That answer mostly depends largely on the debtor’s state laws. Several states – most notably Florida and Texas – are exceptionally debtor oriented. They exempt, or creditor proof, a wide range of assets. That’s why a large number of debtors relocate to Florida. It is not so much to enjoy their favorable weather as it is to take advantage of their generous exemption laws. For instance, Florida protects the entire value of your home, IRAs, life insurance and annuities, and wages. Many of our Florida clients need little or nothing more in terms of additional protection. The state exemption laws cover all – or most – of their assets. Texas is an equally debtor friendly state. On the other hand, a number of states are creditor friendly with narrow exemption laws. New Jersey is an example where relatively few assets are self-protected.  The exemption laws become even more important when planning bankruptcy because the federal bankruptcy exemptions may protect a broader range of a debtor’s assets.

It may then be too late. Many courts consider this a fraudulent transfer. You may attempt it, but it’s not wise to rely on this one strategy alone if you already have a liability. Many states also have anti-conversion statutes that deny the exemption to certain exempt assets purchased after you have a liability.

Planning too late. It comes back to that one word – procrastination. But why should that be surprising? Who really thinks about protecting their wealth until they’re in jeopardy of losing it? That’s when they begin to ‘sweat’. And, typically, that’s when they call us. But think about it from a different viewpoint. Only one out of five adult Americans have even a simple will, and what is more certain than death? It is little wonder so few people think about asset protection until they are sued.

Americans are not necessarily risk-takers; we just don’t always put things in perspective. For example, fifty million new lawsuits will be filed this year, yet there will be only five million injuries and deaths from car accidents. You are then ten times more likely to get sued than to injure or kill someone in a car accident. However, you wouldn’t go without car insurance. You would be ten times as foolish to ignore lawsuit protection. And the number of new civil lawsuits this year will be nearly eighty times the number of residential fires. You probably have insurance to protect your home against fire, but what simple steps have you taken to safeguard your home from lawsuits and creditors? It’s all logic, but that’s not how most people think about these things. And it’s unfortunate because we have seen so many people and families needlessly lose everything they have worked a lifetime to accumulate. It’s sad.

Unquestionably. Most errors are a matter of extreme. There are too many firewalls or too few. Or the wrong firewalls are used. Or there are negative tax consequences that were not considered. Or the plan doesn’t fit with the client’s estate plan. A good part of our work is to reconstruct a client’s plan. But don’t get us wrong. We also see many creative, well-designed plans. But too often the present plan needs adjustment – if the client has a plan at all which is in itself unusual.

Before we discuss when you should not do asset protection, we should examine when asset protection planning is safe. As long as the asset protection does not involve fraud or blatant illegal acts it is safest to do asset protection while the creditor seas are calm and the debtor is solvent. In doing so, even a flawed asset protection program may have a fighting chance of holding up when challenged. Remember, however, that solid asset protection has a much higher chance of surviving scrutiny than flawed planning.

Once a creditor threat has arisen, asset protection may still be done, although our available options are now somewhat diminished. Nonetheless, the U.S. Supreme Court case Grupo Mexican v. Alliance Bond Fund states, “[we] follow the well-established general rule that a judgment establishing the debt was necessary before a court of equity would interfere with the debtor’s use of the property.” Another court even noted that an attorney who represents a client under creditor attack should “protect [the client] from the claims of creditors, to the fullest permissible extent.” This obviously gives us some wiggle room, and we believe an attorney has an obligation to recommend asset protection for his client in certain situations; however, the key phrase is that we must do our planning “to the fullest permissible extent”. This means planning while under creditor duress should only be done while fully considering the UFTA. Furthermore, there are several pitfalls that should be avoided at all costs.

This brings us finally to circumstances where asset protection should not be done. Planning done in these instances can not only cause a program to fail, but could result in additional fines and penalties against the debtor, the planner, and possibly professional discipline against the debtor’s attorney. Such circumstances can be broken down into four categories, and include; 1) planning against a creditor who has a direct interest in the property; 2) planning against a post-judgment creditor; 3) planning that involves dishonesty, misrepresentation, or committing a fraud against the court; and 4) planning that is a blatant and egregious fraudulent transfer under the UFTA.

A responsible attorney won’t get involved in asset protection planning for a client under any of these circumstances.

