Q UA R T E R LY W E A LT H CO U N S E L
VOLUME 9 / NUMBER 1 Q1 2015
Contents From the Editor...................................................................................... 3 A Primer On Asset Protection Planning....................................... 4 Asset Protection - Beyond Just Trusts....................................... 10 Member Spotlight................................................................................12
Asset Protection & Wealth Docx....................................................15
Clarity in Asset Protection: The Voidable Transactions Act.......................................................18
Volume 9, Number 1 â€˘ Q1 2015
Minimizing the Risks Associated with Practicing Asset Protection............................................................24
SENIOR EDITOR Matthew T. McClintock, JD EDITOR
Synopsis of Various Offshore Jurisdictions..............................28 Series LLCs and Asset Protection: Will a Model Uniform Act Clear the Fog?..................................34
Jennifer Villier, JD PRODUCTION EDITOR Caryl Ann Zimmerman
GreenHunter Energy, Inc.: The Rare Case When the Limited Liability Veil Will Be Pierced in Wyoming (And Probably in Every Other Jurisdiction)..............................39
ART DIRECTOR Ellen Bryant
CONTRIBUTING WRITERS Jeremiah Barlow, JD Thomas J. Ray, Jr., Esq. Wealth Docx Executive Editor
Jennifer Villier, JD
WealthCounsel Quarterly is published four times annually by WealthCounsel, LLC, P.O. Box 44403, Madison, WI 53744-4403. Comments and questions about WealthCounsel Quarterly may be addressed to the editor at email@example.com.
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From the Editor... Matthew T. McClintock, JD, Vice President of Education, WealthCounsel Welcome to the spring 2015 issue of the WealthCounsel Quarterly. If you’ve been receiving this magazine for awhile, you’ll notice that this issue is a bit different. The first and most obvious difference is the sheer bulk of the magazine. Where previous issues have highlighted a few topics in brief, this issue marks a new approach as we go deeper. Rather than treat a broad range of items superficially, we will explore the topics at greater depth. Hopefully this will provide you with better and broader understanding of the topics in the magazine. We have also adopted a thematic approach to the magazine. While the coverage in the articles range from basic to advanced, we are taking on the theme of asset protection from the perspective of trusts & estates, business planning, and legal ethics. We hope that readers of all skill levels and practice focus areas will learn something from the authors here.
whose net worth and risk profile may not justify the move offshore, as well as how the domestic plan fits into a modular approach to a more comprehensive asset protection plan. For many of us who have practiced trusts & estates law for a long time, we often overlook the broader application of asset protection for business owners. Jenny Villier and Marty Oblasser each discuss important asset protection matters from the perspective of the business owner, highlighting some fresh concerns and reminding us of common pitfalls for single-member LLCs for business owners. I hope you enjoy this new approach to the WealthCounsel Quarterly. If you have comments about the magazine, or if you have suggestions or would like to be considered as a contributing author to future issues, please email me directly at matt.mcclintock@ wealthcounsel.com. In the meantime, I hope you learn something in these pages that give you fresh ideas to serve clients better.
Kristin Yokomoto looks into some of the ethical issues we often encounter when counseling clients on asset protection matters. She examines some of the tricky situations we must navigate to serve clients ethically and effectively. Jeremiah Barlow provides a great overview of asset protection planning, discussing the broad spectrum of planning options clients have. He discusses some of the critical traps that can ensnare clients and attorneys alike, and sets the stage for other articles here. For some clients, moving asset protection offshore is the right solution. Craig Redler discusses various popular jurisdictions that offer strong protection. For many other clients, domestic asset protection makes the most sense. Domestic planning is generally more affordable for clients, though the protection is not as robust. Jeff Matsen and Jonathan Mintz provide great insight on the use of DAPTs for clients
“When I invited you to join WealthCounsel, I said nothing about a secret handshake.” For more about WealthCounsel’s Member Referral Program, see the back cover of this issue. PAGE
INTRODUCTION Asset protection planning has been practiced by attorneys, financial planners and accountants for several decades. Business persons have always had concerns over the exposure of their personal assets to claims against their business. The corporate form of business entity with its shield of limited liability has been invoked for centuries. Certainly, protecting one’s assets from the myriad of risk involved in business and personal financial planning is not a novel objective or planning idea. Since the 1970’s, expanding theories of liability and the proliferation of litigation have given increased emphasis to asset protection planning to the extent that it is now a well-recognized area of practice. It certainly comes within the concept of lifetime estate planning involving the protection and conservation of accumulated wealth or asset base.
A Primer On Asset Protection Planning
Jeffrey R. Matsen, Esq. & Jonathan A. Mintz, Esq.
PRIMARY GOAL OF ASSET PROTECTION PLANNING A major goal of asset protection planning is to substantially diminish and reduce your client’s financial profile. If you can restructure your client’s assets in such a way so as to place them beyond the reach of future potential creditors, while at the same time maintaining a beneficial interest in those assets, you have succeeded in substantially reducing your client’s financial profile. Accordingly, your client becomes a far less attractive target for litigation because crediPAGE
tors doubt they can collect on any judgment, thusly reducing the likelihood that your client will be sued; or if your client is sued, increasing the likelihood of a favorable settlement.
THE USE OF TRUSTS IN ACHIEVING THE GOAL OF ASSET PROTECTION PLANNING A trust can be an effective foundation for asset protection planning. Trusts have been utilized for centu-
ries as a means of conserving and protecting property for the beneficiaries of the trust. However, most domestic trusts do not provide protection from creditors. The typical revocable living trust, where the trustors are the lifetime beneficiaries and retain the power to revoke, amend and invade the principal of the trust, provides no protection whatsoever against the creditors of the trustors. Accordingly, absent specific legislation to the contrary, self-created or so-called self-settled trusts are ineffective for asset protection planning purposes.
DOMESTIC ASSET PROTECTION TRUSTS (DAPTS) As stated above, most self-settled trusts are not protected from creditors. However, recently, numerous states have provided various degrees of asset protection legislation for a self-settled-trust. The trust legislation in currently 16 states (Alaska, Colorado, Delaware, Hawaii, Mississippi, Missouri, Ohio, Oklahoma, Nevada, New Hampshire, Rhode Island, South Dakota, Tennessee, Utah, Virginia, and Wyoming) is similar in many respects to the asset protection trust legislation found in several offshore jurisdictions. It should be noted, however, that the courts have not had an opportunity to pass muster on this type of legislation because these are relatively recent statutes and cases involving DAPTs typically settle. Depending on when the claim has arisen, these trusts can and should be considered in appropriate circumstances, but only by an attorney who understands all of the ramifications.
MODULAR DAPT STRUCTURE A common DAPT structure includes the use of the LLCs created under the laws of the DAPT jurisdiction, which are owned by the DAPT. While there are no creditors the client(s) can serve as manager(s) of the LLC, thereby retaining significant control over the assets. However, because the DAPT owns the LLC, LLC distributions are made to the DAPT, which in turn can make discretionary dis-
tributions to the clients. If a creditor problem develops, the client(s) can resign as manager(s) to ensure that a court cannot compel distribution or sale of LLC assets.
CLAIM BY SOME COMMENTATORS THAT DAPTS “DON’T WORK” Some commentators assert that DAPTs do not work because the majority of cases (albeit only a handful) considering DAPTs have ruled against the debtor. The vast majority of opinions are Bankruptcy opinions where the court made the DAPT assets available to satisfy the claims of a judgment creditor. Under the 2005 Bankruptcy Act Section 548(d), a transfer to a DAPT is voidable if made within 10 years of the debtor filing for bankruptcy and if the debtor made the transfer with the intent to hinder or defraud current or future creditors. Thus, a client who establishes a DAPT clearly should not file for voluntarily bankruptcy within 10 years of establishing a DAPT. Furthermore, a DAPT will not work if the debtor is involuntarily forced into bankruptcy within 10 years of creating a DAPT. Outside of the bankruptcy context, we have only one case that, in the lower courts at least, considered a DAPT established under the laws of a different, DAPT jurisdiction. On January 30, 2015, the Utah Supreme Court in Dahl v. Dahl considered what appears to be a Nevada DAPT where the defendant husband created the trust, waited for the statute of limitations to run, and then divorced his wife and claimed that the assets
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were unavailable to her as part of the divorce settlement. The lower court had ruled that the trust assets were unavailable to the wife, but the Utah Supreme Court reversed. The Supreme Court ruled that the trust was revocable, and thus not a DAPT, because of the apparent mistaken inclusion of the word “any” in the sentence “Settlor reserves any power whatsoever to alter or amend any of the terms or provisions hereof.” Significantly, the Supreme Court applied Utah law because it found that Utah has a very “strong public policy” in favor of equitable division of marital property in divorce. And that is the concern; that a court in a state that does not permit self-settled trusts will apply its own state’s laws, and not the law of the DAPT state because of a “strong public policy.” If so, the court may very well rule that the DAPT assets are available to satisfy the claims of one or more creditors, particularly where, as in Dahl, the creditor is a protected class. Under these circumstances the judgment creditor would then take its judgment to the DAPT state and seek to enforce it, which the Full Faith and Credit Clause of the constitution says they must do. If this were to happen the DAPT itself would provide little or no protection. However, the entities used in conjunction with the DAPT would continue to provide some protection (e.g., charging order protection if the assets are owned by an entity governed by a state whose exclusive remedy is a charging order). Thus, even if a court voids the transfer to a DAPT it does not mean that a DAPT modular strategy “does not work.” PAGE
Experience tells us that the reason there are so few cases, particularly outside of the bankruptcy context, is because these cases settle before trial, and generally under terms favorable to the debtor. Our experience is that DAPT structures result in settlements favorable to the debtor, certainly more favorable than if there was no such structure in place. Thus, the authors conclude that DAPTs do, in fact, “work”.
FOREIGN ASSET PROTECTION TRUSTS (FAPTS) Offshore asset protection planning normally involves the utilization of offshore trusts and other entities, similar to the structure we use domestically but with offshore entities and trusts. Offshore planning generally raises justifiable concerns with respect to asset security and tax issues. The most efficacious manner to address these concerns is to make certain that your client is receiving the best advice and counsel from a qualified expert in the area. You must be sure that the attorney with whom you are dealing has expertise in the field and is recognized in this regard by his peers. An FAPT is a trust that is set up in an offshore jurisdiction which has enabling trust legislation providing for substantial protection against creditors of the trustor. One of the greatest advantages of the FAPT is the fact that by its very nature any legal attacks against its assets are transferred abroad to a different legal system. The FAPT is generally much more expensive to set up PAGE
and create than a domestic trust and requires a certain willingness on the part of the trustor to deal with offshore jurisdictions and trust entities. The FAPTs greatest value is for asset protection planning well in advance of any potential creditor problem. Moreover, many times FAPTs are used when the client already has some international connections and networking. Recent cases have emphasized the need for careful planning in the structuring of the FAPT if it is to be legally efficacious and successful in meeting the purposes and objectives of the trustor.
THE MAJOR ADVANTAGES AND PURPOSES OF THE FAPT
a higher standard of proof upon civil litigation plaintiffs such as the “beyond the reasonable doubt” standard. This is in sharp contrast to the “preponderance of the evidence” principle utilized in U.S. domestic civil cases.
STATUTE OF LIMITATIONS The FAPT legislation of many jurisdictions establishes a statute of limitations for challenging asset transfers to a FAPT that begins to run on the date of transfer. This is contrary to U.S. law where the statute may begin to run the date the transfer is “discovered” by someone with a claim against the trustor. Additionally, the statute of limitations of many FAPT jurisdictions is much shorter than the typical four year statute found under U.S. law.
NO COMITY OF LAW IN
FEES AND EXPENSES OF
LITIGATING IN FOREIGN
Most foreign jurisdictions do not recognize U.S. judgments. This may force a trial de novo on the merits under the laws of the foreign situs in order for the creditor to impose liability on the trustor and reach the assets of the FAPT. Obviously, the fees and expenses of this trial de novo and the burden of having to select offshore counsel can be substantial. Moreover, the FAPT jurisdiction generally requires plaintiffs to employ attorneys who are licensed in that jurisdiction.
