Why Can't You Just Hide Your Assets?

A common assumption about protecting your assets from judgment creditors is that you can somehow just hide your assets somewhere. First of all, that clearly won't work for immovable assets such as your home, your business, your pension plan and any investment real estate. Secondly, if you attempt to hide movable assets such as cash, stocks, bonds or other securities, you will have to commit perjury under oath. The judgment creditor will be able to engage in a fact finding process (which includes taking a deposition, reviewing any financial statements and even looking at your tax returns) to identify and locate your assets. If you have reported the interest, dividends, rent or related tax deductions for any movable assets on your tax return, it will show up and you will be asked what happened to the assets. The creditor will also ask for any financial statements you have used to secure credit - and those statements may disclose the existence of the assets you are trying to hide. Basically, you have to be prepared to convincingly lie under oath, and to be able to cover your tracks through all of the various paperwork that may identify any assets you have ever owned. 

Asset Protection With a Living Trust

There are some uninformed individuals who will suggest to you that a revocable living trust can be used to protect your assets from your creditors. Don't believe it. A living trust is an alternative to a will and serves to transfer assets to others via the trust - upon your death. Until then, you are the owner of everything in the trust, even though the property is titled in the name of the trust. If you are sued, your judgment creditor can get the court to require you to transfer any assets in your living trust to your judgment creditor. A revocable living trust will not protect your assets from your creditors. 

The Pure Trust or Contractual Trust and Others

The are a number of promoters of trust packages who are claiming that you set up a special type of trust that will protect your assets from all creditors (including the IRS), virtually eliminate all income taxes and eliminate all estate or gift taxes. In addition, the promoter promises that if you establish one of these trust arrangements, you will have complete control over the investment of the funds and the use of the funds. These trust arrangements go by a mind-boggling variety of names as the inventive promoters attempt to make their trust packages appear to be unique. A common sales pitch for these trust arrangements is the promoter has somehow uncovered the "secrets" of the trusts used by the Rockefellers, Mellons, Kennedy's and other wealthy families who have ostensibly been able to avoid income and estate taxes with their "secret" trusts. 

In late 1997, the IRS, CIA and FBI formed a special task force to track down and eliminate these trusts, which they described as "abusive" trusts in their publicity release on the subject. The difference between these "abusive" trusts and legitimate trusts is that when you put money into a trust, you may alter who pays the tax on the income of the trust, but you don't eliminate the tax. With a trust, the tax may be paid by (1) the creator/grantor/settlor, (2) the beneficiary, or (3) the trust. With the "abusive" trusts the IRS is attempting to close down, the promoters claim that no one pays any taxes - ever. 

As for asset protection, if the grantor of a trust retains the power to make distributions to himself or herself, the courts will simply order you to do so if you are subject to the claim of a judgment creditor. 

Last Minute Homestead Protection

Florida, Texas, Kansas, Iowa, Minnesota, Oklahoma or South Dakota, the state creditor protection laws  offer nearly total protection for the equity in a home from creditors who are seeking to attach assets to satisfy their claims. These states do not permit creditors to attach the equity in a primary residence. From time to time, someone will attempt to buy a home in one of these states when they are "under the gun" of judgment creditors (or when a business has failed). Sometimes this tactic works and sometimes it won't. Some Florida judges have recently denied the benefits of the state homestead laws for new residents who clearly moved to Florida for that purpose. In Kansas, a wealthy real estate operator who lived in Missouri went broke and attempted to buy an expensive home in Kansas at the same time he changed his domicile from Missouri to Kansas. But a Kansas judge said that the homestead exemption was not intended to be a magnet to attract those who were attempting to deprive creditors of their rights. To make effective use of the homestead exemption, you need to change residency before you lose a lawsuit. 

Asset Protection By Giving Your Assets Away

Another common attempt to protect assets from judgment creditors at the last moment is to make gifts of the assets to a spouse, children or other relatives. Sometimes, you might attempt to put the assets into a family corporation or even into an irrevocable trust. Assuming that these transfers are disclosed during the discovery process, the creditor can ask the court to have the assets transferred back to the control of the court for the benefit of the creditor. To do this, the creditor only needs to show that you transferred the assets in order to "delay, hinder or defraud" any of your creditors. All of the states have some form of fraudulent transfer or fraudulent conveyance law to protect the rights of creditors. Property transferred without sufficient consideration (payment) can be recovered by the creditor from the person or entity to whom the property was transferred. 

The Domestic "Financial Fortress"

The family limited partnership (FLP) is being promoted as the cure-all for asset protection in the U.S. by some attorneys. However, there are circumstances where the courts are likely to deny the partners the protection generally available to limited partners. Thus far, there have been only a few cases where any courts have done this, but this author believes it just a matter of time. 

The reason limited partners are afforded greater protection from the claims of a creditor than shareholders of The a corporation is because the partnership is presumed by the law to consist of a personal relationship between the partners. By contrast, the shareholders of a corporation have an impersonal relationship to each other. Absent any special prohibitions in the by-laws of a corporation, any shareholder can freely transfer his shares to anyone else. Thus, a creditor can simply take ownership of any shares of stock you may own. 