A judgment creditor has many ways to make you disclose your finances. Depositions, interrogatories and requests to produce documents are all options. Your creditors can also subpoena your records and information from third parties. A judgment creditor searching for your assets can check loan and credit applications, bank records, tax returns, court cases (i.e. prior divorces disclose assets) and insurance policies. The paper trail is revealing. Computers make everyone’s financial affairs an open book.  Because the ways to gain financial secrecy are so sophisticated, judgment creditors and prospective litigants hire professional asset search firms to locate hidden assets – even whether the prospective defendant has enough assets to make a lawsuit worthwhile. Assume your creditor can accurately profile you. Forensic accounting firms trace millions in wealth deviously and secretively deployed. So it’s best to avoid the ‘hide the assets’ game. It’s foolhardy. Your creditor will probably find your assets.

That’s a common mistake. One must never confuse secrecy or concealing assets with asset protection, though to discourage lawsuits, financial privacy can sometimes be helpful. A judgment creditor can compel you to disclose your finances under oath. You can’t then rely on secrecy. Once under oath you must truthfully disclose your assets. It’s perjury to lie to conceal your assets. You want honest protection. With a good plan you can fully disclose your assets, confident that they’ll stay creditor-proof. A judgment creditor is entitled to full and honest answers about your present and past assets.

Having a less liability-prone spouse own all the marital assets has fewer drawbacks. And sometimes it is sensible to title the family assets to the less vulnerable spouse. But this too raises problems. You may title your million dollar home or other assets to your spouse for protection on the belief that your spouse won’t get sued, but how do you really know this? This arrangement also has estate planning disadvantages. When marital assets are titled to both spouses, the spouses can more advantageously plan their estates because each can use credit shelter trusts to maximize their death tax credits. When the assets are titled to only one spouse, only that spouse can claim his or her estate tax exemption. The remainder of your spouse’s estate will be taxed. This can cost your heirs a considerable estate tax. Assets titled to only one spouse forces a lopsided estate plan, and you lose tax planning options.

Nor are assets titled to one spouse necessarily safe from the debtor spouse’s creditors. Even if the liability arose after the debtor’s assets were titled to the ‘safe’ spouse, a creditor might successfully argue that the debtor-spouse has an equitable or beneficial interest in at least part of the property under a constructive or resulting trust theory; namely, that the spouse holding title is a trustee for the debtor-spouse. This argument is particularly likely to succeed when the debtor-spouse’s funds purchased the property or paid the mortgage, maintenance or property upkeep. When the money invested in the asset came from the debtor-spouse, the property is not truly the property of the other spouse. If a debtor-spouse’s assets are traceable to property, the defendant’s spouse’s creditors can claim that property. You don’t want to gamble on further litigation over these sloppy issues. The best plan is free of these possible challenges. Only in a few cases do we suggest titling all the marital assets to one spouse.

Using ‘straw men’ is always poor planning. Its pitfalls are obvious. First is the fraudulent conveyance pitfall. Gifting your assets to a friend or relative after you’re sued with the tacit understanding that they’ll later return your assets seldom works. Even if you title your assets to a ‘straw’ before you have creditors, how do you know that your ‘straw’ is safer from lawsuits than you? Nominee ‘straws’ have their own marital problems, tax troubles, creditors and lawsuits. Your straw can easily lose your assets to their creditors. You also incur a gift tax when you transfer assets to someone other than your spouse. And your nominee straw incurs a gift tax when he re-transfers your assets to you. The third problem is that you can’t be certain that your nominee will return your assets. Not every straw or nominee is trustworthy. Finally, a ‘straw’ deal is asset concealment. This may be a crime in your situation. It certainly would be if you file bankruptcy or you commit perjury to disguise the nature of your transaction.

We agree. Unless your assets are exempt, title them to a protective entity. As long as the entity itself is not a debtor, then a subsequent transfer by that entity will not be considered fraudulent under the UFTA. Accordingly, when creditor threat arises, you can then reinforce the entity or transfer the asset to a new entity, with less fraudulent transfer concerns because the UFTA only considers transfers the debtor makes as being fraudulent. Furthermore, restructuring an entity so that a creditor of the entity’s owner cannot reach the entity’s assets for its owner’s debts usually does not involve a transfer, and is therefore not considered to be a fraudulent transfer in most states. Even if it is, as long as the entity is not a debtor, then a transfer from the non-debtor entity to another entity is usually not considered fraudulent under fraudulent transfer law.

