Asset Protection
A creditor's sole remedy would be to bring a fraudulent transfer action against the trustee of the foreign trust, and attempt to show that the settlement of the trust by the debtor constituted a fraudulent transfer. An arm's-length cash sale is the best way to protect your residence (and the equity in the residence) because it is much easier to protect liquid assets than real estate. Personal residences represent the bulk of many people's fortunes, and have great sentimental value. If the creditor can seize a sufficient percentage of the shares, the creditor will acquire control of the corporation and access to the corporation's assets. Certain state statutes require LLCs or limited partnerships to have a business purpose, and there is no business purpose in holding a personal residence in a legal entity. Did you know that a $1 million loan bearing a 7% interest rate, costs $70,000 per year.
Income producing assets are best protected through LLCs and limited partnerships. Planning is done within a statutory framework, but it is the practical implications of the planning that shape the exact nature of the structures and techniques. Over the years, this new field of law enjoyed a marginal reputation, but started going mainstream in the mid-1990s. While the charging order limitation is generally powerful, its usefulness may not extend to personal residences. It began coming into prominence in the late 1980s, with the advent and the marketing of offshore asset protection trusts. Liquid assets may be protected through many techniques, including LLCs, limited partnerships and irrevocable trusts.
The identity of the creditor refers to how aggressively the creditor will pursue the debtor's assets, and how knowledgeable the creditor is about debt collection laws. Although there have been a few successful challenges by creditors against foreign trust structures, they represent a fraction of all foreign trust structures. The common downside of a fraudulent transfer is the creditor's ability to set aside the transfer, a debtor may have nothing to lose (other than the transaction costs) by engaging in planning that may (or may not) be deemed a fraudulent transfer. A properly structured asset protection plan allows the debtor to reveal the nature and the structure of the plan without sacrificing its efficacy. If you can make an argument that causes the creditors to employ others then it will be sufficiently expensive and time consuming then the creditor may never make it to court. Having a legal right to do something does not mean having the actual ability to do so, and does not mean that the pursuit of the transferred assets would be cost effective.
The more aggressive and knowledgeable the creditor, the more obstacles we need to erect in his path. The focus of all asset protection planning is to remove the debtor from legal ownership of assets, while retaining the debtor's control over and beneficial enjoyment of the assets. A debtor can make a credible argument that he does not own the residence without having to move out. In some cases a creditor will obtain a charging order and try to out wait the debtor. Given that the more favorable asset protection jurisdictions have a very short statute of limitation for bringing a fraudulent transfer action, require proof of intent beyond a reasonable doubt and require proof of debtor's insolvency, the creditor faces a daunting task. To an extent the debtor-settlor retains an interest in the trust, the trust will be deemed self-settled and will not offer the debtor any asset protection.
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