Asset Protection Law Journal

Collapse of Major Law Firm -- Another Reminder That Disaster Can Strike At Any Time

Ken Laino — Wed, 02 May 2012 08:27:59 -0500

As reported by Peter Lattman in The New York Times yesterday and today, a major New York law firm -- Dewey & LeBoeuf -- is on the verge of bankruptcy. The firm was aiming to become a global powerhouse in corporate law. At its peak, it had more than 1,300 lawyers in 26 offices all over the world. It appears to have taken on too much debt; expanded too rapidly; and is on the verge of collapse.

Many individuals and business have gone bankrupt in recent years. The collapse of a giant international law firm is a grim reminder that any of us can suddenly find ourselves in totally unexpected financial trouble. Having a reasonable asset protection plan in place prior to any such problems can be a huge benefit. If even a giant law firm can collapse within a very short period of time, it is obvious that no business or individual is immune from unexpected financial distress.

Proposed Legislation Would Make Ohio a Leading Asset Protection Jurisdiction

Ken Laino — Tue, 01 May 2012 14:38:40 -0500

Ohio House Bill 479 -- commonly known as the Ohio Asset Management Modernization Act (OAMMA) --would make Ohio a leading asset protection jurisdiction. The proposed legislation would:

Permit a so-called Domestic Asset Protection Trust (DAPT).
Provide an essentially unlimited homestead exemption, similar to those in Florida, Texas and several other states.
Specifically protect inherited IRAs.
Specifically protect 529 plans from a plan participant's creditors.
Make some other changes that would help make Ohio one of the better asset protection jurisdictions in the country.

This is proposed legislation. As explained recently by Akron Legal News, sponsors of the proposed law argue that it would allow Ohio citizens and business owners to better protect their assets. It would also provide a legal environment that is favorable to the expansion of banking and trust business. But it is still too soon to predict whether the proponents of the new legislation will ultimately be able to get it enacted.

Ohio LLC Statute Now Provides Better Protection from Creditors

Ken Laino — Fri, 27 Apr 2012 14:42:59 -0500

Following up on my post of April 13, 2012 --

Ohio House Bill 48 (which becomes effective on May 4, 2012) makes important changes to Sections 1705.18 and 1705.19 of the Ohio Revised Code. A new Section 1705.19(C) provides:

No creditor of a member of a limited liability company or any member's assignee shall have any right to obtain possession, or otherwise exercise legal or equitable remedies with respect to, the property of the limited liability company.

Section 1705.19(B) strengthened Ohio's charging order protection. The new subsection (C) makes it even clearer that a creditor of a member simply cannot exercise legal or equitable remedies against the property of the limited liability company.

As I noted in my earlier post, these new provisions make Ohio LLCs much more appealing from an asset protection standpoint.

Debt Collectors Now Pursuing Patients Inside Hospitals

Ken Laino — Thu, 26 Apr 2012 14:32:56 -0500

A front page article in yesterday's New York Times (by Jessica Silver-Greenberg) reports that hospital patients waiting in an emergency room (or even convalescing after surgery) may find themselves confronted by a debt collector -- right in the hospital! The Minnesota attorney general, Lori Swanson, claims that one of the nation's largest medical debt collectors (Accretive Health) was engaging in such practices. The Minnesota attorney general has not yet filed any formal action. But her comments have raised concerns that such practices may have become common at various hospitals across the country.

I served on a hospital Board of Trustees for ten years, and I am certainly sympathetic with the increasing financial pressures faced by hospitals nationwide. Hospitals obviously have to employ various tactics to collect debts. It seems, however, that some hospital collection efforts may be crossing the line of what is reasonable.

The New York Times article is another vivid reminder that debt collectors in general are getting more and more aggressive. Focusing on asset protection (including insurance needs) before a problem arises is more important than ever.

Important Changes to Ohio LLC Statute Take Effect on May 4, 2012

Ken Laino — Fri, 13 Apr 2012 15:01:49 -0500

Ohio House Bill 48 (signed by Governer Kasich on February 2, 2012) makes some significant changes to Ohio's LLC law. The new legislation (which becomes effective on May 4, 2012) affects Sections 1705.18 and 1705.19 of the Ohio Revised Code.

