If you wait to protect your assets until someone brings a lawsuit against you, it's too late. 

Anything you do to remove your assets from the reach of your creditors after a lawsuit is filed is likely to be a "fraudulent conveyance." That means the courts can and will seek to obtain repossession from the transferee. One specialist in the field says that if you are in a high risk profession or occupation, you must keep some assets (or insurance) available to your creditors or the courts can recover any assets you transfer to relatives or protected entities.

Like estate planning, if you wait until you have a problem, it's too late to solve it. Like insurance, lawsuit protection planning must be done when you don't think you need it.

The various state courts have indicated that there must not be any reasonable prospect of a specific claim against you at the time that you put your assets beyond the reach of your creditors. In most states, that seems to be a period of one to three years before any claim is filed against you.

. According to Bill Comer, "fraudulent conveyances under the Uniform Fraudulent Conveyance Act are defined as those: 

1. made when the transferor was insolvent or was rendered insolvent by incurring an obligation or making a transfer and the obligation incurred or the transfer made was without a fair consideration; 

2. conveyances made without fair consideration when the transferor was engaged in or about to be engaged in a business or transaction which leaves the transferor with an unreasonably small capital; 

3. conveyances made or obligations incurred without fair consideration when the transferor believes he will incur debts beyond his ability to pay as they mature, and 

4. conveyances made or obligations incurred with actual intent to hinder, delay or defraud either present or future creditors." 

Generally, a fraudulent conveyance/transfer requires that you have the intention of hindering, delaying or defrauding your creditors. Because intent is difficult to prove, the courts have developed a set of guidelines they use to determine if a transfer of assets without adequate consideration is a fraudulent transfer. These are referred to as "badges of fraud". 

However, if you are solvent at the time that you transfer some assets to another person without adequate consideration, you are far less likely to be found guilty of a fraudulent transfer. Thus, a critical aspect of avoiding a fraudulent transfer is to know whether you are solvent.
 
 

Some subscribers who have talked to me by phone have asked why I don't devote much space to the subject of privacy. That's gotten us into a discussion of the difference between financial privacy strategies and asset protection strategies. Sometimes the two goals can be achieved with the same device, but most of the time, the use of some asset protection entities will reduce your privacy and create more exposure of your financial affairs. Most of the lawyers who actually do a lot of asset protection work advocate full disclosure to the various tax agencies and any other regulatory agencies. (I believe the other lawyers are living on borrowed time.) 

Partnerships, limited liability companies, corporations and private foundations are entities authorized by law. Individuals have certain rights and powers without the consent of the state. A corporation or partnership only exists as a creature of the law. Without virtually full disclosure of the financial affairs of the partnership or corporation, the state won't grant the entity the benefits of a separate entity with it's own rights under the law. Trusts do not require registration with any government agency because they are simply contracts between the grantor/creator of the trust and the trustee. While revocable trusts don't provide any asset protection, an irrevocable trust might provide some protection. 

Certain aspects of the concern for privacy make a lot of sense. You just never know whether some innocent remark might be misconstrued. If you brag about saving taxes, someone might think you are doing something illegal and turn you into the IRS. If everyone knows you are out of the country for three weeks, will one of those people be a burglar? If you have a lot of money and make sure everyone knows it, aren't you inviting a lawsuit? 

Although the use of asset protection devices may be entirely legal, why tell everyone about it? It's one thing to make the necessary disclosures to the regulators, but why let everyone else know what you are doing? Those who set up family partnerships or offshore trusts sometimes seem to feel that using these devices is a mark of success and they have to brag about it at every party or social gathering. It's like the person who is "complaining" about his high tax bracket. It sure sounds a lot like bragging to me. 

But there are some forms of asset protection that rely on secrecy and evasion rather than on openly making use of the law. When that happens, the desire for privacy can overlap into a potential felony. If secrecy, subterfuge or fraud are essential to the success of an asset protection device, the odds are that it's illegal. If it's illegal, it's beyond the scope of my newsletter. My focus is to help you to protect your assets as much as possible, by making intelligent use of the laws. A concern for privacy is reasonable, so long as it's also legal. 

Further details about protecting your assets from future lawsuits  are available in our subscriber's web site. Changes in the tax laws and various federal and state laws affecting various asset protection devices are provided in our monthly newsletter on Asset Protection Strategies.

NOTICE: This Information is intended only for educational purposes and may be regarded as controversial by some legal experts. Readers should consult with a qualified  professional who is familiar with their specific financial and tax circumstances before adopting any ideas that are discussed in this article.

About the author:

Vernon Jacobs is a CPA/CLU who works as a tax author and consultant.  .