MORE FAVORABLE LAW Most foreign situs jurisdictions require that the burden of proof in challenging asset transfers to a FAPT is on the creditor and does not shift to the trustor. Moreover, many foreign jurisdictions impose
JURISDICTIONS Manifestly, it is going to be much more expensive and inconvenient to prosecute a claim offshore. Think of the cost and inconvenience of having to pursue a claim out of state, and then multiply that by two to three times to arrive at the cost to pursue the matter in a foreign jurisdiction. Many foreign jurisdictions prohibit contingency fee arrangements, forcing the claimant to finance a litigation process entirely on his or her own, and some go so far as to require a significant bond when filing suit under its laws. Creditors may think twice about having to deal with a completely different legal system out of the country. This unfamiliarity, plus the additional expenses and costs, and the entire uncer-
tainty with respect to the process, add a substantial element of protection to the FAPT.
NON ASSET PROTECTION PURPOSES The FAPT may assist the trustor in achieving several other objectives and planning goals independent of asset protection planning. Traditional estate planning issues such as the orderly transfer of property at death, the avoidance of probate, the strengthening of spendthrift provisions, greater privacy, the management of offshore assets and businesses, and premarital planning can all be addressed by the FAPT.
HOW THE FAPT PROTECTS YOUR ASSETS A.
The easiest way to understand how a FAPT protects cash and securities is to focus on the process by which a claimant would try to reach trust assets. A claimant must either (i) bring his case in a court that has jurisdiction over the trustee so that the court can order the trustee to give up the assets or (ii) initiate litigation in the court that has jurisdiction over the assets themselves so that the court can attach or seize the assets. However, if the clientâ€™s offshore planning strategy is properly structured and implemented, no domestic court can successfully attack the plan because it would not have the ability to force the offshore trustee to expatriate or return the assets, nor would it have the ability to levy on assets properly held outside of the
Protecting non-liquid assets like real estate, accounts receivable, and business equipment involves the process of equity stripping. Although some of these assets can be put in charging order protected entities that may provide some limited protection, the most effective strategy available to protect a domestic illiquid asset is to strip that asset of its value by encumbering it as collateral for a loan and protecting the loan proceeds with your other liquid assets in the FAPT. Creditors are going to be very discouraged attempting to levy on an asset that may have substantial value, but has very little equity because of a loan encumbrance or lien.
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OFFSHORE PLANNING STRUCTURE Like a common DAPT structure, one typical arrangement for a possible offshore strategy would be for the client to establish the offshore asset protection trust utilizing an offshore trustee. The trust would then set up an offshore limited liability company which would be entirely owned by the offshore trust. The client could be the manager of the LLC with direct
US TAX CONSEQUENCES Generally speaking, the establishment of the offshore asset protection plan will be tax neutral. The FAPT will either be a U.S. grantor trust or a foreign grantor trust with a U.S. grantor for U.S. income tax purposes. It will be necessary to file various forms with the Internal Revenue Service in either case, but these forms simply disclose the assets to demonstrate that the taxpayer is a responsible and lawabiding citizen.
signature control over bank accounts and securities accounts. In the event of a crisis, the client would resign as a manager and appoint a trusted friend, relative or a management company, ideally located offshore. There are modular variations to this strategy that can be worked out with your professional advisors.
OFFSHORE TRUST CASES There have been several high profile cases involving offshore asset protection trusts, in large part because the grantors spent time in prison on contempt of court charges for failure to repatriate trust assets. However, these cases involved very bad facts that undoubtedly will be avoided by practitioners with experience in this area. And notwithstanding the bad facts and jail time, in the end the assets held by the offshore trusts were not repatriated and the settlors benefited from their offshore structure.
FTC V. AFFORDABLE MEDIA, LLC (THE ANDERSON CASE) According to the court, the Andersons ran a telemarketing program that was a “classic Ponzi scheme.” The Andersons then used some of the gains from this program to fund a Cook Islands asset protection trust. Significantly, the Andersons had remained co-trustees of the FAPT throughout litigation and they were also the trust protectors well into the litigation. The Cook Islands Trustee refused to turn over assets of the trust despite repeated attempts by the FTC.
Ultimately, the Court ordered the Andersons to repatriate the Cook Islands assets and, when they refused, jailed them for contempt of court. The Andersons served nearly two years in prison but refused to expatriate any of the trust’s assets. Notwithstanding the Anderson’s jail time, this case emphasizes how strong Cook Islands trustees will be in resisting creditor’s attempts to repatriate, and the strength of Cook Islands trusts generally – the FTC made two attempts to enforce their judgment in the Cook Islands and failed, recovering nothing!
IN RE LAWRENCE Lawrence established and funded $7 million into a FAPT in the Channel Islands only two weeks before a $20 million binding arbitration award was entered against him. The trust was shortly thereafter transferred to Mauritius, and Lawrence voluntarily filed for bankruptcy. The trust provided that in the event of bankruptcy the trustee would remove Lawrence as a trust beneficiary. However, Lawrence retained the power to remove and replace the trustee. The Court denied Lawrence’s assertion that it was impossible for him to repatriate the trust assets on the grounds that he could appoint a new trustee, who could then add him back as beneficiary. The following factors heavily influenced the Court in finding Lawrence in contempt: 1. Executed trust documents were never provided to the Court; 2. Lawrence incredulously testified that he was not aware of any
distributions to him from the trust when the evidence showed otherwise; 3. Lawrence denied that shielding his assets from his creditors was a motivating factor in the establishment of the FAPT; and 4. Lawrence testified that the arbitration proceeding did not influence him in any manner in setting up the FAPT. After Lawrence spent six years in jail without the court successfully forcing him to repatriate the funds, Lawrence was released from prison. The District Court judge stated that, apparently, imprisonment had lost its desired result. Obviously no client wants to be imprisoned for contempt of court; these cases are good reminders of how not to do offshore asset protection planning. There are several other cases, however, where the debtor’s offshore asset protection trusts worked as intended and the Court refused to find the debtors in contempt of court because of the impossibility of their repatriation of trust assets. For example, in the Grant case, U.S. v. Raymond and Arlene Grant (S.D. Fla. 2005), the U.S. District Court refused to enforce a contempt order for their failure to expatriate assets from a foreign trust, holding that compliance with the order was impossible by the settlor/debtor. Significantly, the creditor in Grant was the U.S. government after it had obtained a tax lien in the amount of $36 million for unpaid back taxes. A similar result occurred in the Bellinger case, Branch Banking & Trust Co. v. Hamilton Greens, LLC (S.D. Fla. 2014).
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Matsen Spectrum of Fraudulent Transfer Applicability
FRAUDULENT TRANSFERS No discussion of asset protection planning would be complete absent at least mention of fraudulent transfers. Under the Uniform Fraudulent Transfers Act, soon to be renamed the Uniform Voidable Transactions Act to more accurately reflect the purpose of the statute, a transfer may be voidable where it is made with the intent to hinder or delay a creditor. The Matsen Spectrum of Fraudulent Transfer Applicability shows the spectrum of activities that may give rise to a fraudulent transfer; the further we move to the right on the spectrum, the more likely a transfer is a fraudulent transfer. This is an area where we must be extremely vigilant. If a prospective client knows or reasonably should have known of facts giving rise to a potential creditor claim, future transfers may trigger the state’s fraudulent transfer act. And an unknowing attorney could get caught aiding and abetting a fraudulent transfer!
POTENTIAL PROSPECTS Potential prospects for this type of planning include doctors, dentists, engineers, lawyers, real estate developers, and any other clients in high-risk occupations, includ-
ing wealthier clients, who face the potential of future creditors. While there are no guarantees with DAPTs or FAPTs for that matter, clients who want a greater degree of assurances should consider FAPTs for the reasons discussed below. Also, clients who face as potential creditors those who will zealously pursue any claims against the debtor, such as agencies of the federal government (e.g., the FTC, FDA or SEC, often referred to as “super creditors”) should also consider FAPTs because of the additional protections discussed above.
CONCLUSION The proliferation of plaintiff lawsuits, and the expanding concept of liability that has become second nature in our court system, have engendered much concern and anxiety about the preservation of wealth in the US. Many professionals like doctors and lawyers as well as business owners, corporate executives, real estate developers and investors, contractors and others operate in an environment of high risk. Many such people lack confidence that they will be treated fairly by the legal system and are desirous of reducing their financial profile and eliminating their liability potential. For these individuals, asset protection planning, and
frequently the offshore planning alternative, may very well be the best planning device available for maximum comfort and piece of mind.
About the Authors Jeffrey R. Matsen and Jonathan A. Mintz (WealthCounsel Members since 2005) are partners in Matsen Voorhees Mintz LLP, an “AV” (highest category) rated firm by the prestigious and internationally well known Martindale Hubble Lawyer Directory. Jeff Matsen has been a Professor of Law at Western State University and Adjunct Professor of Law at Chapman University School of Law and an instructor at the Golden Gate Program of Advanced Taxation. He is also a member of the American Bar Association Sub Committee on Asset Protection Planning and has written the ABA’s book on this topic, The Ladder of Success. He has also written course materials and delivered continuing education programs in the areas of estate and asset protection planning, limited liability companies, family limited partnerships and business formations. Jonathan Mintz is the former COO of WealthCounsel, LLC, and during his 25 years of practice he has helped hundreds of clients and taught thousands of professionals in the areas of estate and asset protection planning, business planning, and the use of LLCs and FLPs in estate and asset protection planning. Matsen and Mintz are internationally recognized authorities in these areas.
Asset Protection - Beyond Just Trusts Jeremiah Barlow, JD, WealthCounsel
RISING DEMAND Expanding theories of liability and rising threats of litigation make asset protection more valuable and more demanded than ever. Today’s victim-oriented climate fuels plaintiff attorneys’ hunger for deeper pockets, and increased media exposure elevates client concern regarding anonymity. Powerful asset protection tools provide an additional layer of protection and safeguard privacy. Some asset protection tools come with a higher price tag. Such tools may be suitable only for a certain subset of clients such as those in highly litigious careers (e.g., doctors, lawyers, architects) and business owners who assume risk and threat of malpractice. By the same token, greater asset protection remains salient for individuals with litigious threat, such as potential recipients of a substantial inheritance; individuals who deal with investors; owners of boats, airplanes, and other extreme vehicles; real estate owners; celebrities; high net worth and high visibility individuals; wealthy spouses in second marriages; and parents of teen drivers.
BEWARE OF FRAUDULENT TRANSFERS It remains imperative for estate planning attorneys to keep a sharp eye out for situations involving fraudulent transfers of assets. The common badges of fraudulent transfers include the following: (i) transfers to insiders, (ii) retention of possession or control, (iii) concealment, (iv) threats of a lawsuit or a lawsuit itself, (v) insolvency (i.e. transfer of essentially all the debtor’s assets), and (vi) a transfer that occurred shortly before or after a substantial debt was incurred. Avoiding fraudulent transfer requires due diligence by the attorney before offering these asset protection tools to the client. Best practices for due diligence include gathering information from the client such as state and federal tax returns; the names and contact information of the client’s attorney, accountant, bank, and financial consultant; a description of any current or anticipated litigation; employment history; legal documents; and a thorough background check. PAGE
VARIOUS ASSET PROTECTION PLANNING OPTIONS As most practitioners are aware, estate planning offers a level of asset protection through outright gifts, irrevocable spendthrift trusts, charitable trusts, and marital trusts. However, asset protection includes much more than just trusts. In this regard, attorneys should be familiar with and advise clients on other techniques of asset protection, such as the following:
ADEQUATE INSURANCE Adequate personal and business insurance should be considered the first line of defense. For personal insurance, ensure that your client’s homeowner’s insurance is sufficient and that they purchase umbrella insurance. For businesses, ensure that commercial general liability insurance is sufficient and that they hold umbrella insurance. Additionally, consider as much professional liability insurance as your client can reasonably afford, as well as employment practices insurance. Finally, advise your client to read the fine print of all of these policies.
MARITAL PROPERTY Transmuting jointly held property to separate property interests often yields significant protection. Beware, however, that transfers between spouses may be considered fraudulent if not carefully planned. A professional spouse may transmute separate property or jointly held interests into separate property of the non-working spouse as long as it is not fraudulent. Nevertheless, although marital planning provides greater asset protection, it is
important to note to clients that it could be detrimental in the event of divorce.
