When can we engage in asset protection planning?

By F Hale Stewart, JD, LLM, CAM, CWM, CTEP

The Law Office of Hale Stewart

Consider the following scenarios:

Suppose a high-net-worth client is in the middle of a lawsuit and the prospects look grim. It appears the jury will award the plaintiff a large judgment. At this point, the client decides to create and implement an asset protection plan, with the obvious intent of preventing the other party from collecting on the judgment.

Alternatively, suppose the same individual receives a call from an asset protection attorney who wants to discuss a situation with a former client of the high-net-worth individual (for example, a lawyer representing a former patient calls a doctor who treated the patient with poor results). The high-net-worth person has not been sued (he has not been formally served with papers), but he has a good indication that someone is thinking about suing him. The high-net-worth client calls and asks about asset protection plans.

Or, suppose a company is starting to lose money and the future does not look promising — key clients have gone to other companies, key employees are leaving and the industry is experiencing strong competition from an overseas competitor that has vastly lower labor costs. The company wants to start siphoning off money and assets before creditors either force the company into bankruptcy or simply start suing for non-payment of debt.

In all the preceding examples, a creditor would be well within their rights to ask the court to rescind the transaction that transferred the asset. The reason is the debtor knows with a fairly high degree of certainty that he will have to pay money sometime in the near future. To allow him to make it difficult to pay those amounts would be tantamount to encouraging and promoting fraud.

In general, we can’t engage in asset protection when we know with a pretty high degree of certainty that a judgment, debt, payment, bankruptcy or the like is right around the corner. Put another way, we can only engage in asset protection when things are going well.

This leads us to an area of law that is fundamental to asset protection: fraudulent transfer law. This area of law has its roots in England, or, more specifically, the Statute 13 of Elizabeth. This statute was codified in the Uniform Fraudulent Conveyance Act, which was “promulgated by the Conference of Commissioners on Uniform State Laws in 1918.”

This statute was updated in 1984, and renamed the Uniform Fraudulent Conveyance Act, which provides the bedrock concepts of fraudulent transfer law. This statute tells us when we can engage in asset protection and, just as importantly, how we need to structure those transactions.