Use common sense. Avoid the badges of fraud. Don’t invite suspicion and inquiry. Your transfers must pass a ‘sniff’ test. First, protect yourself before you have a liability. There’s no fraudulent transfer if you transfer your assets before you incur the liability. That’s the reason for the axiom to judgment-proof yourself before you have financial or legal problems. Your safest strategy is to be liability-free when you protect your assets. If you still have fraudulent transfer concerns, make small incremental transfers which will attract less notice than sudden transfers of more significant assets. Also avoid insider transactions. Transfers to family members, friends or close business associates are always suspicious. Use non-family members as trustees, corporate officers or fiduciaries for any entities receiving your assets. Your transfer should not have the obvious goal of defrauding a present creditor. It might better appear that you were engaged in estate planning. Finally, carefully document what you receive for your property. Can you prove you were adequately paid in cash, services or other consideration? Verify the value of your property to show fair consideration. For example, get your home appraised if you sell it to a friend or relative. If you sell assets for an unreasonably low price, document defects or other reasons to justify its low price.

In most states a fraudulent transfer lawsuit must be filed within four years from the date of the transfer or one year after the transfer could have been reasonably discovered by the creditor. In these instances, a fraudulently transferred asset is never completely safe from recovery because a creditor can argue they only recently discovered a transfer which may have happened years earlier. The creditor would then have one additional year to set aside the transfer. Other states impose a strict five-year statute of limitations and disallow later claims regardless of when the creditor discovered the transfer. A bankruptcy trustee has two years from the first meeting of creditors to begin a fraudulent transfer claim on fraudulent transfers within the year preceding bankruptcy. However, a bankruptcy trustee can sue under the state’s fraudulent transfer law rather than under bankruptcy law and use the state’s longer statute of limitations.

Generally not. Litigants, who have yet to win a judgment, ordinarily cannot commence a fraudulent transfer claim or freeze your assets. This is a remedy for judgment creditors. Nor can a pre-judgment creditor usually attach assets or restrain a defendant’s rights to transfer his assets – even if the planned transfer appears fraudulent. The plaintiff’s remedy is to recover the asset as fraudulently transferred after the creditor wins his case. But there are exceptions when a court does allow a freeze order or attachment of a defendant’s assets before the lawsuit is commenced. That’s why delay in seeking protection is always dangerous.

Pre-judgment freeze orders are common when a federal agency – the SEC, FTC, etc. – are the plaintiff. They commonly get freeze orders before the defendant even knows that they are being sued by the government. The safest attitude is to assume that your assets can be frozen or attached at any time – and without advance notice. This again underscores the need for advance planning.

What should be obvious from our conversation so far is that the best time to protect yourself is before a creditor threat is foreseeable. You should always protect yourself:

• At least 2 years before you file bankruptcy.

• Well before your marriage turns sour and heads for divorce. Preferably, if you wish to do specific pre-marital/pre-divorce planning, and a pre-nuptial agreement is not an option, then set up your program before you get married. At least, do planning at least one year before you divorce.

• Before someone threatens you with a lawsuit.

• Before your business starts going under.

• Before the IRS audits you. In other words, because we often can’t foresee creditor threats before they materialize, a protective plan is best implemented before these threats occur. In sum, you should set up an asset protection plan as soon as possible!

Can we protect you after a threat to your wealth arises? Except in some circumstances, the answer is usually yes. But your asset protection program will definitely be stronger if it’s set up well before your wealth becomes threatened. Furthermore, you may have to take more complex and expensive steps to protect your assets after your problems appear. Our plans may then include offshore planning with exclusively offshore managers, or even something as radical, however pleasant, as moving to Florida to buy a homestead property which is protected against creditors, even if the home purchase is a fraudulent transfer.

Generally speaking, it’s too late to try to protect yourself once you have a judgment against you, unless you arrange to pay the judgment and you follow through with that arrangement and are only planning to safeguard your assets against future creditors. Asset protection planning to thwart collection attempts post-judgment may result in you and your asset protection planner being fined and you can then be worse off than if you planned.

