WHYS AND WHEREFORES OF ASSET PROTECTION: THE WAYS AND MEANS

1. WHYS AND WHEREFORES OF ASSET PROTECTION:THE WAYS AND MEANS By: C. Arthur Robinson, II & the Trust & Estates Team

2. How do you know whether a client needs an asset protection vehicle? • Every client needs asset protection to some degree • The greater the net worth the more difficult it is to achieve asset protection without utilization of more sophisticated tools Asset Protection

3. Isn’t asset protection against public policy? “The doctrine that the owner of property, in the free exercise of his will in disposing of it, cannot dispose of it, but that the object of his bounty… must hold it subject to the debts due his creditors… is one which we are not prepared to announce as the doctrine of this court… Every State in this Union has passed statutes by which a part of the property of the debtor is exempt from seizure (for) the payment of his debts… to property so exempted the creditor has no right to look… as a means of payment when his debt is created (and) this court has steadily held that (such exemptions are) invalid as to debts then in existence (but) as to contracts made thereafter, the exemptions (are) valid. This distinction is well founded in the sound and unanswerable reason, that the creditor is neither defrauded nor injured by the application of the law to his case, as he knows, when he parts with the consideration of his debt, that the property so exempt can never be made liable to its payment.” ~ Nichols v. Eaton, 91 US 716, 725-726 (1875) (Justice Samuel Freeman Miller) Asset Protection

4. United States Legal System The U.S. legal system is different from other Western legal systems in many important ways. • Contingency fees allowed • Pleadings are protected speech • Punitive damages are allowed in civil cases against individuals (rather than only in cases involving corporate products liability) • There is no bond requirement, except for appeals • There is no loser-pay system • Regulatory “Super Creditors” pose additional risks Asset Protection

5. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 • Expands list of non-dischargeable consumer debt • Amends means test so that, in general, debtors with income greater than state median household income can not get discharge and will be required to reorganize. Asset Protection

6. Family Law • With its strong public policy towards support of spouses and division of assets also represents a substantial hurdle to asset protection. Asset Protection

7. What is Asset Protection? • The structuring of Ownership of assets to defeat or substantially increase the difficulty of creditors attempts to collect on obligations. • Control rather than ownership of assets is the critical underlying principle to asset protection. Asset Protection

8. Main Challenges: • Fraudulent Conveyance, Va. Code §55-80 to 55-105. • Voluntary Conveyance, op. cit. • In bankruptcy various preferences which can be exercised to void transactions and reclaim assets 11 U.S.C §§547, 548 Asset Protection

9. Creditor Protection: Fraudulent Transfer Law General Rule • A gratuitous transfer of property with the actual or constructive INTENT to avoid creditors is fraudulent and may be set aside by creditors • Any transfer of assets from nonexempt status to exempt status should be tested to assure that it is not a fraudulent transfer Three classes of creditors • Present creditor – solvency analysis • Potential subsequent creditor – badges of fraud • Unknown future creditor Asset Protection

10. Creditor Protection: Fraudulent Transfer Law (cont’d) Statute of limitations • Statue of limitations on fraudulent transfer claims in most states is 4 years (5 years in VA) from the transfer, or, for existing creditors, within one year of when the transfer could reasonably have been discovered, if later • A bankruptcy trustee can have a fraudulent transfer set aside if the transfer is made within two years of bankruptcy – certain transfers to a self-settled trust or similar device subject to a ten year statute of limitations. Asset Protection

11. Total value of assets Less: Liabilities (including contingent) Less: Creditor protected assets (e.g., homestead) __________________________________________________________________________________________________________________________ Equals: Amount that can be transferred Solvency Test

12. Methods of Asset Protection

13. Levels of Asset Protection 4 Levels of Asset Protection • Inherent protections for assets held in certain forms. • Use of Family Limited Partnerships and Family LLC in conjunction with trusts and other normal planning techniques. • Use of trusts to import the law of a foreign jurisdiction. • Domestic Asset Protections trusts • Foreign (outside of US) Asset Protection Trusts • Use of foreign trusts to export the assets to a foreign jurisdiction. Asset Protection

14. Inherent Protection Inherent protection is present in some ownership structures for some assets. Asset Protection

15. Protection Structures Tenants by the entireties ownership by a married couple. • Only joint debts reach the property. • Long established by common law. • Does not work for federal tax liens. • Often used in real estate, available but less common for other asset classes. Asset Protection

16. Protection Structures Qualified Retirement Plans • Blanket protection of assets held inside a Qualified Plan provided by the Employee Retirement Income Security Act of 1974 (ERISA) Codified in scattered sections of 5 U.S.C., 26 U.S.C., 29 U.S.C., and 4 U.S.C. • Bankruptcy protections for these plans as well as 11 U.S.C. §522. Asset Protection