SETTING UP A BUSINESS ENTITY Creating a business entity lends protection against debts and claims. If a client owns everything in one company or in one’s own name, a single lawsuit can result in catastrophic loss. If assets are held in separate companies, then only the entity involved in the suit is at risk. As a result, it is important to segregate a client’s most valuable assets, such as real estate or equipment, in separate LLCs. Additionally, it is important to instruct clients regarding proper corporate governance practices, such as maintenance of LLC and corporation corporate formalities. This ensures that creditors remain unable to “pierce the corporate veil.”
LLCS FOR REAL PROPERTY Real property requires special protection. Tremendous liability potential exists for jointly owned real estate. Thus, placing real property in an LLC or FLP is more advantageous in terms of asset protection. Conversely, clients lose tax benefits by placing property in an LLC.
CHARGING ORDER A charging order is an order by the court in favor of the creditor requiring that distributions from the LLC be made to the creditor who obtained the charging order. However, if there are no distributions from the LLC and the charging order is the exclusive remedy for the creditor, the creditor will not receive anything. Thus, this is advantageous for clients seeking greater asset protection.
FORUM SHOPPING There are many favorable jurisdictions for LLCs, including the following: DE, AK, SD, AZ, NV, and WY.
DOMESTIC ASSET PROTECTION TRUSTS (DAPT) Domestic asset protection trusts are favored as an asset protection tool because probate is avoided, confidentiality is maintained, and transfer of assets can be more efficient. However, in most states settlor’s creditors can reach the trust assets while the settlors are alive. Regardless, DAPTs form a significant barrier against creditors and afford significant leverage
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to the debtor with respect to negotiations with the creditor.
SPENDTHRIFT CLAUSES A spendthrift clause protects a beneficiary’s interest from creditors’ claims. However, these clauses are generally unenforceable for a settlor who is a beneficiary, i.e. while settlor is alive. Nevertheless, 14 states now have legislation providing spendthrift protection to a settlor-beneficiary. The recommendation remains to have significant connections with one of the 14 states to establish a DAPT in that jurisdiction.
FOREIGN ASSET PROTECTION TRUSTS (FAPT) A foreign asset protection trust is a trust that is formed in an offshore jurisdiction. Offshore trusts place assets out of the reach of US courts. Some believe that offshore trusts provide maximum protection for clients seeking to protect assets because creditors are now required to litigate in foreign jurisdictions, subject to foreign laws and justice systems, rather than being able to more easily sue the debtor in the American court system. Offshore trusts may be appropriate for individuals who have liquid assets, connections abroad, and the ability to sustain an offshore trust structure since these entities require more reporting and maintenance. One of the key advantages is that most foreign jurisdictions do not recognize US judgments; thus, the creditor would need to litigate a new trial in a foreign jurisdiction where the burden of proof is often far higher than in the US judicial system. In the end, it is important to consider all of the above strategies when working with clients to design a comprehensive asset protection strategy. Although no strategy can prevent a lawsuit, they will certainly help clients’ chances of settlement or dismissal of a lawsuit.
About the Author Jeremiah Barlow is part of the Legal Education faculty at WealthCounsel. He has extensive experience in estate planning as in-house estate planning attorney for a national wealth management firm, and as founder of a law firm that focused exclusively on estate and asset protection planning. Before joining WealthCounsel’s education faculty, Jeremiah was a member of WealthCounsel. Jeremiah loves the outdoors and traveling. He, his wife, Kym, and their two sons live in Santa Barbara, California.
Jeffrey R. Matsen is the founder and managing partner of Matsen Voorhees Mintz LLP in Costa Mesa, California, experienced in the areas of business planning, estate planning, asset protection, real estate and international law. Tell me about life before the practice of law. I grew up in Los Angeles. After high school I went to college at BYU in Utah. Between my junior and senior years of college I joined Officer Candidate School for the Marines. This was during the Vietnam era. I knew I was likely going to get drafted so instead I decided to join the military on my own terms.
to serve, so I tried some cases and ultimately spent some time as a judge for the Marines. I started moonlighting to make a little extra money and taught law school at night. One of the courses I taught was estate planning, and I got to know several students who went on to become WealthCounsel members in Southern California.
How did you get interested in law â€“ and specifically, estate planning?
You have developed a great reputation for asset protection. How did you get into that niche?
I got interested in business and tax when I was in college. After I graduated, the Marines allowed me to attend law school at UCLA. During my studies I got to know attorneys at some of the larger firms in Los Angeles and learned how they were doing estate and business planning for their clients. Estate and business planning seemed to naturally fit together.
During college I spent two and a half years doing mission work in Brazil. I was interested in international business and got to know some folks who also did business in Bermuda. After I started practicing law I got the sense that there werenâ€™t many people who did international planning at that time, but I didnâ€™t really see it as a specific niche for several years.
After law school I served in the Marine Corps. Because of the war in Vietnam there was a shortage of lawyers
I was able to serve many clients and help with their estate and business planning. Helping them protect
Member Spotlight JEFF MATSEN WealthCounsel Member since 2005
Matsen Voorhees Mintz LLP 695 Town Center Drive, 7th Floor Costa Mesa, CA 92626 949-274-4390 | mvmlawyers.com
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JEFF CHANNELS HIS ENERGY BY FOCUSING ON HIS PRIORITIES AND PLANNING STRATEGICALLY TO EXECUTE ON
their assets became a natural fit. I honed my skills through collaboration with other friends I met in practice. The more I got into it the more I realized that there weren’t many people who focused on asset protection; it was a fairly open field. I had some international contacts already so I saw it as an opportunity. With asset protection planning most clients have a sense of urgency to get the work done. When you can help clients protect what they’ve worked hard to build – and when those clients are motivated to get started – that’s a great combination for success in practice. What has been your greatest challenge in practice? One of my early challenges was in building the right relationships in my law firm. It’s essential to find the right people who have the mix of passion, integrity, and vision. You need people who are committed to each other like members of a sports team. When people are passionately invested in a vision, you know you can completely rely on them. What has been the biggest influence in your practice?
I was doing fine in practice for years. Some time around 2003 I got an email from WealthCounsel and decided to check it out. Pretty soon I realized that my practice could be so much more than it was.
WealthCounsel really helped me up my game. I developed a vision for what my practice could be and then I executed on that vision. Over time I got to know many great people who have helped me in my practice and helped me see that I can take my practice to a higher level.
Family is a big deal to you. How you keep perspective in a busy practice? You have to set your priorities and take care of what matters most. I look at each day and see what absolutely must happen to meet my priorities. Then I just do whatever it takes to get that done. If that means I have to be at the office at 6:00 in the morning, then I’m there. If that means I have to work late or on a weekend, I do it. But that also means that if I’ve committed to coach a kid’s game, I’ll be there. It’s not a matter of putting work over family; my family – and especially my relationship with my wife – comes first. But you have to be clear about your priorities. Whatever you set as a priority you simply have to commit to doing whatever it takes to get it done – no matter what.
Coming Soon in Wealth Docx
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Set your plans to meet your priorities. Today has its own obligations, and tomorrow isn’t going to be any less busy than today. Why not just get it done today? What is the most important advice you’ve received? My great mentor was the president of the mission where I served in Brazil during college. He had a great talent for strategic vision, and great skill for leading to execute on that vision. I remember once that I had overstepped some boundaries in Brazil and he sat me down to talk about it. I’ll never forget what he told me: “It’s a lot easier to channel energy than it is to create it.” I’ve always had a lot of energy; I just needed to be able to channel it effectively. That’s something that has stuck with me all these years later, and I’ll never forget it.
The April update will feature: Asset Protection Enhancements Expanded Trust Protector Provisions and Ancillaries Improvements Inspired By Our Members
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Asset Protection & Wealth Docx™ Thomas J. Ray, Jr., Esq, Wealth Docx Executive Editor In fall 2014, the Asset Protection Advisory Group— which includes Jeff Matsen, who is featured in this issue—met to review WealthCounsel’s Domestic Asset Protection Trust module. The group suggested some minor enhancements to the system but more importantly, suggested the addition of a new asset protection tool: The Wealth Docx Third-Party Domestic Asset Protection Trust. The Third-Party DAPT is the brainchild of Las Vegas attorney Steve Oshins (who calls it the Hybrid DAPT). It is an alternative to the traditional Domestic Asset Protection Trust, legislation of which has been enacted by several jurisdictions. (The most popular DAPTs are creatures of the Alaska, Delaware, Nevada, and South Dakota statutes, and Wealth Docx gives you the ability to create a DAPT using the laws of those states.) Why an alternative to a traditional DAPT? Although the first DAPT legislation was passed nearly 20 years ago, not a single DAPT has been tested by any state’s court of last resort. But a US Bankruptcy Court recently refused to honor an Alaska DAPT. In re Huber, 2013 Bankr. LEXIS 2038, May 17, 2013. And Section 548(e) of the federal bankruptcy code contains the 10-year “clawback” provision impacting these trusts. These factors have led some attorneys to question the effi-
ciency of the DAPT, and to look for a safer alternative. The Third-Party DAPT offers that alternative. Here’s why: The common law prevented a beneficiary’s creditor (except in the case of a self-settled trust) from attaching the beneficiary’s trust interest when the trust provided that a third-party Trustee distribute to the beneficiary “only so much of the income and principal . . . as the [T]rustee shall see fit to pay,” (that is, a wholly discretionary third-party trust), and even without inclusion of a “spendthrift clause.” Restatement of Trusts (Second) § 155. This common law rule protecting the interest of the beneficiary of a third-party trust is effective in most jurisdictions. The Third-Party DAPT relies on this rule. Unlike the traditional DAPT—which is a self-settled trust for the benefit of the grantor—the Third-Party DAPT is initially set up for the benefit of the grantor’s spouse and descendants but NOT for the grantor. Instead, the settlor can access the trust assets indirectly through the spouse or, if the grantor isn’t married, through his or her descendants.
A PROPERLY DRAFTED THIRD-PARTY DAPT HAS THESE FEATURES: The trust is drafted with the spouse as beneficiary. It includes a provision that defines the spouse as the person to whom the grantor is married to and living with from time to time. This provision gives the grantor the ability to access the trust assets through a subsequent spouse if the grantor’s current spouse dies or if there is a divorce. The grantor retains the ability to remove and replace the Trustee. The trust includes a provision giving the Trust Protector the authority to add trust beneficiaries, including the settlor. (If the Trust Protector adds the grantor as a beneficiary, the trust assets may become subject to the claims of the grantor’s creditors. Some planners seek to avoid this outcome by situsing the trust in a DAPT jurisdiction like Alaska, Delaware, Nevada, or South Dakota.)
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The Third-Party DAPT will be available in the next Wealth Docx release. You will find the Third-Party DAPT in the system, here:
In addition to the Third-Party DAPT, the Asset Protection Advisory Group recommended the addition of the Tennessee Community Property Trust to our system. (Yes, we know this isn’t an asset protection tool, but the Asset Protection Advisory Group felt compelled to recommend it.) The Tennessee Community Property Trust is a joint living trust that allows married couples in common law states to take advantage of the so-called double step-up available to married couples in community property states. Under community property rules, all the basis in assets owned as community property receive a “step-up” in basis at the death of the first spouse to die, not just ½ of the basis attributable to that deceased spouse. This double step-up can save significant capital gains taxes if the surviving spouse sells the property. If a couple in a common law jurisdiction transfers their joint property to a Tennessee Community Property Trust, the property in the trust will be treated as community property for that couple. The Tennessee Community Property Trust will be available in our next release as well. It is part of the Joint Revocable Living Trust module and can be found here:
About the Author Mr. Ray is executive editor of Wealth Docx, and the primary draftsman of Wealth Docx charitable components. Ray has lectured and written extensively in the charitable tax planning area, and conducted seminars and workshops for attorneys, accountants, financial advisors, development officers, and donors throughout the United States. He is the author of the ABA bestselling deskbook entitled Charitable Gift Planning: A Practical Guide for the Estate Planner. Mr. Ray has written two privately published technical training manuals for lawyers on remainder trusts, lead trusts, private foundations, and supporting organizations. He is a member of the Missouri and Oklahoma bars, and is admitted to practice before the United States Tax Court and the United States Supreme Court. Mr. Ray is a principal in Planned Giving Concepts, Inc., a trust administration company providing support for charitable remainder trusts, lead trusts, and private foundations. Mr. Ray received his undergraduate and law degrees from Oklahoma City University.
