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COPYRIGHT 2002 A Thomson Healthcare Company
Editor's note: Horror stories of physician colleagues losing personal assets in malpractice judgments make the subject of asset protection of particular interest. This issue of ED Legal Letter is not intended to be an all-inclusive discussion, but rather an informative primer, thus affording readers valuable information about options for protecting their personal savings and retirement accounts.
Introduction
Asset Protection Planning. Asset protection planning consists of strategies taken to protect and insulate assets from future creditor attack. While asset protection planning long has been a fundamental component of the savvy physician's estate plan, its techniques have become even more popular in recent years for nonphysicians as juries in the United States issue ever-increasing monetary awards. As a result, the statutory and case law interpreting particular techniques has evolved significantly during the last decade.
Asset protection planning involves a comprehensive inventory of assets held by an individual or a family, along with the manner in which such assets are titled. For this reason, asset protection techniques often are implemented in conjunction with an estate plan. Planning techniques require consideration of the estate, gift, and income tax consequences of a proposed transfer.
Since asset protection is a highly complex area of practice, it strongly is recommended that an individual interested in pursuing such planning consult with experienced advisors. Not only is it necessary to be counseled on the interplay of available asset protection strategies with various conflicts of laws, laws of foreign countries, corporate laws, estate planning, and estate, income, and girl tax ramifications applicable under a particular situation, proper planning will avoid transfers classified as fraudulent.
This article will describe the traditional as well as the more pioneering asset protection planning techniques available; the tax consequences of various techniques; the pitfalls of a fraudulent transfer; and current legal developments concerning various asset protection planning techniques.
Fraudulent Transfer Laws
The Importance of Planning Today. Because even the most basic asset protection planning typically involves a transfer of assets, a preliminary consideration in any plan is the applicable fraudulent transfer laws. (1) In general, the fraudulent transfer laws prevent transactions made with intent to defraud a particular creditor. (2) If made with the intent to hinder a creditor, a transfer is fraudulent regardless of whether it also may have been motivated by nonfraudulent intentions. By failing to comply with the governing fraudulent transfer laws, an asset protection planning transfer will be void and the individual making the transfer (and possibly his or her attorney or other advisors) may be exposed to civil--and in extreme instances, criminal--liability. In light of this potential liability, most professionals are willing to advise their clients about asset protection only if they are confident that neither a current claim nor a legitimate expectation of a future claim exists.
In determining whether a transfer is fraudulent (i.e., whether the transfer was meant to hinder a present creditor), a court will not necessarily require that the creditor in question have a claim that has been reduced to a judgment. Consider, for example, a surgeon, concerned about the consequences of a particular procedure she performed on a patient, who immediately transfers her investment account to her spouse. A court later reviewing the transfer is likely to classify it as fraudulent because it was made with the intent to hinder access to the investment account. In this example, it is not necessary for the patient to have obtained a judgment or even filed suit against the surgeon to be considered a creditor for fraudulent transfer purposes. By contrast, consider an internist about to form a private practice. While establishing his practice, an attorney advises him to establish an offshore trust to protect his personal holdings from potential professional negligence claims. A subsequent creditor is not likely to succeed on a fraudulent transfer assertion because the trust was not established with a particular creditor in mind (see table, p. 135).
While the previous examples illustrate the advantages of engaging in asset protection strategies before a potential claim arises, there are possible solutions for a client who is faced with existing claims or creditors. A determining factor for a court in ascertaining whether or not a transfer was made with the intent to defraud a particular creditor is the solvency of the debtor. If the debtor became insolvent as a result of the transfer in question, there is a greater likelihood that transfer will be void. Thus, in instances where individuals have an existing creditor or claim, asset protection plans often are structured for the benefit of protection against future creditors while ensuring that the debtor remains solvent with regards to his current creditors.
Traditional Asset Protection Planning Concepts
Business and Corporate Entities. To minimize exposure resulting from business ventures or real estate holdings, individuals routinely are advised to consider an appropriate entity to shield their personal assets from creditor attack. Various types of entities can be established to distinguish the assets of the business from the personal assets of the business owner and thereby limit a business creditor's ability to recover from the business owner's individual assets (see insert).
Asset Protection-Planning
As noted above, asset protection and estate planning often operate in conjunction with each other. The following discussion will focus on certain asset protection strategies that are equally popular for their estate planning advantages and their utility in reducing estate tax liability.
Gifts. Gifts of property to family members have long been a staple of any asset protection or estate plan. An outright gift to a spouse or family member not engaged in a high-risk profession has the distinct advantage of removing the gifted asset from claims of future creditors. In addition, a gift has the estate-planning advantage of removing assets from the transferor's taxable estate. Of course, a gift is not a plausible alternative for an individual concerned with relinquishing control and enjoyment of his or her property. In addition, any gifting program must consider gift tax consequences and maximize use of the exemptions available in the Internal Revenue Code. (3) Finally, if a gift is not made to a particular type of protected trust, the gifted asset immediately will be subject to the donee's creditors.
Co-Tenancies. Many individuals (particularly those who purchase real estate in a joint capacity) do not fully appreciate the estate and asset protection consequences of the form of co-tenancy they creme. When purchasing a joint asset with another individual, it often is advisable to seek advice surrounding the appropriate form of co-ownership.
Joint Tenancy with Right of Survivorship. Property held in joint tenancy with right of survivorship, traditionally popular for convenience reasons (in that it will pass directly to the surviving joint tenant without the necessity of probate by virtue of the survivorship feature), provides no asset protection. In fact, joint tenancy with right of survivorship exposes the property to the creditors of each joint tenant. In addition, negative estate planning and estate tax consequences can result from this form of ownership, particularly when it is used to hold property between persons not married to each other.
Tenancy by the Entirety. Any discussion of asset protection would be incomplete without consideration of the availability of tenancy by the entirety under the applicable state statute. Tenancy by the entirety is a very popular, cost-effective form of ownership that often can protect a family's most valuable asset. Tenancy by the entirety is a specific form of joint tenancy that can exist only between a husband and wife. Like joint tenancy with right of survivorship, upon the death of one spouse the entire property held in tenancy by the...
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