PROTECTING YOUR ASSETS FROM CREDITORS: ARE YOU BULLET-PROOF? PART 3
by: Begley Law Group
by Thomas D. Begley, Jr., CELA
This is the final article in a series devoted to protecting assets from claims of creditors. (The other articles in the series are here: Part 1 and Part 2.) The main issue in this type of planning is the Fraudulent Transfer Act. Previous articles have discussed insurance, titling of assets, retirement plans, assets used in a profession or business, Domestic Asset Protection Trusts (DAPTs), and Off-Shore Trusts. This article will discuss the Elective Share, the Fraudulent Transfer Act, and whether you are a good candidate for asset protection strategies.
Divorce often subjects assets of a professional or business person to claims of the divorcing spouse. It appears clear that the spouse of a Delaware decedent is unable to reach assets in a Delaware DAPT by asserting rights to an elective share. Delaware law does not defer to the decedent’s domicile to determine the surviving spouse’s elective share rights, so it is likely that the Delaware DAPT would offer protection against elective share rights even if the grantor of the trust was a resident of New Jersey or Pennsylvania. Even better insurance against a claim for an elective share is a valid prenuptial agreement. If an individual enters a marriage with significant assets and never commingles them with marital assets and never uses the income or those assets to fund the marital lifestyle, courts may find that these assets should be excluded from consideration as martial assets. Inherited assets, including stock portfolios, vacation homes, etc., may also be protected so long as they are not commingled with other marital assets. If assets that have never been marital assets are placed in an irrevocable discretionary trust with a third party trustee, this would reduce the chances that assets will be considered to have supported the marital lifestyle and, thus, classified as marital property. If the parent leaving the inheritance establishes the trust, the protection is significantly greater.
TIMING/FRAUDULENT TRANSFER ACT
Timing is the key to implementation of an effective asset protection planning strategy. New Jersey follows the Uniform Fraudulent Transfer Act. This Act essentially provides that with respect to present or future creditors a transfer by a debtor is fraudulent as to a creditor whether the creditor’s claim arose before or after the transfer was made, if the debtor made the transfer:
- With actual intent to hinder, delay, or defraud any creditor of the debtor; or
- Without receiving a reasonably equivalent value in exchange for the transfer…, and the debtor:
- Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
- Intended to incur, or believed or reasonably should have been believed that he would incur, debts beyond his or her ability to pay as they became due.
There is a statute of limitation for bring fraudulent transfer claims. Generally, a cause of action for actual fraud is extinguished unless an action is brought within four years after the transfer was made or, if later, within one year after the transfer was, or could reasonably have been discovered, by the claimant. This means that implementation of asset protection strategies are governed by this rule. Many, if not most, individuals want to implement asset protection strategies after a claim has already arisen or an incident has occurred that appears likely to give rise to a claim. At that point, the Fraudulent Transfer Act applies and it is too late to implement these strategies.
In transferring assets to a DAPT, an individual is required to execute an Affidavit of Solvency to the effect that the individual has sufficient assets remaining after transfer to the trust to take care of all foreseen expenses.
ARE YOU A GOOD CANDIDATE FOR ASSET PROTECTION STRATEGIES?
There are a number of factors to be considered in answering this question:
- Risk Analysis. What is the risk that a claim will be brought against you? Most likely, the claim will be in connection with some activity related to your profession or business, but it could be from other causes.
- Net Worth. What is the size of your net worth?
- Have you implemented all or some of the asset protection strategies listed in previous articles?
- Willingness to Plan. Are you willing to engage in all or some of the asset protection strategies listed in previous articles?
- Investment Assets. Do you have significant investment assets outside of your profession or business?
- Are you willing to give up control of a portion of your investment assets by placing them in a DAPT? It should be noted that not all of your investment assets should be placed in a DAPT. The assets placed in the trust should be assets that you are not likely to require for living expenses. While these assets are available in the event of an emergency, good practice dictates that they be invested and grow and that the income be accumulated in the trust. They are available in an emergency, but should not be used for daily living expenses.
- Fraudulent Transfer Act. Are you considering implementing these asset protection strategies before a claim has arisen and before an incident that may give rise to a claim has occurred?
- Trustee’s Discretion. Are you aware that you cannot obtain income and assets from a DAPT simply upon request? Distributions from the trust are discretionary with the trustee and certain procedures must be followed.
- Real Estate. Are most of your assets real estate? If so, you are probably not a good candidate for a DAPT but you may be able to employ alternative strategies. Income and estate tax considerations must be carefully analyzed.