The new legislation clarifies that a charging order is the sole and exclusive remedy for satifsying a judgment against a membership interest of a debtor-member. Other legal and equitable remedies are barred.

There had been some uncertainty about this area of Ohio law, and new legislation clears up that uncertainty.

Ohio law still does not specifically state that single member LLCs and multi-member LLCs will be treated the same.

At any rate, the new Ohio legislation makes Ohio LLCs much more appealing from an asset protection standpoint.

Estate Planning Checklists Should Include Online Accounts

Ken Laino — Tue, 27 Mar 2012 15:35:54 -0500

Most of us now have multiple on-line accounts that require some sort of password in order to access that account. Concerns about privacy and protecting assets make us inclined to keep these passwords secret. Unfortunately, very few people consider what happens if they die and no one can access their on-line accounts.

Your asset protection/estate planning should include leaving a list of on-line accounts (including passwords) with a trusted advisor or family member. This will avoid a lot of wasted time and effort in the event of your death or disability.

Disclaiming an Inheritance can Constitue a Fraudulent Conveyance

Ken Laino — Mon, 26 Mar 2012 15:28:59 -0500

Transferring an asset under certain circumstances can constitute a fraudulent conveyance. Refusing to accept an asset can also constitute a fraudulent conveyance.

Let's say that you owe a creditor a significant amount of money. You then learn that you have received a substantial inheritance. If you take the inheritance it will go to the creditor. So you decide to disclaim the inhertiance so that it can go to another family member. In most states, that disclaimer will be deemed a fraudulent conveyance. This all depends on state law; but the majority view seems to be that the creditor will be able to successfully reach those funds.

This is why multi-generational asset protection planning can be very important (just like multi-generational estate planning). If the person leaving the inheritance had left it in a trust (with the right kind of provisions) it probably could have been protected.

It is important to keep in mind that many state fraudulent transfer laws are broad enough to encompass disclaiming certain assets as well as transferring certain assets.

Update on Domestic Asset Protection Trusts

Ken Laino — Fri, 23 Mar 2012 13:02:40 -0500

A domestic asset protection trust (DAPT) is one of many different entities that may (or may not) be an appropriate part of an asset protection plan.

At least eleven states have enacted DAPT legislation.
States that have DAPT statutes include Alaska, Delaware, Nevada, South Dakota, Hawaii, Missouri, New Hampshire, Rhode Island, Tennessee, Utah and Wyoming.
While there are similarities, each state statute has different provisions.
A DAPT must be irrevocable; the trustee must be a resident of the state in which the trust is formed, or a bank, trust company or other financial institution with offices in that state.
The validity of these trusts is still unsettled. There is no reported court decision either affirming or striking down this relatively new type of trust.

Asset protection lawyers have varying views about DAPTs. Foreign asset protection trusts provide greater certainty because court decisions have either directly or indirectly upheld their validity in many circumstances. But these trusts are more expensive to set up, and holding assets offshore can create certain issues and reporting requirements that are not applicable to domestic trusts.

My own view is that each client's situation has to be examined individually. A DAPT might be an appropriate alternative for some (but certainly not all) of a client's assets. If you are thinking about a DAPT or any other form of asset protection, it is critical that you consult with an attorney who will look at all alternatives (and who is not simply selling a particular kind of trust or other device).

Retirement Plans and IRAs are Well-Protected from Creditors

Ken Laino — Thu, 22 Mar 2012 09:19:53 -0500

This is the time of year when we are all focused on taxes. This includes our tax returns for 2011 and tax planning for 2012. So it is an appropriate time of year for a reminder about retirement plans and IRAs. We all seem to be aware of their tax advantages; but I constantly remind clients that they are also highly advantageous from an asset protection standpoint.

An ERISA qualified retirement plan is protected from the plan participant's creditors pursuant to the 1992 decision of the U.S. Supreme Court in Patterson v. Shumate.
IRAs received specific protection under the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act.
Some IRA protections (for example, those relating to inherited IRAs) depend on state law. For example, Texas and Florida have enacted specific legislation to provide that inherited IRAs are protected from creditors. Ohio and some other states have passed legislation exempting inherited IRAs in bankruptcy.