Frequently you can’t. When you review these three elements of a constructive fraudulent transfer, you still have hundreds of unanswered questions. For instance, is it fraudulent to exchange non-exempt assets for exempt (protected) assets of equal value? What if you transfer your assets at the time you have a

foreseeable creditor (i.e. you expect to sign a lease)? We can go on. The fraudulent transfer laws are complex, murky, and there can be gray areas of uncertainty. Many transfers are neither clearly fraudulent nor conclusively non-fraudulent. A seasoned asset protection specialist can perhaps best understand the complexities and apply the nuances of these laws to best predict whether a court is likely to unwind a transfer.

If you sell an asset for less than its fair value, the creditor must secondly show that the transfer occurred after you had the liability. Once you have a present liability, you cannot safely transfer your assets for less than fair value. No less safe are assets that you transfer when you have a future, foreseeable or probable liability. But you can safely transfer your assets to protect them against a future possible liability. How do we differentiate a probable from a possible liability? The courts consider the facts of each case. When did the act occur that created the liability? When did the debtor first learn of the liability? When was the transfer? Courts conclude differently on whether a liability was probable or possible. A ‘present liability’ exists from the moment you have a creditor (incurred a liability). Later asset transfers can be challenged. For example, if you sign a lease today and gift your assets tomorrow, your landlord can recover your gifted assets if you later default on your lease. You didn’t have to be in default on your lease for your transfer to be fraudulent. It’s also immaterial whether you were yet sued. The critical date is when did the liability arise – not the date of default or when the lawsuit was filed.

One obvious situation is when the debtor merely gifts his assets. However, proving a sale was made for less than fair value can sometimes be difficult to prove. Courts define ‘fair’ consideration subjectively. ‘Fair’ consideration is the price for which a reasonably prudent seller would sell his property in a commercially reasonable manner. ‘Fair value’ depends largely on the type of property. For example, public stocks or bonds have an ascertainable fair value and a debtor who transfers public shares for less than its daily quoted price would create a fraudulent transfer equal to the difference in value. Conversely, real estate sold for 70 percent of appraised value has been held to satisfy the fair value test. Other difficult-to-value items include jewelry and the closely-owned business. Courts must then consider the relevant facts to determine ‘reasonable value’.

Since actual fraud cases are difficult for creditors to prove, creditors more often claim constructive fraud. Constructive fraud is a gift or sale of property for less than fair value (or fair consideration), made in the face of a known or probable liability and which leaves the debtor insolvent. A transfer can be constructively fraudulent, even if you act innocently and without actual intent to hinder your creditors, but a creditor challenging your transfer must still prove each of these three elements.

There are two types of fraudulent transfers: 1) Fraud in fact, or actual fraud, and 2) Fraud in law, or constructive fraud. Actual fraud is when you actually intended to hinder, delay or defraud your creditor. This, of course, is usually difficult to prove because the creditor must prove your state of mind – unless you admit to fraudulent intent. However, courts can infer fraudulent intent from badges of fraud such as transfers to close family members or friends, secretive transfers, transfers for less than fair value, situations when the debtor continued to use or possess the property after the transfer, concealing assets, transfers made after the debtor incurred a large debt or anticipated a lawsuit, and transfers that rendered the debtor unable to pay the debt. It’s important to understand that a fraudulent transfer is not the same as fraud. Fraudulent transfers should more appropriately be called ‘voidable transfers’.

Every state has fraudulent transfer laws. Some call it the Uniform Fraudulent Conveyance Act (UFCA), and others the Uniform Fraudulent Transfer Act (UFTA). Fraudulent transfers or fraudulent conveyances laws can be interchangeably discussed here since they are so similar. The fraudulent transfer laws essentially let a judgment creditor unwind transfers previously made by a debtor so that the fraudulently transferred property can be claimed by the creditor. In other words, given certain circumstances, courts invalidate and revoke prior sales, gifts or other transfers. Whatever assets the debtor sold or gave away for less than fair value are then re-transferred to the judgment creditor. Fraudulent transfers then partially or totally destroy your protection.

For effective protection, you must safely title your wealth. That’s the only way to keep your wealth beyond the reach of your creditors. Judgment creditors trying to seize a debtor’s wealth often use the fraudulent transfer laws to seize assets the debtor previously transferred. The fraudulent transfer may be to a spouse, other relative, friend, corporation, partnership, trust or anyone else. Whether the creditor can succeed on their fraudulent transfer claim chiefly depends on whether the creditor can convince the court that the transfer was simply a last-ditch effort to defraud the creditor.