becomes legally entitled topursue such property, they are entitled to do what they can to get it. Thesteps taken in advance may make that effort a difficult problem for them,though, and there is nothing legally improper in having taken those preventivesteps.

On the other hand, if a person waits until there is a potential problemand then moves or hides money or property to prevent them from being availablewhen that potential problem turns into a genuine legal dispute, a fraudulentconveyance has occurred. The movement of that property may have constituteda crime and very likely a court could overturn the transfer, again makingit available to satisfy a creditor or a legal judgment.

Protecting against creditors

Transferring real estate to joint ownership is one commonly used techniqueto protect that property from creditors of either of the joint owners.

For example, if a creditor obtains a judgment against a man, it can almostcertainly be satisfied, at least in part, by going after property belongingto that man. However, if the man had previously transferred the propertyto himself and his wife as "tenants by the entirety," a creditorcan usually only "step into the shoes of the husband." That is,the creditor is stuck being a joint tenant with the wife and may not beable to force sale of the property, at least until the wife dies. The costsand logistical problems in pursuing that partial right could dissuade thatcreditor from pursuing the property at all.

Protecting against divorce

Let's take the same example as previously outlined and assume that thereason the real estate started out in the husband's name was that he receivedit as an inheritance. As long as the property remains in his exclusive name,it would probably remain his in the event that his wife and he became embroiledin a divorce proceeding.

Once the property is transferred to the man and his wife as "tenantsby the entirety" the property is less available to creditors. By beingtransferred, though, the real estate will likely become available to thedivorcing wife. The transfer makes the property lose its protected statusas a sole asset of the husband and becomes genuine joint property over whichthe wife may well have a strong claim.

UGMA custodial accounts

Placing title to assets in UGMA custodial accounts or in an adult child'sname is oftentimes a beneficial estate planning technique to transfer financialassets to one's children or to a Uniform Gifts to Minors Act (UGMA) accountfor the benefit of a child.

One benefit is a potential reduction in estate taxes, if they shouldeventually apply to the party making the transfer. Another benefit, however,can be to isolate the gift property from the ownership of the donor (theperson making the gift), making that money unavailable to the donor's creditors.(Remember, however, that even these "gifts" can be consideredfraudulent conveyances depending on their timing).

The question arises again, however, "Who are you more afraid of?"Are

you more concerned about mom or dad's creditors or some party who maybe injured as a result of the negligence of their child who received thegift property?

Naturally, the most obvious potential claims against the child wouldbe as a result of an automobile accident. But don't forget that teenagersand even pre-teens can engage in some very silly, very reckless stunts fromtime to time. The upshot: If your children tend to be responsible, drivesafely and stay out of bar room brawls, you might want to consider a gifttransfer of some assets to them for a number of possible motivating reasons.

Protective trusts

Trusts are legal entities that are created by a person who takes propertyand turns it over to a third-person for safekeeping and management. Theperson who "controls" the property is called the "trustee."Anyone who eventually gets to use the money in the trust is a trust beneficiary.

Trusts have varying degrees of effectiveness in protecting property fromcreditors, including nursing facilities and Medicare, depending, in largepart, on how much control over the property is retained by the person settingup the trust.

The most successful trusts for asset protection are those where the personestablishing the trust relinquishes most or all of his control over theproperty and does not reserve any rights to modify or revoke the trust.

State caveats

In addition, states vary dramatically in their recognition of trustsas an asset protection vehicle. Each state establishes its own rules asto how much validity it will give a trust when creditors come seeking itsproperty to satisfy a claim.

Two states at the forefront of recognizing the validity of such "assetprotection trusts" are Delaware and Alaska.

Individuals who want to maximize the likelihood that their property willbe protected often transfer their assets to trustees in those states. Thestatutory framework and the judicial environment in those states are farmore sympathetic to trusts designed to frustrate creditors than in statessuch as, for example, New York and California.

When really large sums of money are involved, it may even pay to considerestablishing a trust in a country outside North America. Much has been printedand broadcast recently about American corporations which have either re-incorporatedor move subsidiaries to island nations such as Bermuda or the Cayman Islands.The same cottage industry that has developed in these countries in cateringto foreign corporations extends to serving trusts established by foreignnationals seeking to protect their wealth from attachment by creditors.

As might be imagined, though, the costs and paperwork involved in usingsuch a country for the protection of a typical veterinarian's net worthwould likely make the strategy impractical. This is especially true whenit is so easy to get help from the friendly trust officer at Anchorage Nationalor the First State Bank of Wilmington.