Selected Planning Issues: Planning After the Lawsuit – Can it be Done?

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Volume XX • Number 3 • AUGUST 2011

© Donlevy-Rosen & Rosen, P.A.

BACKGROUND. It is often said that once a person has been sued nothing can be done to protect assets. This is usually true. The knowledgeable asset protection professional will, however, be able to recognize the few exceptions to that rule. The ability to recognize and utilize the exceptions will depend upon a thorough understanding of the relevant fraudulent transfer law.

WHAT DOES THE FRAUDULENT TRANSFER LAW PROVIDE? If a transfer is a fraudulent transfer, the court may be able to “undo” the transfer, putting the asset back in your hands. In order for a fraudulent transfer to take place, apn20-3a “transfer” must occur, and the Uniform Fraudulent Transfer Act (“UFTA”) defines a “transfer” as “… parting with an asset or an interest in an asset”. Every state has laws which provide that certain assets, or a set dollar amount of certain assets, cannot be taken by a person’s creditor. These assets are referred to as “exempt assets”. For purposes of the UFTA, an exempt asset does not count as an asset, so, under most circumstances, an exempt asset can be transferred to a (more) protective arrangement without violating any ethical or legal standard.

WHY BOTHER? Why should you consider transferring an exempt asset (or its proceeds) to a more protective structure? After all, your state law provides that the asset is protected, right? To answer these questions, ask yourself this: “Am I certain that if I am sued I’ll be treated fairly by our legal system?” We have all been witness to surprises in our U.S. court system, in both civil and criminal cases. Being “treated fairly” implies that the court will follow the letter of the law (for example, upholding your state’s statutory exemptions in your favor). The sad fact is that you should not bet your (financial) life on that happening. We have personally seen cases where a court has disregarded not only the state law exemptions, but also the statutes of limitations. So, “Why bother?” – because you prefer certainty to uncertainty. Because you do not want to “roll the dice” in our legal system in the hope that the court will treat you fairly and follow the law upon which you based your planning.

In addition, even though an asset may be exempt, some state laws (modifying the UFTA) provide that if the asset became exempt within four years of a creditor’s claim, it may not be exempt if the creditor can prove a fraudulent transfer was made to obtain the exemption.

PLANNING AFTER THE LAWSUIT – CAN IT BE DONE? The short answer: “Yes, sometimes.” We just need to know when. This APN issue is not exhaustive, but let’s take a look at some examples. Please understand that each of our 50 states has its own version of statutory exempt assets and fraudulent transfer laws, so the following discussion and examples are based upon Florida law.

CASE STUDY: WAGE EXEMPTION. You (a Florida resident) have just been sued for breach of contract and the claim is significant. Your litigation attorney does not think you can win the case. You earn a very significant salary and qualify as the “head of family” under Florida’s wage exemption law. That law provides that 100% of the earnings of a head of family are exempt from creditor claims for a period of six months after being deposited in a financial institution. We usually recommend that the head of family establish a separate account to more clearly identify such exempt amounts (some call this a “wage account”). In this example, your wage account totals a significant amount of earnings received within the last six months. But the exemption “clock” is ticking (i.e., soon the exemption will expire). Can you do anything? Here’s what we recommend: We recommend that you transfer such exempt funds to a properly established offshore asset protection trust – effectively extending the exemption indefinitely since the funds are then beyond the reach of the U.S. legal system. Recall: exempt funds are not an “asset” for purposes of the UFTA, so this can’t be a fraudulent transfer. RESULT? You have “clean hands” and are in a substantially stronger position to bargain for a favorable settlement than would be the case without the offshore trust.

CASE STUDY: TENANTS BY THE ENTIRETIES. Let’s continue with the same facts as in the previous case study. An examination of your assets reveals that you and your spouse have had a brokerage account in both your names for 10 years with a significant amount of marketable securities in it. Under Florida law, such an account is deemed to be held by a married couple as “tenants by the entireties” (TBE), and, where only one spouse is liable to a creditor, the TBE account is fully exempt from the creditor of the indebted spouse. Here’s what we recommend:You transfer the securities (without having to sell them) into a Swiss financial account established within your offshore asset protection trust by the offshore trustee. RESULT? The securities cannot be reached by your creditor – period. Why be concerned with this additional degree of protection? Simple: In the unfortunate case where the non-indebted spouse predeceases the indebted spouse, the TBE protection vanishes instantly. The offshore asset protection trust insures against that possibility and the possibility of unfair treatment by a US court.

CONCLUSION. Asset protection planning may be possible after a lawsuit has been filed against you, but not in all cases. Use experienced, qualified counsel to advise you of your options. A properly implemented asset protection trust would assure the transferor that the property will always be available for the transferor’s benefit and enjoyment while the transferor is alive.

August 17, 2011

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