Clarity in Asset Protection: The Voidable Transactions Act Jeremiah Barlow, JD, WealthCounsel
In 2014, the Uniform Fraudulent Transfer Act (UFTA) was renamed to the Uniform Voidable Transactions Act (UVTA).1 Why is this important in asset protection? In the realm of asset protection, “fraudulent transfers” provide a means for creditors to void assets that were transferred to an asset protection trust. Thus, understanding the importance of what is now the UVTA, as well as how it applies, is vital for any attorney practicing in the area of asset protection. This article will discuss the following key revisions to what is now the UVTA: 1) the term “voidable” is now used in place of “fraudulent”; 2) the burden of proof is clarified; and 3) the amendment seeks to clarify the choice of law issue that commonly arises during application of fraudulent transfer laws. 1 The UFTA was approved by the National Conference of Commissioners on Uniform State laws in 1984 and is in effect in approximately 37 jurisdictions.
WHAT IS THE UFTA? Under the UFTA, a “fraudulent transfer” occurs when a debtor transfers property to another party with the intent to hinder, delay or defraud creditors; or, if the debtor was insolvent at the time of the transfer, the debtor received less than reasonably equivalent value for such property. In general, the UVTA provides a remedy for creditors against these transferees by allowing any such fraudulent transfer to be “voided” and treated as if it never happened. As a result, the value of the property is returned to the debtor or its estate. In the realm of asset protection, the UFTA is significant as creditors often try to use the fraudulent transfers to void transfers to an asset protection trust. By doing so, the creditors are able to effectively attach these assets, where this may not have been possible if the assets remained in the asset protection trust itself.
FRAUDULENT VS. VOIDABLE The change made in the UVTA from using the term “fraudulent” to “voidable” is significant. The UFTA’s very name has made it difficult to understand how it applies because it implies some type of fraud has occurred, rather than just voiding a transfer. As such, the changes to what is now the UVTA seek to clarify its application and provide a greater degree of certainty for those litigating fraudulent transfer cases. The terms “fraud” and “fraudulent transfer” are actually unrelated terms, apart from their semantic similarity. Per Black’s Law Dictionary, “fraud” is “[a] knowing misrepresentation of the truth or concealment of material fact to induce another to act to his or her detriment.” Whereas a “fraudulent transfer” is merely a transfer made with the intent to hinder, delay, or defraud a creditor. As one can see, under the UVTA, a fraudulent transfer does not require a showing of actual fraud, nor was it ever intended to do so. The difference between common law fraud and a fraudulent transfer is important because they apply different evidentiary standards of proof. Some courts have applied the higher “clear and convincing” standard of proof that applies to fraud, whereas others have applied a lesser “preponderance of the evidence” standard of proof.
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Noteworthy, the term “fraudulent transfer” also improperly attributes impropriety to asset protection planning, and the term suggested that a fraudulent transfer imposed additional liability upon the debtor and attorneys other than the reversal of the transaction, which could not be further from the truth. By changing the term used from “fraudulent” to “voidable”, the UVTA addresses the above confusion by clearly identifying the evidentiary requirements for a voidable transaction claim. In addition to replacing the word “fraudulent” with the word “voidable”, the UVTA clarifies the standard of proof for a voidable transaction and the burden of rebutting the presumption of a debtor’s insolvency.
BURDEN OF PROOF When it comes to proving a “fraudulent transfer,” a debtor usually does not outright admit they transferred assets with the intent to hinder, delay, or defraud creditors. For this reason, the UFTA provides a set of factors, referred to as “badges of fraud,” that if a creditor is able to prove one or more exist, then the creditor can deem the transfer void. In short, these factors include whether the: a) transfer or obligation was to an insider; b) debtor retained possession or control of the property; c) transfer or obligation was disclosed or concealed; d) transfer was of substantially all of the debtor’s assets; e) debtor removed or concealed assets; and (f) debtor was insolvent or became insolvent shortly thereafter. Under the UVTA, it is now clearly stated that the creditor has the burden to establish the elements of its claim by a “preponderance of the evidence,” and not the higher “clear and convincing” standard. Importantly, in its comments the Commission warns that courts should not “apply any nonstatutory presumptions that [alter] the allocation, and should be wary of the nonstatutory presumptions that would dilute” the UVTA.2 While the burden of proof remains with the creditor, the UFTA has historically provided a rebuttable presumption that a debtor is insolvent if it fails to pay debts as they come due. The UVTA enhances this presumption in two ways. First, the UVTA clarifies 2 See, official Comment 11, National Conference of Commissioners on Uniform State laws
that any nonpayment of debts that are the subject of a “bona fide dispute” are not presumptive of insolvency. This aligns the UVTA with the intent of the Bankruptcy Code.3 Second, the UVTA expressly states that the burden to rebut this presumption falls on the debtor, conforming to the treatment of rebuttable presumptions in the Uniform Rules of Evidence.
CHOICE OF LAW The issue of which state’s law should apply is often an intensely litigated issue because fraudulent transfer laws vary among the states in several respects. For example, in California there is a seven-year statute of limitations for a fraudulent transfer claim4, while Delaware has a four-year statute of limitations5, and Virginia has no statute of limitations.6 The UVTA resolves this choice-of-law issue by including a governing law that applies the law of the debtor’s residence at the time that the transfer was made to claims under the UVTA.7
to adopt all or a portion of the Act. Currently, most states have adopted a version of the UFTA (including California, Delaware, the District of Columbia and Pennsylvania). Until states begin to adopt the UVTA and its application is seen in courts, the full impact of the revised UVTA will not be known. Additionally, in the realm of asset protection, the use of the term “voidable” helps to remove any implication that a debtor or attorney should be liable for something more than just voiding the transaction. This should help to rest attorneys’ angst for those who create trusts that are later declared voidable under the UVTA because they will not be forever connected with a “fraudulent” transaction.
REFERENCES: National Conference of Commissioners on Uniform State Laws, 2014 Amendments to the Uniform Voidable Transactions Act (formally Uniform Fraudulent Transfer Act). Uniform Fraudulent Transfer Act (1984).
IMPLICATIONS FOR ASSET PROTECTION? As evidenced in the foregoing, the intent of the revisions made by the Commission was to create more uniformity in application by courts; foster uniformity between other uniform acts and law, such as the Uniform Rules of Evidence and Bankruptcy Code; and provide greater certainty for those litigating fraudulent transfer cases. It is important to note, however, that the UVTA, as with any uniform code, is adopted at the discretion of individual states. Thus, each state legislature may choose 3 See, 11 U.S.C. § 303(h)(l) 4 Cal. Civ. Code § 3439.09 5 Del. Stat. Ann. § 1309 6 Virginia instead relies only on the common law doctrine of laches to determine if claims are stale (See Bartl v. Ochsner (In re Ichiban, Inc.), No. 06-10316-SSM, (Bankr. E.D. Va. 2007)). 7 For individual debtors residence is determined by the person’s state of residence, and for businesses, the state in which its business is conducted.
Jay Adkisson, “The Uniform Voidable Transactions Act – What’s With The Name Change?”, forbes.com, (July 18, 2014). Jonathan Karmoan, “What’s in a Name? Amendments to the Uniform Fraudulent Transfer Act” (August 15, 2014).
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Minimizing the Risks Associated with Practicing Asset Protection Kristin Yokomoto, MBA, JD, LLM The demand for asset protection by persons seeking to protect their wealth from creditors and third parties is justifiably on the rise. Similarly, the number of attorneys becoming educated about, and experienced in, asset protection is also on the rise. This trend may be due, in part, to the permanent five million dollar gift and estate tax exclusion, as adjusted for inflation, which eradicated significant portions of some estate planning attorneys’ practices; the increase of malpractice and breach of contract claims; and a heightened awareness of asset protection due to recent favorable and unfavorable opinions and rulings. Some asset protection techniques such as insurance, qualified retirement planning, or forming corporations and limited liability companies may be relatively simple, are governed by clear laws and may not trigger fraud concerns. However, other techniques such as off-shore trusts, domestic asset protection trusts and hybrids are complex, involve a myriad of complex laws and are often sought by persons who are already subject to known or probable claims against them. These people can create great risks to an attorney. To minimize the risks associated with practicing asset protection, below are seven things that attorneys can consider doing.
attorneys should be familiar with the fraudulent conveyance or transfer rules in their jurisdiction. States have implemented the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act, or their own rules. Nonetheless, every state has enacted rules which are similar to the U.S. Bankruptcy Code’s fraudulent transfer provisions and make certain transfers voidable in order to protect creditors and other third parties who have a valid interest in the transferred assets. Embedded in these rules are the related statutes of limitation that
govern the amount of time that a creditor can look back and void certain transfers. These rules provide, among other things, that it is fraud if the person is insolvent at the time of the transfer or possesses an actual intent to hinder, delay or defraud present or future creditors. These rules further provide specific definitions for “transfer”, “creditor” and “claim”, and include provisions for civil and criminal liability that should be reviewed.
attorneys need to understand the applicable state’s ethics rules, state and local bar opinions, and applicable case law, if any. While a discussion of ethics would constitute a separate article, attorneys should be familiar with the general rules of their state which prohibit an attorney from engaging in conduct involving dishonesty, fraud, deceit or misrepresentation and provide that an attorney shall not counsel or assist a client to engage in conduct that the attorney knows is criminal or fraudulent. Attorneys who purport to specialize in an area of law which requires legal specialization may be held to a higher standard of care. Asset protection may be considered such a specialized area of law. If so, attorneys would be required to exercise the care, skill and diligence commonly exercised by asset protection experts. Accordingly, attorneys practicing asset protection should either be experts or seek a strategic relationship with an expert. (For information on strategic relationships see Minimizing the Risks Associated with Strategic Relationships, The WealthCounsel Quarterly, October 2011, Volume 5, No 4.) While a violation of an ethics rule may not give rise to a cause of action against an attorney in itself, the rules are designed to provide guidance to attorneys and a structure to regulate attorney conduct through disciplinary proceedings which could result in suspension or disbarment. Likewise, failure by an attorney to exercise the requisite care, skill and diligence
could result in malpractice liability. On a separate note, attorneys may have an ethical obligation to provide asset protection advice or refer a potential or actual client to an asset protection expert. Although the rules appear to be silent on the issue, there are cases which suggest that an attorney is required to protect clients from creditor claims to the fullest extent and that an attorney has a duty to inform clients of issues outside of the engagement. An attorney may be able to limit such exposure by notifying a potential client in writing that asset protection planning is specifically excluded from the contemplated engagement.
as emphasized by Steve Oshins, Esq., AEP (Distinguished) of Oshins & Associates in Las Vegas, Nevada, it is imperative to get to know the person seeking asset protection and ask the right questions. Many of the requisite questions will come to the attorney based upon the demeanor and statements of the person seeking services and whether or not the person was referred by a trusted referral source. Attorneys should, among other things, ascertain if the person appears to be in a rush to implement asset protection planning and the related reasons; inquire about their relationships with their spouses, children, and business partners; gather information about their assets, wealth, sources of income, businesses, employment, debts and liabilities; determine if they have existing estate planning, insurance, retirement plans; assess their level of worry or concern about existing or anticipated problems with creditors or other third parties; and discover if there are any outstanding judgments or pending litigation, or the threat of such.
obtain an affidavit of solvency from the person seeking asset protection. In such affidavit, the person would declare under penalty of perjury, among other things, that such person: (i) is the owner of the subject assets to be transferred with all rights, title, and privileges to convey or transfer such assets; (ii) is not subject to any pending proceedings or threatened claims which could result in a judgment; (iii) is not involved in any event or transaction which could be expected or antic-
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ipated to develop into a claim or controversy with any creditor in the future; (iv) is not a judgment debtor; (v) is not a named defendant in any lawsuit or proceeding; (vi) is, and will remain, solvent and able to pay all reasonably anticipated debts after the transfer of the subject assets; (vii) is not, and is not about to become, engaged in any business or transaction which would render the remaining assets insufficient; (viii) does not intend to incur debts beyond such person’s ability to pay; (ix) does not have any intent to hinder, delay or defraud any creditor or third party; (x) has not filed, and does not intend to file, for relief under any Chapter of the U.S. Bankruptcy Code in the future; (xi) is not, and does not reasonably expect to be, under investigation by any federal or state agency, or in violation of any statutes administered by any agency, including, the Internal Revenue Service, Federal Trade Commission, Securities and Exchange Commission, United States Postal Service, Drug Enforcement Agency or Federal Bureau of Investigation; (xii) has read the Money Laundering Control Act and confirms and represents that none of the subject assets were derived from any of the activities specified in such Act and that none of the items of “financial misconduct” are applicable to such person; and (xiii) is not in default on any child support payments and does not intend to default on any such payments.
