The Debtor May Need To Make A Distribution That Would Be Intercepted By The Charging Order

Category: Finance.

Asset Protection. There is no" magic bullet" asset protection strategy.

According to Jacob Stein simply changing legal title to a living trust with a generic name may work to defeat the claims of some creditors, but not most. Different structures are used to protect different types of assets. The nonrecognition of foreign judgments is the most important protective feature of these jurisdictions. Personal residences represent the bulk of many people s fortunes, and have great sentimental value. Some creditors may stop trying to collect when they realize that there is no equity in the residence. The specific structure best suited for each person will depend on the nature of the asset being protected.

A properly structured asset protection plan allows the debtor to reveal the nature and the structure of the plan without sacrificing its efficacy. QPRTs are irrevocable trusts with spendthrift clauses the interest passing to the remainder beneficiaries is generally not subject to creditor claims( absent a fraudulent transfer challenge) . Engaging in after- the- fact asset protection planning may be deemed to be a fraudulent transfer allowing the creditor to set aside the planning. The interest retained by the settlor is reachable by the settlors creditors because that interest is self- settled. There are literally dozens of various asset protection structures in use today. The more aggressive and knowledgeable the creditor, the more obstacles we need to erect in his path. Depending on the creditor s intelligence and aggressiveness, the debtor, timing s risk- tolerance and other factors, the strategies discussed in this article may significantly tilt the economic equation in the debtor s favor.

As a practical matter, LLCs and limited partnerships create a formidable obstacle to the creditor s collection efforts and usually force the creditor to drop his collection efforts or to settle. Creditors do not pursue the residence itself, but the equity in the residence that can be converted into money through a foreclosure sale of the residence. 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. In most states( and many foreign jurisdictions) interests of debtors in LLCs and limited partnerships are not subject to attachment because of the so- called charging order limitation. A creditor may be able to make a successful legal argument that a given structure should not stand, and thus be able to retrieve the debtor s assets. Hiding assets is an ineffective means of shielding them from creditors because a debtor would usually have to disclose his assets in a debtor exam, under penalty of perjury. The QPRT is a great example of the practical efficacy of asset protection.

The term" foreign trust" usually means an irrevocable trust domiciled in and governed by the laws of a foreign jurisdiction. The debtor may need to make a distribution that would be intercepted by the charging order. 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. Some debtors may be willing to do nothing more than shuffle paper agreements, whereas others may be willing to go through a divorce, move assets offshore or sell their home.

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