17. Protection Structures Individual Retirement Accounts • Protection for balances of approximately 1.2MM provided by Va. And Federal bankruptcy statutes. See Va. Code §34-34 and U.S.C. §522. • This exemption must be affirmatively claimed. Asset Protection

18. Protection Structures Life Insurance Policies • Exempt from claims of creditors, Va. Code §38.2 – 3122, provided the policy does not payout to the insured estate. Asset Protection

19. Protection Structures Business assets Owned by Corporations and other forms which limit liability. • Many active businesses are conducted in corporate form or as registered Limited Partnerships or Limited Liability Companies. • These entities limit the liability of owners. See Title 13.1 Chapters 7, 9, 10, 12, 13 & 14. • This authority limits liability in various ways for Professional Corporations, Business Corporations, Limited Liability Companies and Professional Limited Liability Companies, And Virginia Business Trusts. Asset Protection

20. Protection Structures Various Statutory Exemptions • Homestead Exemption, Va. Code §34-4. • Exemption for Veterans, Va. Code §34-4.1. • Poor Debtor’s Exemption, Va. Code §34-27. • Garnishment Exemption, Va. Code §34-29. • In Estates various allowances Va. Code §64.2 – 309, -310, -311 Asset Protection

21. Protection Structures Family Limited Liability Entities • Corporations • Limited Liability Companies • Limited Partnerships (registered and unregistered) • Business Trusts (some states) Asset Protection

22. Protection Structures Domestic Asset Protection Trusts • A growing list of states that statutorily permit the creation of self-settled spendthrift trusts- trusts which afford spendthrift protection to the interests of the trust’s creator. Fifteen states already afford such protection by statute: Alaska, Delaware, Hawaii, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia and Wyoming. • Several other states appear to permit these trusts by case law. See, e.g. Uhl. v. United States, 241 F. 2d 867 (7th Cir. 1957)(Indiana law); Estate of German v. United States, 7 cl. Ct. 641 (1985) (Maryland law); Herzog v Comm’r, 116 F. 2d 591 (2d Cir. 1941), aff’g 41 BTA 509 (1940) (New York law) Asset Protection

23. Protection Structures Domestic Asset Protection Trusts (cont’d) • Virginia recently enacted its own version of this law which can be found at Va. Code §64.2 – 745.1 and -745.2 • In these states a trust can be created that affords significant protection from creditors. Asset Protection

24. Protection Structures Domestic Asset Protection Trusts (cont’d) • In states which do not have these statutes a trust which has situs in a state with the statutory protections could also afford significant protection. • Fraudulent & Voluntary conveyance attacks require that these arrangements be set up proactively, i.e. before liability arises. Asset Protection

25. Protection Structures The question of Federal Preemption in Bankruptcy has been present since these statutes were enacted, and is an open question. • A partial answer to this question was provided in Battley v. Martensen, Chapter 7 Case No. A09-00565-DMD, Mem Adv. No. A09-90036-DMD (Bkrpt D. Alaska May 26, 2011) • In Martensenthe Bankruptcy Judge set aside a transfer of real property to an Alaska asset protection trust as a fraudulent conveyance. Asset Protection

26. Protection Structures The question of Federal Preemption in Bankruptcy has been present since these statutes were enacted, and is an open question. (cont’d) • The court based its ruling on the intent of Mr. Martensen which was to protect the property from his creditors. • This is the first case to reach this result and it may be limited on its facts. However it casts doubt on the validity of these state statutes, at least in the Bankruptcy context. • Since Martensen, Bankruptcy Courts around the country have begun to examine these issues. Asset Protection

27. Protection Structures In Family Law/Divorce Actions, Courts may find ways to capture assets which are protected in a domestic asset protection trust. Dahl v. Dahl, 2015 UT 23 (2015) Asset Protection

28. Protection Structures Foreign (Non U.S.) Trusts used for Asset Protection • Foreign trusts or their equivalents exist in approximately 30 “Tax Haven Jurisdictions” around the world. • With the advent of the Foreign Trusts Rules and the reporting rules of foreign bank accounts the opportunity to maintain secret accounts and to avoid income taxes have been substantially reduced. Asset Protection

29. Protection Structures Foreign (Non U.S.) Trusts used for Asset Protection • Two approaches are used with foreign trusts: • Import the law, i.e. have U.S. assets including Family Limited Liability entities owned by a foreign trust which is subject to the jurisdiction and laws of the country of situs for the trust. • Export the assets, i.e. have U.S. assets converted or transferred into ownership interests or accounts located offshore and subject only to laws of the offshore jurisdictions involved. Asset Protection

30. Protection Structures • Planning at this level is fact specific, complex, and involves the critical choice of situs considerations. This is a very detailed discussion and is beyond the scope of this presentation. Asset Protection

31. There are a variety of techniques and statutory exemptions or provisions which can be helpful. • Careful attention to a landscape in this highly technical area can yield tremendous benefits. Final Thoughts

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