conduct adequate due diligence on the person seeking asset protection. The ABA Committee on Ethics and Professional Responsibility provided in Informal Opinion No. 1470 (1981) that an attorney should not undertake representations without making further inquiry if the facts presented by a prospective client suggests that the representation might aid the client in perpetrating a fraud or otherwise committing a crime. As such, attorneys should consider requesting and reviewing existing estate planning documents, tax returns, business agreements, permits and licenses. Furthermore, consider searching for publically available information such as lawsuits, real property liens, personal property liens, and license standings. Finally, consider conducting consented background checks and obtaining personal references from the client’s banker, other attorneys, and accountant.
prepare a proper engagement letter for asset protection services. Due to the commonly known definition of “asset protection” as placing assets beyond the reach of creditors, attorneys may want to consider whether or not to specifically use such words as they may be inferred to suggest a scheme. Some attorneys are of the opinion that the engagement letter should set forth what constitutes a fraudulent transfer and the related consequences and that the attorney is relying upon the person’s full disclosure. Some attorneys also include a provision indicating that there is no guaranty that the implementation of asset protection techniques will indeed protect the person’s assets from all creditors. While it is prudent for attorneys to include these descriptive and protective provisions, such needs to be weighed against the inherent implication of a scheme, even if a legitimate one. Other general provisions which should be thoughtfully mentioned are the scope of services and excluded services, rights to withdrawal, and ability to hire and consult with other professionals, including other attorneys which shall be paid for by the client. While certain provisions which refer to the nature of services and planning techniques may be redacted, keep in mind that engagement letters and billing statements may not be protected by the attorney-client privilege. Attorneys should also consider sending non-engagement letters to persons whom the attorney declines to engage and those who fail to return a signed affidavit of solvency or other requested due diligence. Such non-engagement letters should be sent out anytime that an engagement does not occur, whether or not the consultation involved asset protection.
an attorney should r e v i e w such attorney’s malpractice policy for coverage and exclusions. Insurance carriers require applications to be completed. Verify that the submitted application indicated that asset protection may be performed for clients. Different carriers have different forms, but most, if not all, require applicants to indicate the percentage of their practice dedicated to various areas of law. Complex areas of law such as securities, taxation and estate planning require supplemental ap-
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plications and associated riders. As asset protection becomes a more established area of law, insurance carriers may require supplemental forms and charge additional premiums. This may be the case especially if there were to be a rise in successful malpractice claims against attorneys who practice in this area. In conclusion, attorneys practicing asset protection can minimize liability exposure by being knowledgeable about the applicable rules and laws, being an expert or forming a strategic relationship with an expert, and implementing some common sense practices.
About the Author Kristin Yokomoto (WealthCounsel Member since 2014) is the founder of Balanced Legal Planning, APLC which specializes in Estate Planning and Business Planning in Newport Beach, California. Kristin helps her clients by providing plans which balance benefits and risks. She can be reached at (949) 769-3448, firstname.lastname@example.org or www.balancedlegalplanning.com. Kristin thanks Steve Oshins for providing helpful answers which were incorporated into this article.
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Synopsis of Various Offshore Jurisdictions Craig Redler, Attorney at Law, Manager - Client Services, Southpac Trust Asset protection planning takes many forms. There are several countries and various American states that hold themselves out as suitable ‘asset protection jurisdictions.’ As for the American states that have enacted asset protection statutes, most notably Nevada, Delaware, Alaska and South Dakota, these are not the focus of this article and are worth mentioning only so much as to illustrate that any practitioner offering asset protection services would be well advised to be aware of the weaknesses of Domestic Asset Protection planning. Accordingly I will only briefly discuss Domestic Asset Protection Trusts (‘DAPTs’) versus Offshore Asset Protection Trusts. Quite simply put, by most measureable standards, Foreign Asset Protection Trusts (‘FAPTs’) are the most reliable asset protection vehicles available. Considering that the essence of an APT is essentially to put an asset beyond the reach of a creditor, it seems obvious that if the asset remains domiciled in the US, anywhere in the US, it is potentially vulnerable to a creditor utilizing American courts. Keeping in mind that transfers to a trust are, by their very nature, generally without consideration, a creditor bringing a timely claim against a DAPT can set aside the transfer under the various state adaptations of the Uniform Fraudulent Transfer Act, the Federal Bankruptcy Act or any number of other Federal and state laws that disfavor transfers for little or no PAGE
consideration. Cases have demonstrated that the Full Faith and Credit Clause and the Supremacy Clause of the US Constitution make a DAPT vulnerable. (See e.g. Waldron v. Huber, 2013 WL 2154218 (Bk.W.D.Wa., Slip Copy, May 17, 2013), Case No. 3:14-cv-05083; Kilker v. Stillman, 2012 WL 5902348 (Cal.App. 4 Dist., Unpublished, Nov. 26, 2012)). In contrast, in the case of Offshore or Foreign Asset Protection trusts, a judge simply cannot compel a foreign trustee to release assets to your client’s judgment creditors. Most of the jurisdictions with asset protection legislation will not even recognize a judgment that originates in another country thus forcing the creditor to essentially re-litigate the claims in the offshore jurisdiction. Moreover, most jurisdictions with asset protection statutes have very short limitation periods for bringing a claim against the trust such that often, before the creditor even obtains a domestic judgment, the statute of limitations in the offshore jurisdiction has already run. Even if the creditor gets its claim filed in a timely manner, re-litigating the claim requires physically appearing in the offshore jurisdiction and overcoming procedural obstacles, making the task of challenging the trust truly daunting. Additionally, unlike the US, most offshore jurisdictions have no bankruptcy laws and therefore there are no claw-back provisions. In these situations the creditor is left with no option other than common law fraud as a theory to convince a court to void a dispo-
sition to a trust. While the effectiveness of the FAPT is clearly superior if domiciled offshore, not all offshore jurisdictions are the same. The purpose of this article is to compare and contrast some of the jurisdictions with asset protection legislation to assist the practitioner in making a decision as to where to domicile an APT. Of course, the starting point in selecting an appropriate jurisdiction in which to domicile an APT is that jurisdiction’s statutes which vary from jurisdiction to jurisdiction. Beyond the legislation there are other issues to consider in selecting an appropriate jurisdiction in which to establish an APT. These issues include, but are not limited to, the jurisdiction’s political situation. (Is it stable? Is it possible that the client’s assets will be seized or compromised?) Does the country have a familiar legal system (i.e., a common law system vs. a civil law system)? Other factors often overlooked are the jurisdiction’s location and the quality of its judiciary. In this article I compare and contrast some of the jurisdictions commonly used to establish APTs. The jurisdictions I will cover are the Cook Islands, the Cayman Islands, Nevis, Belize and the Bahamas. While this is by no means a comprehensive list of offshore jurisdictions with legislation providing for APTs, these are some of the more common jurisdictions used by American practitioners. Together, they illustrate some of the features of the various statutes that appeal to American clients.
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COOK ISLANDS The Cook Islands is the ‘granddaddy’ of asset protection jurisdictions having one of the older, and better-tested asset protection statutes. APTs are governed by the International Trust Act of 1984. The statute has only been slightly amended from its original form and remains, in the opinion of this author, one of the most robust, useable statutes in this area. The Cook Islands is an independent, English-speaking sovereign nation. The nation consists of 15 islands with a total land area of only 240 square kilometers (92.7 sq. mi). While its land mass is small, the Cook Islands’ Exclusive Economic Zone covers 1,800,000 square kilometers (690,000 sq. mi) of ocean. It is located in the South Pacific approximately 2,940 miles south of Honolulu, HI; 4,700 miles southwest of Los Angeles, CA; and 1,900 miles northeast of Auckland, New Zealand. The Cook Islands are in the same Time Zone as Hawaii, and two hours behind Pacific Standard Time. While the remote location of the Cook Islands may ‘put off’ some clients, the location serves to ‘put off’ creditors as well. The Cook Islands is a member of the British Commonwealth, and has a freely elected, parliamentary form of government. The government is stable and will be familiar to westerners. It has a unique ‘free association’ relationship with New Zealand wherein Cook Islanders carry New Zealand Passports, use New Zealand Currency and may freely work in, and travel to and from New Zealand. The Cook Islands’ main population center is on the island of Rarotonga which is also the nation’s capital. On Rarotonga, you will find modern infrastructure including broad band internet, excellent cell phone coverage and an international airport. It is also where all of the financial services companies can be found.
THE LAW As the Cook Islands is small, in order to prevent bias and favoritism, its Constitution prohibits citizens from serving on the Bench. Cook Islands Constitution §49(2). In order to serve as a Judge in the Cook Islands a person must have either served as a justice of the High Court of New Zealand, on the Court of Appeal of New Zealand, or on the Supreme Court of New Zealand. Id. §49(3). A person that has practiced as a barrister in New Zealand or in a country with an equivalent legal system for at least seven years may also serve. Id. The result of these constitutional provisions is that the judiciary is by and large unbiased, excellent and of a caliber that might otherwise be difficult to find in such a small country.
The legal system in the Cook Islands is founded upon English Common Law. The statute governing trusts is the International Trust Act of 1984, as amended. Trusts registered under the International Trust Act are exempt from any taxation in the Cook Islands. International Trust Act §27B(a)(ii). The legislation explicitly provides for the establishment of self-settled, spend-thrift trusts. Id. §13F. The settlor may retain significant powers. Id. §13C. It provides for a choice of governing law provision and provides that community property transferred to an international trust retains its character as community property. Id. §§13G, 13J. The courts of the Cook Islands will not recognize a judgment from a foreign jurisdiction Id. §13G. Accordingly a creditor must first
come to the Cook Islands, establish its claim and then prove beyond a reasonable doubt that the trust and subsequent transfer of assets was to defeat that particular creditor. Id. §13B. If a solvent settlor settles a trust prior to an occurrence giving rise to a cause of action, the protection offered by the trust is essentially immediate, and any cause of action against the trust is effectively barred. Id. §13B. Moreover, the statute’s definition of “solvent” is narrow. A settlor is “solvent” under Cook Islands law so long as settling the trust leaves the settlor with enough property to satisfy the particular creditor’s claim (if successful). Id. §13B(2). In other words, to be solvent one must merely possess the ability to pay the debt ultimately in question without consideration of any other obligations that the settlor might have. PAGE
If a trust is settled more than two years after the date of the occurrence of the event giving rise to the claim, then transfers to the trust are statutorily deemed not fraudulent. Id. §13B(3)(a). If the trust is settled less than two years after the date of the event giving rise to the claim, then the creditor must commence a cause of action within one year from the date of
settlement of the trust. Id. §13B(3) (b). The International Trust Act has explicitly eliminated any prohibitions against perpetual trusts. Id. §6. The Cook Islands does not have bankruptcy legislation thus denying a creditor relief under a claw-back provision. The International Trust Act of 1984 provides that the settlor’s bankruptcy does
not render the trust void or voidable. Id. § 13A
OTHER LEGISLATION OF NOTE The Cook Islands also has legislation providing for International Business Corporations, Limited Liability Corporations, and Foundations. o
CAYMAN ISLANDS The Cayman Islands are a British Crown Colony located in the Caribbean. The country consists primarily of three islands: Grand Cayman, Cayman Brac and Little Cayman. It is located 500 miles south of Miami, Florida; south of Cuba and northwest of Jamaica. It is in the same time zone as the eastern US. The Cayman Islands issues its own currency, the Cayman Island dollar. English is the official language of the Cayman Islands. Its government is a parliamentary democracy. However, the United Kingdom has reserved the right to disallow bills passed by the legislature and approved by the governor. Cayman Islands law is also derived from English common law and supplemented by local legislation. While the proximity of the Cayman Islands to the US and its familiarity to most Americans might increase the comfort level of a client, it will inevitably do so for creditors as well. The Cayman Islands court of appeal is the highest court in the nation. The court of appeal and grand court judges are appointed by the governor on the advice of a judicial and legal services commission. The Cayman Islands court system is reasonably well developed, with final appeals ultimately heard by the Privy Council in London.
