The Art of the Impossible The solution to the riddle of asset protection requires a discussion of tax and estate planning. The laws that have evolved to protect creditors from certain common and prohibited acts by debtors require having an overall plan that has benefits besides protecting yourself from lawsuits. If the plan only was designed to protect against lawsuits, the courts can set it aside on the grounds that it was an attempt to defraud future creditors. By making the extra effort to set up your structure correctly, you will find that income and estate tax savings will far exceed the cost of creating the plan in the first place. So first lets examine what you cannot do to protect yourself from lawsuits. Badges of Fraud All 50 states have laws that guard against the common practice of dodging judgments by transferring assets. Example: Dr. Paul gives Mrs. Paul all of his assets. He tells his judgment creditor "all I have is yours, but..." This does not work. Any transfer made for less than valid consideration can and will be undone. The transferee (Mrs. Paul) will be treated as a trustee for the transferor (Dr. Paul). The court will unzip the transfer and the value of the asset will be available to satisfy the judgment. Any transfer that leaves the transferee insolvent or substantially unable to pay his current creditors may be treated as a fraud against the creditors. However, there is no prohibition on the transfer of assets to a different form of ownership, such as into a corporation or partnership. There are several tests that determine that a transfer does not have the badges of fraud, and the transferor must pass all of them; in this case a transfer is guilty until proven innocent! As part of an estate plan it is permissible to transfer assets to a family limited partnership provided that you receive back an equal value of the partnership itself. In other words, instead of owning $1,000,000 of real estate in fee simple which is easily attachable by your creditor, owning $1,000,000 of limited partnership interest is not a fraud on creditors; any resulting difficulty in attachment is a result of the laws of partnership and does not wear any badges of fraud. The Thin Corporate Veil The use of a corporation to shield one from liability may be crucial and effective. Too often, however, forming a corporation is only useful as a first line of defense. Too many individuals mistakenly rely completely on this maneuver. The first problem with it is that the corporation may be penetrated (piercing the corporate veil is the legal term), exposing all officers, directors, and even shareholders to direct and personal liability. Many minor failures on the corporate owner's or officer's part may lead to its failure in asset protection. Such failures include, but are not limited to: 1) Failure to capitalize the corporation -- did you really pay for the stock? 2) Failure to hold annual meetings -- did you stop treating the corporation as a separate entity? 3) Commingling the corporate bank accounts with your individual check book - do you occasionally (or frequently) use the corporate checks or credit card to fund personal expenses? 4) Failure to file all necessary corporate papers with the state - have you ever done business in California with your Nevada corporation, or in New York with your Delaware corporation? 5) Failure to keep all incorporation papers current - have you filed your corporate reports with your state of incorporation? 6) Failure to file tax returns - your inactive corporation didn't need one? Well, now it does! 7) Failure to hold corporate meetings - do your corporate minutes reflect the type, change in, and ebb and flow of your business? If you cannot correctly answer all of the above, then your corporation may not provide the shelter you expected of it. The Folly of Corporate Control Over the years substantial abuses have been visited upon shareholders of corporations by "insiders." As a result any majority of shareholders have the right to force the sale of the corporation, its dissolution, distribution of assets, etc. As a share of stock is an item of personal property, similar to a bank account, certificate of deposit, or cash, it can be ordered sold, or, in effect, transferred to the creditor, to (partially) satisfy a judgment debt. Thus a person who hides behind corporate ownership may soon find himself the former owner, or, the president voted out of office. Worthless Insurance Less than one in a hundred readers of this report have actually read their insurance policies. Insurance companies are in business to make money. They do this by limiting risks. Probably only one in five know where their policies are to read them if they wanted to. Most insurance covers you for only a portion of the risks that you assume. For example, if you are sued for unlawful discharge of an employee (average verdict: $300,000) are you covered? Does your automobile coverage protect you when you drive your vehicle off-road to a picnic site? The fire that started in your bushes and spread to your neighbor's property - are you covered? Are your limits adequate, or were they set years ago and never adjusted? Make sure that you have a separate Umbrella Coverage policy that fills in the cracks left by your other policies. Many people in the United States have recently found that the coverage afforded by their medical plans was no better than the financial well-being of their now- defunct insurance companies. After the savings and loan mess, are we absolutely sure that the insurance industry is fiscally sound?