Asset Protection

August 9, 2007 at 9:28 am | Posted in Asset Protection | 2 Comments

Is your lawyer willing to tell you everything you need to know about asset protection?

We are the first to tell you that you are well served by seeking counsel from both a lawyer and an accountant when you are setting up an entity for asset protection. We will also tell you that despite their ability to engender widespread ridicule, lawyers are truly invaluable when you need them. However, when it comes to asset protection, it is important that you understand the problems and pressures that attorneys face. There are many rules and competing interests that may cause an attorney to tell you less than what you really need to know. The key to getting a meaningful opinion from your lawyer is to understand these factors and to insist that your counsel address how they affect his or her approach to your specific situation. Remember, the whole idea of asset protection is to defeat the efforts of lawyers, and you may encounter an attorney who is resistive to the concept of placing your assets beyond the reach of creditors’ legal claims.

The Rules of Professional Conduct

Lawyers in all states are subject to a code of professional conduct. Code provisions may vary from state to state but most closely follow the American Bar Association’s Model Rules of Professional Conduct. It is important for you to know that some attorneys believe that it is a violation of the Rules of Professional Conduct to assist a client with the creation of an arrangement designed to frustrate future creditors. Other attorneys disagree and are willing to provide asset protection advice. In light of this, it is critical to know an individual attorney’s view of how the Rules of Professional Conduct affect your asset protection objectives and the attorney’s suggested strategies.

Applying the Model Rules of Professional Conduct to fundamental asset protection strategies presents several problem areas. The questions set out below should serve as the basis for a discussion between you and any lawyer you consult regarding asset protection.

Model Rules of Professional Conduct, Rule 4.4 – Respect for Rights of Third Persons

In representing a client, a lawyer shall not use means that have no substantial purpose other than to embarrass, delay or burden a third person…

Issue:

Will the creation of entities, trusts or structures which delay or burden creditors subject an attorney to sanction?

Model Rules of Professional Conduct, Rule 3.3 – Candor towards the Tribunal

• A lawyer shall not knowingly:

1. fail to disclose a material fact to a tribunal when disclosure is necessary to avoid assisting a criminal or fraudulent act by the client

2. the duties stated in paragraph (1) continue to the conclusion of the proceeding, and apply even if the compliance requires disclosure of information otherwise protected by Rule 1.6 (i.e., by attorney-client confidentiality)

Issue:

1. Does an attorney have a duty under this rule to advise the court when a client may not have personal control over an asset sought by a creditor, but does control the asset through the client’s control over a corporation, LLC, trust or similar entity?

2. If a lawyer creates a structure that has the effect of hiding a client’s assets from creditors, does the lawyer have any duty to affirmatively communicate this fact to the court? Does the failure to do so constitute the knowing failure to disclose a material fact to a tribunal when disclosure is necessary to avoid assisting a criminal or fraudulent act by the client?

Attorney Discipline Proceedings

Lawyers are not taught asset protection in law school. It is a skill, learned in the trenches, which involves multiple disciplines. For the inexperienced, it can be a minefield. Because of this, asset protection issues have been the subject of numerous attorney discipline proceedings. The following cases are representative. In Re Kenyon and Lusk, 327 S.C. 307, 491 S.E. 2d. 252 (1997) involved an attorney who counseled a client in connection with a conveyance of property designed to frustrate creditors; the attorney was suspended for 15 months. In re Hockett, 303 Ore. 150, 734 P.2d 877 (1987) involved an attorney who assisted his client in transferring assets to avoid creditors. The court concluded that assisting clients to cheat creditors violated the code of professional conduct. The lawyer was suspended. Florida Bar v. Scott, 566 So.2d 765 (Fla. 1990) involved an attorney who helped a friend conceal property from creditors and was adjudged to have thereby committed misconduct.

Fraudulent Transfers

One of the most frequent problems we encounter are professional advisors of all stripe who are not well versed in The Uniform Fraudulent Conveyances Act. This Act, which exists in some form in all states, prohibits the transfer of assets when such transfer render the transferor unable to pay the claims of a lawful creditor. This general rule is frequently misinterpreted resulting in the advice that once you’ve been sued there’s nothing you can do. There are many instances when litigation has commenced but the claim is frivolous, exaggerated or based in whole or part on fabricated facts. All such factors are relevant to whether the claim is lawful. Remember, the Act prohibits only those transfers designed to defeat lawful claims. Many advisor’s fail to understand that the issue of what constitutes a lawful claim is judged from the perspective of a reasonable person in the Debtor’s position, and not from the Creditor’s perspective. Thus, if you rear end another driver at 2 mph, but he and his bottom feeding lawyer decide that he is totally disabled and that you owe him millions because he’d rather peel grapes than work, a reasonable person in your position could conclude that such claim is anything by lawful. There are specific ways to effectively handle such situations. Telling the client that there’s nothing that can be done may protect the lawyer but does nothing to protect the client.

Transmutation/Separate Property Agreements

It is an often repeated maxim that creditors of one spouse may reach all assets held by the marital community. Many advisors rely on this general rule and advise clients that you cannot achieve asset protection by transferring property between spouses. In fact, a married person may convert marital property to separate property and thereby remove it from the reach of a spouse’s creditors. This may be done in both community property and common law states. This has to be done with precision by a valid separate property agreement, known in California as a transmutation agreement. Factors similar to those surrounding fraudulent transfers must be addressed. We can help you with this very effective strategy for protecting the assets of married persons.

Bottom Line

Our mission statement is this:

We are willing to take every possible appropriate and legal step that we can to help you protect your assets. We believe in asset protection. We believe that everyone has a right to know about asset protection mechanisms and that asset protection strategies should not remain the exclusive province of only the vested and most powerful interests in society.

The directive of John D. Rockefeller, own nothing, control everything, is sage advice for all.

Please call us at 1.800.910.9919 with your questions and concerns, or visit our web site at Nevada State Corporate Network, Inc. – Graig Zapper – President