THE LAW Cayman Islands Trust law is principally codified in three statutory instruments: Trusts Law (2009 Revision) (the ‘Trusts Law’), the Fraudulent Dispositions Law (1996 Revision) and the Perpetuities Law (1999 Revision). Under Cayman law, trust property may be exempted from income tax, capital gain tax, wealth tax, withholding tax, gift tax, or inheritance tax for up to 50 years if the trustee obtains a certificate from the Governor-in-Council confirming that the trust will remain exempt from any potential future taxes for the specified time. Trusts Law 2009 Revision §81(1)-(2). PAGE
The Fraudulent Dispositions Law (1996 Revision) provides that any disposition of property to a trust is voidable within six years at the instance of a creditor if that disposition was in fact an attempt to defraud creditors. Id. §4(3). The burden of proof to establish the fraudulent intention is upon the creditor. Id. If a court finds that a voidable transfer has been made it will only set aside what it finds to be voidable to the extent necessary to satisfy the claim of the creditor bringing the action. Id. §6. The duration of a trust in the Cayman Islands cannot exceed 150 years. Perpetuities Law (1999 Revision) §5(1).
Although the Cayman Islands have strict secrecy laws, it has entered into the Mutual Legal Assistance Treaty with the United States. Under this agreement, the Cayman Islands will supply information to the United States in connection with certain drug investigations and white-collar crimes. The Cayman Islands does have bankruptcy laws which could lead to diminished asset protection.
OTHER LEGISLATION OF NOTE The Cayman Islands also has legislation providing for Low Tax Corporations. o
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NEVIS Nevis, along with St. Kitts, is one of two islands comprising the Federation of St. Christopher (collectively, the “Federation”). This two-island nation is located in the Eastern Caribbean approximately thirteen hundred miles southwest of Miami, Florida. It is in proximity to Antigua, Dominica, and Puerto Rico. It is an English-speaking common-law jurisdiction with modern communications facilities and established professional financial services. The Federation became an independent member of the British Commonwealth in 1983, under a constitution granting Nevis autonomy and the right to its own legislative and executive functions. It is notable that in 1993, the relationship between St. Kitts and Nevis became strained over disagreements concerning offshore legislation. Nevis is a member of the Caribbean Community (CARICOM) and the Caribbean Single Market and Economy (CSME). The official currency in Nevis is the Eastern Caribbean dollar.
THE LAW Nevis asset protection trust law consists mainly of the Nevis International Exempt Trust Ordinance of 1994 (“Ordinance”), effective April 28, 1994 (amended 2000). The Ordinance was modeled after the Cook Islands International Trusts Act of 1984. The Ordinance permits self-settled spendthrift trusts, Id. §6(4), prohibits forced heirship, Id. §48, and abolishes the common-law rule against perpetuities, Id. §5(3). The Ordinance exempts trust assets from income, corporation, gift, withholding, estate, asset inheritance, succession, and stamp taxes. Id. §43. Community property transferred to an International Trust in Nevis will maintain its character as Community property. Id. §56(1). An interesting aspect of the Nevis law is that a creditor seeking relief against a Nevis asset protection trust will be required to post a $25,000 bond with the Nevis court in order to proceed with a lawsuit. Id. §55. Similar to the Cook Islands, to attack an international trust the creditor must prove beyond reasonable doubt that the trust was
settled by or on behalf of the settlor with the principal intent to defraud that particular creditor and at the time such settlement took place and that said settlement rendered the settlor insolvent. Id. § 24(3)(a)(b). Even in such a case, a settlement or disposition will not be void or voidable but rather shall be available to satisfy the creditor’s claim to the extent of the interest that the settlor had in the property prior to settlement. Id.
or place of ordinary residence, an international trust is not void or voidable in the event of the settlor’s bankruptcy, insolvency or liquidation. Id.§46.
OTHER LEGISLATION OF NOTE Nevis also has legislation providing for International Business Corporations, Limited Liability Corporations and Foundations. o
A disposition of property to a Nevis International Trust shall not be fraudulent as against a creditor of a settlor if the settlement took place before that creditor’s claim accrued. Id. §44(4). A trust or disposition is deemed not fraudulent as against a creditor if it is settled after the expiration of 2 years from the date that such creditor’s cause of action accrued; or where settled before the expiration of 2 years from the date that the creditor’s cause of action accrued. Id. Moreover, that creditor must commence a cause of action before the expiration of 1 year from the date of such settlement. Id. §44(3)(a)(b). Notwithstanding any provision of the law of the settlor’s domicile PAGE
BELIZE Belize is a country in Central America bordering the Caribbean Sea. Neighboring countries include Guatemala and Mexico. Belize (formerly British Honduras) is the only Central American member of the British Commonwealth. English is its official language, and it utilizes an English common law-based judicial system. The government system is a parliamentary democracy. Belize became an independent republic in 1981 and has been internally politically stable since then; however, it does have an ongoing border dispute with Guatemala. The controversy dates to 1821, when Guatemala gained independence from Spain, and England was occupying what later became Belize. Guatemala claims more than half of what is now territorial Belize. Belize has fewer than 350,000 inhabitants, making it the most sparsely populated country in Central America. It is also Central America’s only English-speaking republic. Belize has excellent telecommunications and a convenient time zone as it is in the Central time zone (the same as the midwestern US). Belize has a mixed economic system with both free market and centralized economic planning. Belize issues its own currency, the Belize dollar.
THE LAW Offshore Trusts in Belize are regulated by the Trusts Act of 1992 (the “Act”). The Act provides that trusts are not subject to Belizean income, estate, or gift taxes when settled by non-residents for the benefit of non-residents. Id. §64. At Section 6, the Act provides the duration of a trust may not exceed 120 years. It explicitly validates self-settled spendthrift trusts, Id. §12(4), and provides that a settlor may not only choose the governing law of the trust but also permits the terms of the trust to be severed with each severed section subject to different governing
laws. Id. §240. There seems to be a great misunderstanding regarding statutes of limitations as they apply to claims against a Belizean trust. Belize is often touted as offering immediate asset protection without regards to any statute of limitations on claims. If this were the case I would question whether an American judge would view the statute as legitimate. Be that as it may, while the restrictions upon the Court are generous, the types of claims that can’t be pursued are in fact limited. Section 7 of the Act provides that where a Belizean trust is concerned, any claims arising out of marriage, divorce,
forced heirship, or creditor claims in the event of the settlor’s insolvency are immediately barred. Id. §7(6). In other words only marital claims, estate claims, and claims from creditors in bankruptcy are barred. All other types of claims for fraudulent transfer may be brought against a Belize international trust.
OTHER LEGISLATION OF NOTE Belize also has legislation providing for International Business Corporations, Limited Liability Corporations and Foundations.o
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THE BAHAMAS The Bahamas is an archipelago of almost seven hundred islands in the Atlantic Ocean extending from sixty miles east of Palm Beach, Florida, to just north of Haiti. Other proximate countries include Cuba and the Dominican Republic. English is the official language of this common-law member of the British Commonwealth. The Bahamas was settled around 1640 by a group of Englishmen from Bermuda. It has a representative form of government, and has so since the seventeenth century. It has existed as an independent country within the Commonwealth since 1973. While the official currency in the Bahamas is the Bahamas Dollar, US Dollars are freely used there. The Bahamas has an open-market economy and is in the Eastern Time Zone.
THE LAW Bahamian Asset Protection trusts are by and large governed by the Fraudulent Dispositions Act. Under this Act, a transfer of assets will be voidable if liability to the creditor bringing the claim existed at the date of transfer, and the transfer was for no or inadequate consideration. Fraudulent Dispositions Act §4(1). Before prevailing on a claim the creditor must establish that a transfer was made with intent to defraud. Id. §4(2). The Act defines ‘Intent to Defraud’ as “an intention of a transferor willfully to defeat an obligation owed to a creditor” Id. §2. I would note that the defini-
tion does not seem to be limited to a particular creditor. Be that as it may, the burden of establishing an intent to defraud is on the creditor seeking to set aside the disposition. Id. §4(2). The transfer is voidable by the creditor who is prejudiced only to the extent of that particular creditor’s claim. Id. §6. At any rate the creditor must bring his action within two years of the transfer. Id.§4(3).
Trusts (Choice of Governing Law) (Amendment) Act 1996. It is interesting to note that although Bahamian trust law permits a settlor to be a beneficiary of a Bahamian trust, a settlor is not protected by a spendthrift provision in their own rust.
Other Bahamian trust-related legislation includes the Trustee Act 1998, the Trusts (Choice of Governing Law) Act 1989, and the
The Bahamas also has legislation providing for International Business Corporations, Limited Liability Corporations and Foundations. o
OTHER LEGISLATION OF NOTE
CONCLUSION This is just a small sample of the dozens of jurisdictions that have asset protection legislation. The lesson here is that despite the temptation to create a DAPT, there is an appropriate jurisdiction for virtually any client that is interested in or that could benefit from effective asset protection planning. Each offshore jurisdiction has its strengths and weaknesses but there is likely at least one that you and your client will be comfortable with despite the temptation to plan domestically.
About the Author An original shareholder of the law Offices of Redler & Seigel, P.C., an estate planning, tax planning, asset protection and trust administration law firm serving the St Louis metropolitan area, Craig relocated to the Cook Islands office of Southpac Trust International, Inc. Prior to this, Craig was a litigation associate with Goffstein, Raskas, Pomerantz, Kraus & Sherman, L.L.C. in Saint Louis. He has also served as a Legislative Assistant to the Honourable Richard A. Gephardt, Majority Leader, US House of Representatives, as well as spent time as a Systems Engineer for EDS/GM in Detroit Michigan and a talk-radio host. Craig earned his B.S.B.A degree from the University of Missouri, Columbia and his J.D. degree from Washington University in St. Louis. Craig is admitted to The Missouri Bar and the Illinois State Bar Association. He is also admitted to practice before the U.S. District Court, Eastern District of Missouri, U.S. District Court, Southern District of Illinois and the U.S. Court of Appeals for the 8th Circuit.
Series LLCs and Asset Protection: Will a Model Uniform Act Clear the Fog? Jennifer Villier, JD We have all heard the common expression: “you get what you pay for.” Touted by some as a low cost asset protection strategy, series LLCs have gained increasing popularity over the past several years. Yet there are some significant concerns about the use of series LLCs, including uncertainty with respect to tax, bankruptcy, and choice of law issues. Unlike limited liability companies, series LLCs are far from having achieved uniform recognition across the U.S. To that end, the National Conference of Commissioners on Uniform State Laws (“NCCUSL”) drafting committee has been working on a uniform law for series LLCs. The drafters’ comments, however, leave open questions regarding whether such statute will ever be finalized. This article discusses these and other issues pertaining to the use of series LLCs in an asset protection plan, and ultimately cautions practitioners against the use of such entities until the unknowns are resolved.
WHAT IS A SERIES LLC AND WHAT IS ITS APPEAL? A series LLC is a sophisticated alternative to forming separate, stand-alone LLCs. A series LLC is comprised of a single entity, partitioned into multiple “series” or “cells,” each segregated from the others with respect to ownership, assets and liabilities. In other words, each protected series1 has its own separate veil of limited liability protection. Initially business structures created under Delaware law for mutual funds, series LLCs are now being used in the context of other business enterprises for purposes of asset protection. They tend to appeal to those with different lines of business, different categories of assets, or different types of property they wish to manage and operate separately, under the umbrella of a “master” LLC. For example, a real estate developer may establish a series LLC to segregate each property within its own protected series. Similarly, a taxi company may utilize a series LLC to keep each taxi in a separate, protected series, segregating it from the liabilities associated with any other taxi in the fleet. Series LLCs are also being used for holding companies, which are often used in asset protection strategies to hold valuable assets separate from the operating company, which then leases the holding company’s assets. Estate planners have also used series LLCs to separate assets according to beneficiary. The big question is: if limitation of liability is the goal, then why choose a series LLC structure over separate LLCs that serve the same purpose? The answer for some is the perceived cost savings of forming and operating a series LLC compared to multiple separate LLCs. As discussed in more detail below, the allure of paying a single filing fee for a series LLC, as opposed to multiple filing fees when multiple LLCs are formed, in most cases simply does not justify the risks inherent in this novel and untested vehicle.