The legal details of retirement plans and IRAs can be very complicated. But a simple point to keep in mind is this: maximizing contributions to retirement accounts is a very basic (and very effective) tax and asset protection strategy.

Medical Malpractice Suit can be Emotionally Devastating to a Physician

Ken Laino — Wed, 08 Feb 2012 11:43:32 -0500

Being named as a defendant in a medical malpractice case can be emotionally devastating to a physician -- even if the physician is only peripherally involved in the case. Very few people fully appreciate how troubling it can be for a doctor who is named in such a lawsuit.

An excellent article by Pauline W. Chen, M.D. in the New York Times articulates very clearly how involvement in a medical malpractice suit can negatively impact a physician's way of practicing medicine.

According to the article, a recent survey of more than 7,000 surgeons found that nearly one in four were in the midst of litigation. The lead author of the survey (Dr. Charles M. Balch of the University of Texas Southwestern Medical Center in Dallas) notes that malpractice is at the top of the list of major stressors for most physicians.

I have found that meaningful asset protection can be a huge benefit to a physician -- not only financially, but emotionally as well. Having reasonable malpractice insurance is a critical first step. But going a step further -- and making sure that you have done everything reasonably possible to lawfully protect your personal assets -- will usually bring quite a bit of peace of mind.

Another Debt Collection Firm Agrees to Change its Collection Practices

Ken Laino — Tue, 07 Feb 2012 09:21:41 -0500

Debt Collector NCO Financial Systems will pay $1.5 million and change some of its collection practices to end an investigation by 19 states, including Ohio. That is according to an article today in the Cleveland Plain Dealer, by its Consumer Affairs Reporter, Sheryl Harris. The article reports that consumers in various states may be eligible for refunds if they had paid NCO for a third party debt they did not owe, or if they were charged interest on a debt that was not permitted by law or the original contract. NCO also agreed to change some of its collection practices.

This is yet another reminder that debt collectors can be very aggressive -- and sometimes too aggressive -- in attempting to collect debts. Debt collectors are subject to various fair debt collection and credit reporting laws. This recent settlement shows once again that debt collectors sometimes fail to abide by the applicable requirements.

You can pretty much count on a creditor using all lawfully permitted means to attempt to collect a debt from you. You should likewise take advantage of available laws to protect your assets to the greatest extent that you are able to do so.

Mitt Romney Keeps Funds in Cayman Islands and Switzerland

Ken Laino — Fri, 03 Feb 2012 08:36:40 -0500

As I have mentioned in many other posts, there is nothing wrong with using Swiss bank accounts or offshore entities. A recent front page article in the New York Times noted that Mitt Romney and his wife hold millions of dollars in a Swiss bank account and millions more in partnerships in the Cayman Islands. Their attorney, R. Bradford Malt, said that the Swiss bank account complied with all Internal Revenue Service reporting requirements, and that the family had paid all applicable taxes.

This is simply another reminder that it is perfectly appropriate for a U.S. citizen to hold funds outside the United States -- as long as applicable U.S. taxes are paid in full. Even though holding assets offshore may sometimes be tax neutral, those assets can frequently be much better protected from U.S. creditors.

Asset Protection Planning Should Have a Multi-Generational Focus

Ken Laino — Thu, 26 Jan 2012 15:11:26 -0500

It is generally estimated that more than half of all Americans have absolutely no estate planning documents. This can potentially create a lot of hassles for your loved ones.

But even those Americans with very good estate planning documents often fail to focus on asset protection for their children and other beneficiaries. If you simply leave assets to your beneficiaries without any kind of ongoing trust arrangement, those assets can generally be reached by their creditors with little effort.

We now recommend dynasty trusts for many of our clients. These trusts are not as exotic as the name might imply. They simply allow your children and other beneficiaries to hold assets in a continuing trust arrangement. This can provide better protection in the event of a divorce; and it can also provide better protection from future creditors of the beneficiaries.

Providing some added protection for the assets that you leave to your loved ones can be an important gift to them.

IRS Form 8938 -- Another Reporting Requirement for Offshore Assets

Ken Laino — Tue, 24 Jan 2012 13:55:24 -0500

The IRS is continuing its efforts to identify sources of offshore taxable income of U.S. taxpayers. This has lead to a new reporting requirement. Many U.S. taxpayers with foreign assets must now file IRS Form 8938 - Statement of Specified Foreign Financial Assets. This new requirement is applicable to the 2011 tax year, and must be filed with an individual's annual federal tax return. The IRS has issued instructions for the new form.