But if you are a partner, the law presumes it would be a burden on the other partners to permit a creditor to become a partner by "stepping into the shoes" of a previous partner. A creditor is not allowed to take the place of a partner as a co-owner of the partnership because it would cause an injury to the other partners. In addition, a partnership is presumed by the law to be operating a business or managing investments. To permit a creditor to become a partner and force a dissolution of the partnership would cause an injury to the partners who are not subject to the claims of the creditor. Instead, the creditor of a partner is usually granted a "charging order" that requires the general partner to divert the payment of any distributions of a partner to his or her creditor. However, the general is not required to make distributions to any partners. Thus, if all the partners are members of a family, the general partner is not likely to make any distributions. 

The problem arises when a person forms a limited partnership in which he is both the general partner and the only limited partner. There are probably thousands of these partnerships in existence at this time. Why should the courts deny a creditor of this partner access to the assets? Certainly not because any other partners will be harmed by such an action. In the opinion of this observer (who is not a lawyer), it's only a matter of time before the courts begin to break up this type of asset protection device. 

Closely related to the one-owner partnership is the family limited partnership in which the only partners are a husband and wife and where there is no active business being conducted by the partnership. The assets of the partnership consist only of passive investments that require little or no management. While this type of partnership may survive the attacks of creditors for a while longer than the partnerships with only one owner, some judges are likely to conclude that breaking up the partnership is not causing an injury to any innocent parties - particularly where all the assets of the partnership were provided by one of the spouses and then a partnership interest was gifted to the other spouse. 

Bankruptcy courts are courts of "equity" - meaning that the judge is empowered to secure an equitable result for the parties in dispute. The judges are not as bound by legal precedent and some of them are "loose canons" with respect to the nuances of the law. They will make rulings that totally contradict a long line of precedent in order to obtain what they regard as an equitable result. Thus, it won't be long before some bankruptcy judges begin to ignore the legal nuances of the family limited partnership and order the partners to deliver the assets in the partnership to their creditors. 

Does this mean that the family limited partnership itself is a scam or a scheme that should be avoided? Not al all. It just means that some common sense should be applied. The partnership is far more likely to withstand a challenge if it includes partners other than the two spouses and their minor children. It's far more likely to withstand an attack if it is operating an active business or owns investment real estate or at the least is actively managing its investments. 

The Foreign Bank Account Scheme

Some "advisors" will tell you that the money in a foreign bank account is protected from any creditors, but they often fail to point out that this only works if you are able to keep the existence of that foreign account a secret and are willing to commit perjury on your tax return. These advisors allude to the well publicized "numbered accounts" of Swiss banks and Austrian banks, whereby there is no record in the U.S. of the ownership of these accounts. 

But first, you have find some way to get the money out of the country without leaving a paper trail of any kind - and that's extremely difficult. You can take up to $10,000 out of the country with you on a trip. If your spouse travels with you, he or she can take another $10,000. As I understand it, each child could take $10,000 out of the country - if it's their money. But if you use this exemption too often or just use your kids as a conduit, you will be guilty of a crime called "structuring". This crime was created to prevent drug dealers from laundering money through multiple smaller transactions, but it's a crime without regard to whether you are a drug dealer and without regard to whether you are even engaged in money laundering. As a practical matter, if you, your spouse and each of your five children are searched (or questioned) when you depart from the U.S. or when you enter another country, the fact that each of you are carrying $10,000 in cash is likely to be viewed as a crime by the customs official and you will then have to spend a lot of time to try to prove you haven't committed any kind of crime. 

Of course, you can transfer funds to a foreign bank account with a check or a wire transfer, but that leaves a trail that could be found by a determined creditor. And you are still faced with the decision of whether to lie on the part of your tax return that asks if you have a foreign account. It may be possible to hide some of your assets in a numbered foreign bank account, but it "ain't easy". It will require a great deal of careful subterfuge - which most people are not capable of accomplishing. 

The Last Minute Foreign Trust

Another scheme that requires some careful implementation is the transfer of funds to a foreign trust shortly before you are expecting to be served with a judgment by a creditor. In all but a few jurisdictions in the world, a determined creditor can bring suit against your foreign trust and have the transfer overturned under the fraudulent transfer laws of that jurisdiction. With no exceptions that I can think of, a transfer immediately before or after being sued will be a fraudulent transfer in the foreign jurisdiction. And, in some cases, even if your transfer can't be overturned in a foreign court, a U.S. court might demand that you repatriate the assets on the theory that you will have retained that power - whether directly or indirectly. If you refuse, the court can put you in jail for contempt. You might argue in an appeal that you don't have the legal power to recover the funds (because of a duress clause in your trust), but you might have to stay in jail until the appeal is heard and decided. 

The bottom line is that this kind of last minute asset protection is a game of serious "hard ball" and you may be faced with having to decide between your liberty or your money. 

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.  He  sponsors and moderates a free discussion group on asset protection and offshore topics.  His email address is vkj@rpifs.com.  He can be reached by phone or fax at (913) 362-9667.

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