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WHAT ARE SOME UNANSWERED QUESTIONS SURROUNDING SERIES LLCS? Series LLCs are complex entities being used in circumstances that they were not originally intended for. Anyone interested in forming a series LLC must consult with an attorney experienced with series LLCs and well-versed in the myriad of risks inherent to their use. Such risks include but are not limited to the following: 1. Choice of Law Given the relatively small number of U.S. states that have adopted series LLC legislation, and the limited case law to provide guidance, there are certain jurisdictional uncertainties facing series LLCs. For example, if a series LLC is sued by a third party in a state that does not authorize the formation of series LLCs, it is possible that the law of that state would be applied. It is not known whether that state would respect the liability shield of the series LLC structure. If the limited liability among the protected series were not respected, then such a lawsuit could potentially put the assets of all protected series and the master LLC at risk. As the NCCUSL committee has noted, the series LLC “construct has long existed in the context of investment trusts, but in that context cross-series liability claims do not arise.” Thus, the dearth of case law directly on point leaves practitioners to draw analogies from cases involving traditional LLCs, or to analyze unpublished opinions with limited precedential value.2 2. Bankruptcy The U.S. Bankruptcy Code does not recognize series LLCs, thus, it is not possible to say with certainty how series LLCs would be treated in 2 See Alphonse v. Arch Bay Holdings, L.L.C., No. 1330154, 2013 WL 6490229 (5th Cir. Dec. 11, 2013) (“The internal affairs doctrine does not apply to disputes that include people or entities that are not part of the LLC”;
1 Note that in this article, the term “protected series”
thus, a non-series LLC state need not apply the law of a
will be used to refer to these units, as that is the term
series LLC’s state of formation in disputes involving third
consistently used in the NCCUSL committee drafts.
the event of bankruptcy. It is not clear whether an individual, protected series in a series LLC can file for bankruptcy in its individual capacity. Furthermore, because of an absence of precedential case law, it is difficult to ascertain whether a bankruptcy court would protect the assets of a non-filing protected series from the assets of the protected series that filed for bankruptcy. 3. Corporate Governance As with LLCs generally, the formation and operational requirements of series LLCs are flexible and defined by relevant state law. Part of the attraction of series LLCs is the perceived notion that these requirements will be streamlined and simplified with the use of a series LLC rather than separate LLCs. Practically speaking, forming and operating a series LLC is far from simple. Even though a single LLC operating agreement is permissible for a series LLC, this document must clearly delineate the manner in which assets and liabilities are to be allocated among the different protected series. Depending on how many protected series make up the series LLC, the operating agreement could be a lengthy, heavily nuanced document. Furthermore, the records of each protected series must be separately maintained, which suggests that there should be separate bank accounts for each protected series. Whether there can be any overlap among the protected series in the context of daily operations is untested in court. For example, would sharing insurance coverage, training programs, or administrative support services be permissible? How about inadequate capitalization of one protected series compared to another? What if there is some degree (or significant) overlap in ownership or management between protected series? Would any of these circumstances blur the lines of separation among the protected series and lead to piercing of the veil? Given the lack of case law, it is not possible to say whether series LLCs are under any greater risk of having their veil of limited liability pierced than any other related LLCs. 4. Tax Treatment Aside from IRS Letter Ruling 200803004 (tax classification of separate cells depends on the
structure of each separate cell) and Proposed Regulations Section 301.7701-1 (tax classification of series LLCs and each of their protected series is determined by general tax principles rather than the laws of the state of formation), important tax questions remain unanswered. No guidance exists on the treatment of employment taxes or retirement programs, and there is no indication of when the Proposed Regulations, published in 2010, will be finalized. Until that time, protected series in a series LLC are generally treated as a separate legal entity that determines its tax classification under the “check-the-box” rules.
WHICH STATES HAVE AUTHORIZED SERIES LLCS? The number of states that have authorized series LLCs continues to grow. Presently, there are 12: Alabama, Delaware, Illinois, Iowa, Kansas, Montana, Nevada, Ohio, Oklahoma, Tennessee, Texas and Utah. Additionally, Minnesota, North Dakota and Wisconsin permit the formation of series LLCs, but offer no liability protection among the protected series. The District of Columbia and Puerto Rico also have provisions for series LLCs. California does not authorize series LLCs, but permits series LLCs formed elsewhere to register as a foreign entity and do business in California as a series LLC, provided such entity pays taxes and fees for each of its protected series.
STATUS OF UNIFORM SERIES LLC ACT The inconsistency in recognition and treatment of series LLCs across the U.S. suggests that there is a need for uniform legislation. In drafting the Revised Uniform Limited Liability Companies Act in 2006, the drafters considered following Delaware’s lead in authorizing series LLCs, but ultimately opted out of addressing series LLCs in the Act. The drafting committee explained the omission as follows: “Originally devised by sophisticated Delaware lawyers for their ‘funds’ clients, series are now being (mis) used to subdivide assets of operating businesses and to provide unwarranted hopes of low cost ‘asset protection.’ What’s good for Delaware and highly sophisticated deals is not necessarily good for the LLC law
of other states.” A study committee was formed in 2011 to assess the need for uniform series LLC legislation. Among the issues identified in support of a uniform law were the variations among states with respect to (i) the manner for creating protected series, (ii) the “powers” of protected series, and (iii) the nature of a protected series (as a standalone entity or not). A drafting committee was then formed which, at its meeting in April, 2013, identified seven pages of unanswered questions pertaining to series LLCs. Those questions included: (i) protected series separateness, (ii) public disclosure issues, (iii) service of process, (iv) default rules regarding protected series relationships, (v) governance, (vi) management, (vii) transferability of interests in protected series, (viii) ownership of property, (ix) protected series mergers, (x) dissociation and termination, (xi) bankruptcy, (xii) titling and recordation issues, and (xiii) charging order protection. Since the series form of business is also available for limited partnerships and statutory business trusts with characteristics similar to those of series LLCs, the drafters referred to the model act as the “Series of Unincorporated Business Entities Act.” The first draft was published in September, 2013; the second draft followed in February, 2014; and the most recent draft was made available in November, 2014. While it seems that progress is being made, the drafting committee’s comments seem to indicate otherwise, leading to questions as to whether the model act will ever be finalized. The committee instructed that the most recent draft should be considered a “first draft – i.e., a starting point for discussion,” since “fundamental changes” were made to previous drafts. The committee also questioned the need for series LLCs, stating that “the special advantages of protected series remain obscure.”
TAKEAWAYS Although recognized by an increasing number of states, series LLCs remain a largely unfamiliar entity outside the investment fund context. For asset protection purposes, a more predictable approach involving multiple LLCs would be prudent, at least until the series LLC is more widely accepted, used and
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tested in courts. As one commentator put it: “The series LLC may turn out to be a heaven-sent planning tool, or an attractive nuisance that will lure clients and advisors to economic disaster. Anyone involved with series LLCs should proceed with caution.” Cuff, “Delaware Series LLCs and Transactional Practice – Part 2,” 38 Real Estate Tax’n 170 (2011). For Business Docx users who choose to form a series LLC, please note that the option is available only in the full version of the Operating Agreement.
REFERENCES Adkisson, Jay, “Series LLC and the Abyss of the Unknowns” (December 26, 2013) www.forbes.com/sites/ jayadkisson Bahena, Amanda J. “Series LLCs: The Asset Protection Dream Machines?”, The Journal of Corporate Law (2010) Batey, Doug, “NCCUSL Starts Work on a Uniform Series LLC Act – Many Questions Remain” (November 25, 2014) www.llclawmonitor.com/2014/11/articles Deo, Patrick J., CPA, “A New Kid on the Block: Series LLCs” (March 27, 2014) www.cpa2biz.com Forester, Drake, “Defining the Series LLC” (June 20, 2014) www.score.org/resources www.uniformlaws.org Series of Unincorporated Business Entities Act (Drafts 2013-14), National Conference of Commissioners on Uniform State Laws
About the Author Jenny Villier is a member of the Legal Education faculty at WealthCounsel. Prior to joining WealthCounsel, Jenny practiced tax and corporate law at firms in Chicago and Denver. In addition, Jenny has taught business law and transactional drafting courses at DePaul College of Law and Temple University School of Law. Jenny received her JD, magna cum laude, from Notre Dame Law School in 2004, where she served as an editor of the Notre Dame Law Review. Jenny and her husband and their three children reside in Denver.
WYOMING IS HOME TO SOME OF LIFE’S FINER PLEASURES… SKI SLOPES DUSTED WITH CHAMPAGNE POWDER, NATIONALLY RECOGNIZED FLY FISHING RIVERS, AND THE ENACTMENT OF THE FIRST LIMITED LIABILITY COMPANY STATUTE. RECENTLY THE LIMITED LIABILITY PROTECTION AFFORDED TO MEMBERS PURSUANT TO THE 2010 WYOMING LIMITED LIABILITY COMPANY ACT WAS CHALLENGED. ON NOVEMBER 7, 2014, THE WYOMING SUPREME COURT PIERCED THE LIMITED LIABILITY VEIL AND HELD THE SINGLE MEMBER LIABLE FOR THE JUDGMENTS PREVIOUSLY ENTERED AGAINST THE LLC IN GREENHUNTER ENERGY, INC. V. WESTERN ECOSYSTEMS TECHNOLOGY, INC., 337 P.3D 454 (WYO. 2014).
WHILE THE COURT ULTIMATELY PIERCED THE
LIMITED LIABILITY VEIL IN GREENHUNTER, WYOMING REMAINS A FRONTRUNNER JURISDICTION WHEN SELECTING THE VENUE IN WHICH TO FORM A LIMITED LIABILITY COMPANY.
FURTHERMORE, GREENHUNTER PROVIDES PRACTITIONERS
WITH EXCELLENT PLANNING OPPORTUNITIES TO CREATE ONGOING RELATIONSHIPS WITH THEIR BUSINESS CLIENTS AND THE RESPECTIVE ADVISORS.
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GreenHunter Energy, Inc.: The Rare Case When the Limited Liability Veil Will Be Pierced in Wyoming (And Probably in Every Other Jurisdiction) Marty L. Oblasser, Partner, Corthell and King, PC
BRIEF OVERVIEW In 2009, GreenHunter Wind Energy, LLC (“GreenHunter LLC”) entered into a contract with Western Ecosystems Technology (“Western”) for consulting services concerning the potential development of a wind turbine farm in Platte County, Wyoming. Between March of 2009 and July of 2010, Western performed the requested services pursuant to the terms of the contract and billed GreenHunter LLC $43,646.10 for those services. GreenHunter LLC never made any payments toward the outstanding balance, so Western pursued legal action. The trial court entered judgment against GreenHunter LLC in the amount of $43,646.10 for the unpaid bill plus $2,161.84 for attorney’s fees incurred by Western in its effort to compel discovery. Western quickly realized that GreenHunter LLC had no assets with which to pay the judgments. Accordingly, Western sought to pierce GreenHunter LLC’s limited liability veil and hold GreenHunter Energy Inc. (“Member”), the sole member of GreenHunter LLC, liable for the amount of the judgment and discovery sanctions. The trial court found in favor of Western and the Wyoming Supreme Court affirmed its decision.