This new requirement does not replace the annual FBAR report, which is due by June 30 of the applicable filing year.

Some, but not all, U.S. taxpayers are subject to the new requirement. For instance, it applies to married taxpayers filing a joint income tax return if the total value of your specified foreign financial assets is more than $100,000 on the last day of the year or more than $150,000 at any time during the tax year.

There are failure-to-file and accuracy-related penalities relating to Form 8938, and these penalties can be severe. It is therefore very important for anyone with funds in offshore accounts to have a tax preparer who is familiar with all of the applicable reporting requirements.

Even Libraries Are Using Debt Collection Agencies

Ken Laino — Tue, 27 Dec 2011 15:08:35 -0500

According to a recent article in The Cleveland Plain Dealer, the Cleveland Public Library has hired a national collection firm to recover fines and overdue items. Director Felton Thomas reported that the agency had collected $550,000 in fines and $2.6 million worth of outstanding material; and fees were less than $90,000. So it would seem that using an outside agency for collection will continue. Other libraries have taken similar action.

My point in bringing this article to your attention is not simply the fact that libraries are now using outside collection agencies. The main point is that almost all creditors seem to be getting more and more aggressive in their collection efforts. For example, real estate developers and business owners in the past could reasonably assume that a bank would not immediately call a loan if you failed to meet certain financial covenants. That is simply no longer the case. Having been burned by so many bad real estate loans, banks and other lenders are not going to be as lenient as they used to be if any problems develop with your loan.

Stated another way --- if even libraries are using collection agencies, you can imagine what might happen with your business or real estate loan if your circumstances suddenly change. All of this makes asset protection planning more important than it was in the past.

Debt Collectors Sometimes Go Too Far

Ken Laino — Mon, 26 Dec 2011 14:38:32 -0500

The Ohio Attorney General's office recently settled a lawsuit filed against Allied Interstate, one of the country's largest debt collectors. According to the Columbus Dispatch, Allied Interstate agreed to pay $150,000 and make changes in its practices. Allied faced two dozen allegations of misconduct after a state investigation -- for instance, calling before 8:00 a.m. and after 9:00 p.m., and even making unauthorized withdrawals from bank accounts. It was also accused of calling people's employers, despite being asked to stop; making idle threats; and repeatedly calling the wrong people.

This settlement came shortly after a $350,000 agreement reached in August between the State of Ohio and Credit Bureau Collection Services, which has its headquarters in Columbus. According to the Columbus Dispatch, Allied agreed last year to pay $1.75 million to settle a similar federal probe; and Credit Bureau Collection Services agreed to pay $1.1 million. The Ohio Attorney General has reached settlements with other collection firms as well.

If you feel you have been the victim of an unlawful debt collection practice, you should contact your state attorney general or other state consumer protection agency. Debt collection is of course perfectly valid -- as long as it is conducted in accordance with applicable law.

Ohio Court of Appeals Provides Guidance About "Piercing the Corporate Veil"

Ken Laino — Tue, 22 Nov 2011 14:38:34 -0500

The Ohio Court of Appeals (10th District, Franklin County) recently provided some very specific guidance about "piercing the corproate veil" in Ohio. The case is Lind Stoneworks, Ltd. v. Top Surface, Inc., 194 Ohio App.3d 98 (10th District 2011).

The trial court held a corporation and its sole owner liable for a corporate debt. The trial court "pierced the corporate veil" and found the owner to be personally liable. The owner admitted that the corporation had no officers, no directors, and had apparently failed to follow some other corporate formalities.

The Court of Appeals held that in this case, these facts alone were not sufficient to impose personal liability on the owner. The appeals court basically found that there was insufficient evidence to pierce the corporate veil. The decision of the trial court was reversed and the case was remanded for further consideration.

Many factors can influence whether or not personal liability will be imposed on a corporation owners. The Court of Appeals noted that in general, shareholders, officers and directors are not liable for a corporation's debts.

A limited liability company does not have as many required formalities as a corporation. Nevertheless, it should still have a separate bank account and otherwise be treated as a separate entity.

The message from this recent Ohio court decision is clear: make sure that you follow basic formalities with your corporation, limited liability company, or other business entity. This is relatively easy to do; and failing to do it can completely defeat the purpose of forming the entity in the first place.

Mortensen Case Highlights Fraudulent Conveyance Issues

Ken Laino — Mon, 21 Nov 2011 14:06:53 -0500

A recent decision by the United States Bankruptcy Court for the District of Alaska (In Re: Thomas Mortensen, Case No. A09-00565-DMD) is clearly worth reading -- for a discussion of fraudulent conveyances, Alaska asset protection trusts, applicable statutes of limitations, and a variety of other asset protection topics. I will likely comment on this recent case in several different posts, but here is a quick initial summary.

U.S. Bankruptcy Judge Donald MacDonald IV held that a transfer by Thomas Mortensen of real estate into an Alaska asset protection trust was a fraudulent conveyance. The Judge found that there was persuasive evidence of an intent to hinder, delay and defraud present and future creditors. The Bankruptcy Judge voided the transfer of real estate to the trust as a fraudulent conveyance.

There are numerous lessons to be taken from this court decision and here are just two of them --

Transferring assets when you are insolvent is likely to constitute a fraudulent conveyance. While Mortensen was found to be solvent at the time of the real estate transfer, his own testimony from a child support action was used against him in the bankruptcy proceeding. In a child support proceeding against his ex-wife, Mortensen took the position that his divorce had thrown him into heavy debt. This is simply a reminder that whatever you say in one court case can obviously be used against you in another!
Think carefully about choosing the trustee of a trust. Mortensen named his brother and a personal friend as trustees of his Alaska asset protection trust, and named his mother as a "trust protector." All of these individuals were named as defendants by the Chapter 7 Bankruptcy Trustee in his adversary action against Mortensen. While it is perfectly appropriate in many instances to name family members as trustees or trust protectors, you need to consider that these individuals can sometimes be dragged into litigation.

Many court decisions are difficult to read, but the Mortensen case is fairly easy to follow. It is useful reading for anyone interested in some of the more technical aspects of fraudulent conveyances and other asset protection issues.

Federal Judge Orders Convicted Defendant to Forfeit Pension Funds

Ken Laino — Mon, 14 Nov 2011 12:44:18 -0500

A federal judge in Cleveland, Ohio recently ordered a convicted public official to pay $57,000 in damages by taking those funds from his retirement account. An Ohio law passed several years ago specifically authorizes such an action if a public official has been convicted of certain crimes, including bribery. The decision by U.S. District Judge Sara Lioi was reported in an October 29, 2011 article by James McCarty in the Cleveland Plain Dealer.

The convicted public official (former state court judge Steven Terry) was ordered to cash out the $57,000 from his retirement fund. Mike Tobin, a spokesman for the U.S. Attorney's office, acknowledged that this was clearly a precedent.

Retirement accounts are generally well protected from creditors. The Ohio statute involved in this particular matter has limited application -- to certain convicted public officials. It is nevertheless important to be aware of cases like this one -- because we would not want to see a law like this one extended too far.

Asset Protection Planning is Often Possible After You Have Creditor Issues

Ken Laino — Fri, 28 Oct 2011 12:23:32 -0500

It is clearly better to engage in asset protection planning before you have any creditor issues. But planning after a lawsuit has been filed -- or even after a judgment has been entered against you -- is frequently possible.

State fraudulent transfer statutes vary in a number of respects. But as a general rule, a conveyance is voidable (i) if there is intent to improperly prevent a current creditor from collecting against you or (ii) if the transfer would make you insolvent. See for example Section 1336.04 of the Ohio Revised Code.

Stated another way, you are not always prevented from transferring assets just because there is a lawsuit or judgment pending against you. For example, lets say that you have a net worth of $1 million and a judgment against you for $10,000. As long as you have no other known creditor issues, that $10,000 judgment does not prevent you from protecting the other 99% of your assets.

Again, it is clearly better to engage in asset protection planning before any creditor issues arise. But trasnferring assets after a lawsuit has been filed or even after a judgment has been entered may, under many circumstances, still be appropriate and advisable.