VEIL PIERCING The protections from liability offered to shareholders/ members by corporations and limited liability companies are routinely scrutinized by courts across the country. In the matter of GreenHunter Energy, Inc., the Court repeatedly stated in incontrovertible terms that “limited liability is the rule, and piercing is the rare exception to be applied only in cases involving excep-
tional circumstances,” that are determined on a caseby-case basis. Id. at 465. The court in GreenHunter outlined a two-prong test and the respective factors that will be considered when determining whether or not to piece the limited liability veil. According to the GreenHunter Court: The veil of a limited liability company may be pierced under exceptional circumstances when: 1) the limited liability company is not only owned, influenced and governed by its members, but the required separateness has ceased to exist due to misuse of the limited liability company; and 2) the facts are such that an adherence to the fiction of its separate existence would, under the particular circumstances, lead to injustice, fundamental unfairness, or inequity. Id. at 462. The court further found that the two-prong test is fact driven and “focuses on whether the limited liability company has been operated as a separate entity as contemplated by statute, or whether the member has instead misused the entity in an inequitable manner to injure the plaintiff.” Id. at 463. Furthermore, it should be noted that the Wyoming Limited Liability Company Act provides limitations on a court’s ability to pierce the limited liability veil. According to Wyo. Stat. Ann. § 17-29-304 (2010): (a) The debts, obligations or other liabilities of a limited liability company, whether arising in contract, tort or otherwise: (i) Are solely the debts, obligations or other liabilities of the company; and (ii) Do not become the debts, obligations or
other liabilities of a member or manager solely by reason of the member acting as a member or manager acting as a manager.
court based its finding on the following facts: •
On June 8, 2009, Western submitted its first invoice to GreenHunter LLC in the amount of $5,022.85, for services provided. Beginning in June 2009 through the end of July 2009, Member transferred approximately $16,500 to GreenHunter LLC’s operating account to pay some of the financial obligations owed by GreenHunter LLC. However, GreenHunter LLC did not pay any part of Western’s invoice.
On August 31, 2009, when Western submitted a second invoice for services rendered in the amount of $14,916.51, GreenHunter LLC had $0.00 in its operating account. During September of 2009, Member transferred $2,397.79 to GreenHunter LLC’s operating account to pay some of GreenHunter LLC’s financial obligations. Yet again, GreenHunter LLC did not pay any part of Western’s invoice.
On November 6, 2009, Western submitted its third invoice in the amount of $7,175.82. On November 23, 2009, Member transferred $4,978.86 to GreenHunter LLC’s operating account to pay some of the financial obligations owed by GreenHunter LLC. Once again, GreenHunter LLC did not pay any part of Western’s invoice.
Credulously, Western continued to provide consulting services under the terms of the contract with GreenHunter LLC. From December of 2009 through July of 2010, Western submitted four additional invoices totaling $10, 740.37. During that time, Member transferred funds to GreenHunter LLC’s operating account to pay some of the financial obligations owed by GreenHunter LLC. Predictably, GreenHunter LLC did not pay any amount owed to Western.
(b) The failure of a limited liability company to observe any particular formalities relating to the exercise of its powers or management of its activities is not a ground for imposing liability on the members or managers for the debts, obligations or other liabilities of the company. The court in GreenHunter analyzed several factors that may be applied when determining whether both prongs of the veil piercing test have been satisfied. Three factors analyzed by the court include inadequate capitalization, intermingling of business and finances, and fraud (actual and constructive). A court may consider evidence of inadequate capitalization because basic busiFACTOR NO. 1: ness practices and “societal policy” dictate that when a limited liability company INADEQUATE incurs potential exCAPITALIZATION penses, the company attempts to arrange for capital remuneration of its financial obligations. When determining whether a company is undercapitalized, a court will “compare the amount of capital to the amount of business to be conducted and the obligations which must be satisfied.” Id. at 463. The court in GreenHunter conspicuously failed to create a bright line rule regarding the amount of business a company must conduct in relation to its financial obligations, to avoid being deemed undercapitalized. The Court did recognize, however, that undercapitalization alone is insufficient to pierce the limited liability veil because “some businesses need a great deal of capital, others need very little, and of course there are the in-betweens.” Id. at 463 – 64. In GreenHunter, the court found that undercapitalization was a proper factor to consider, in the totality of circumstances, when determining whether or not to pierce GreenHunter LLC’s limited liability veil. The PAGE
The Court also noted that GreenHunter LLC often carried a $0.00 balance in its operating account prior to receiving the monetary transfer from Member and immediately thereafter. The court was sensitive to the fact that “start-up companies, new business ventures, and early stage companies sometimes may not have initial capital or income sufficient to cover their expenses, and that they do in fact require periodic capital infusions from members to meet their financial obligations.” Id. at 466. The court, however, was unwilling to accept this premise for GreenHunter LLC
because Member continuously manipulated GreenHunter LLC’s operating account to ensure it would remain undercapitalized and serve as a judgment-proof shell. When considering whether GreenHunter LLC and Member intermingled their businesses and fiFACTOR NO. 2: nances, the Court noted that GreenHunter LLC and the Member did in INTERMINGLING fact maintain separate accounting and busiOF BUSINESS ness records. The Court AND FINANCES did not end its analysis there when considering this factor in the context of piercing the limited liability veil. The specific facts that the Court found to be persuasive that GreenHunter LLC and Member intermingled their businesses and finances included: •
The overlap between GreenHunter LLC’s and Member’s ownership and management was considerable and difficult to understand where one entity ended and the other began. Member and GreenHunter LLC used Member’s accounting department and that the same accountants managed the finances of both entities.
The entities used the same business address and creditors of GreenHunter LLC mailed their invoices to Member’s address for processing.
GreenHunter LLC consolidated its tax returns with the tax returns of Member.
GreenHunter LLC did not have any employees who were independent of Member; rather, all of GreenHunter LLC’s functions were carried out by employees of Member. Employees of Member negotiated and entered into contracts on behalf of GreenHunter LLC, and these same individuals decided which of GreenHunter LLC’s creditors to pay through contributions from Member.
Member assigned its own employees to perform work of GreenHunter LLC, and although Member “charged” GreenHunter LLC for the labor performed by Member’s personnel, Member directly
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paid its employees for that work. •
GreenHunter LLC had no source of revenue aside from the contributions received from Member.
The funds were commingled in the sense that GreenHunter LLC’s bills that Member wanted paid were settled with Member’s funds which were “passed through” to GreenHunter LLC by periodic transfers. A particular bill was paid only if and when Member decided to transfer funds to pay it.
GreenHunter LLC entered into an agreement with Western to procure services for the purpose of supporting and benefitting Member’s business. Member claimed a deduction in the amount of $884,092.00 attributable to the Platte County wind energy project and a loss on its corporate tax return in the amount of $61,047.00 attributable to the same project on its 2009 tax return. Member manipulated the assets and liabilities in a manner such that Member improperly reaped all of the rewards and benefits of GreenHunter LLC’s activities, while simultaneously saddling GreenHunter LLC with all of the liabilities, including the unpaid bills for services rendered by Western. Member had enjoyed significant tax breaks attributable to GreenHunter LLC’s losses, without bearing any responsibility for GreenHunter LLC’s debt and obligations that contributed to such losses. Such a disparity in the risks and rewards resulting from this manipulation would lead to injustice.
Id. at 467. The Court tempered its findings by acknowledging that a single-member limited liability company may properly be taxed as a disregarded entity. The Court specifically decided not to create a scenario “in which a single-member limited liability company would be confronted with a catch 22: either follow federal tax law and risk losing limited liability, or forego advantages available under federal tax law to assure limited liability.” Id. at 468. Accordingly, the Court considered the tax filings because Member directed the benefits from GreenHunter LLC’s wind farm project to itself, while deciding which debts associated with the project would not be paid, while attributing responsibility for those decisions and debts to GreenHunter LLC. The Court further extenuated its holdings by acknowledging that a single-member limited liability company is permitted pursuant to the express language of PAGE
Wyoming’s Limited Liability Company Act. Moreover the Court reasoned that a single-member limited liability company is likely to use the member’s home address as its business address, and the single-member will likely manage the company’s finances, as well as conduct business and negotiate contracts on behalf of the company. The Court was mindful of the fact that single-member limited liability companies are not only valid in Wyoming but also appropriate when created to engage in legitimate business purposes. Finally, the Court recognized that fraud, both actual and constructive, is sufficient FACTOR NO. 3: to pierce the limited liability company’s veil, FRAUD but not a necessary prerequisite. Furthermore, fraud is the only factor that may stand alone to justify a decision to disregard the veil of limited liability because “[i]t is in the public interest to disregard the legal fiction of a separate entity, whether that be a corporation or LLC, when those benefiting from that fiction commit fraudulent conduct.” Id. at 469. In the GreenHunter matter, the Court found that Western did not specifically allege fraud against Member. In Wyoming, a party must assert allegations of fraud with particularity and prove the existence thereof by clear and convincing evidence.
ASSET PROTECTION Wyoming continues to serve businesses, single member or publicly traded, with innovative limited liability protection. Just a few examples of the progressive provisions that practitioners may utilize, under the Wyoming’s Limited Liability Company Act, include: 1. Increased privacy concerning the names of members and managers and their respective capital contributions; 2. Increased flexibility when operating and managing the company; 3. Allowing the enforcement of oral operating agreements; 4. Certain fiduciary duties PAGE
of the members and managers may be waived; 5. A creditor’s sole remedy against an limited liability company is the charging order; 6. A dissociating member only retains a non-voting economic interest and is unable to participate in management or obtain information; and 7. “[A] member is not an agent solely by reason of being a member.” Wyo. Stat. Ann. § 17-29-301. Like all jurisdictions, Wyoming is intolerant of companies that serve as judgment-proof shells and is unwilling to allow injustice to prevail. Notwithstanding GreenHunter LLC’s blatant disregard for basic business practices, the Court struggled with piercing its limited liability veil and stated that its decision was a “close call.” While any other decision by the Court in GreenHunter would have been an affront to justice, certain facts considered by the Court when piercing the limited liability veil cause us discomfort as practitioners. Nevertheless, the GreenHunter Court has created an excellent opportunity for us to alleviate the trepidation of the potential veil piercing scenarios our clients may face. (Yet another reason we are set apart from LegalZoom and its “online legal solution.”) While we all initially counsel our business clients not to comingle assets, to avoid defrauding creditors, and to ensure the company exists for a legitimate business purpose, it is now prudent for attorneys to encourage their clients to participate in subsequent meetings with their advisors to discuss their normal course of business and receive advice on best practices. About the Author A Wyoming native, Marty L. Oblasser (WealthCounsel Member since 2015) attended the University of Wyoming to obtain both her undergraduate and juris doctor degrees. Marty began her career as an associate attorney in the Legacy Planning Department with a law firm in Casper, Wyoming. During that time, she not only focused on building an estate planning and business law practice but she also engaged in trust litigation matters and successfully argued to the Wyoming Supreme Court. Marty is a partner with Wyoming’s oldest law firm, Corthell and King, P.C. and is licensed to practice law in the State of Wyoming as well as the United States District Court for the District of Wyoming. Marty enjoys educating the public about various estate planning and business law matters as well as teaching legal seminars for her local community and presenting continuing legal education courses to her peers for the Wyoming State Bar and the National Business Institute. Marty, her husband, Erik, and their two dogs reside in Laramie, Wyoming.
9 NUMBER 1 / Q1 2015
Education Calendar Q2 APR 2
Thought Leader Series webinar: Dahl v. Dahl and The Hybrid DAPT
Thought Leader Series webinar: Estate Planning in Agriculture and Farming
RLT Drafting Intensive virtual course
Advisors Forum Legal Marketing Showcase webinar
Business Planning webinar
Word on the Street webinar: Ethics of Asset Protection
Joint Webinar with FSP: Role of Life Insurance in Closely-Held Businesses
Advisors Forum Legal Marketing Showcase webinar
APR 14 Business Planning webinar: Estate and Business Planning for the Next Mark Zuckerberg APR 16
Word on the Street webinar: Physician Planning
Advisors Forum Legal Marketing Showcase webinar
EP Essentials II: Expanding Your Toolkit virtual course
Word on the Street webinar: Estate Planning in Agriculture and Farming
Q3 JULY 14-17 Symposium 2015
SEPT 14-18 Funding Mini-Intensive virtual course
Word on the Street webinar
Business Planning webinar
Advisors Forum Legal Marketing Showcase webinar
Advisors Forum Legal Marketing Showcase webinar
AUG 10-21 Irrevocable Trust Planning Intensive virtual course AUG 18
Thought Leader Series webinar SEPT 28-29 Decanting Mini-Intensive virtual course
Word on the Street webinar
Advisors Forum Legal Marketing Showcase webinar
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Published on Apr 1, 2015
The premier publication for trust and estates planning professionals. You'll find insightful and informative articles about many facets of T...