Asset Protection

My Response to Stephen Greer Regarding Tenant Amendment
Stephen Greer is a member of the American Bar Association's Asset Protection Planning Committee, and a regular poster on the ABA-RPPT listserv which discusses trust and related issues. His comments are in the following post.

From : Jay Adkisson -- jay_adkisson [at] MSN.COM
Reply-To : The Estate Planner's and Administrator's Discussion
Sent : Friday, March 11, 2005 10:18 AM
Subject : Re: [ABA-PTL] Bankruptcy Act -- Talent Amendment vs APTs

Stephen,

I wholeheartedly agree with your thoughts that a healthy and objective debate will be needed to fully flesh out the impact of this legislation.

1. The 10-year limitations provision is a two edged sword. Within the 10-year limitations period you'll be concerned about transfers to a SSST, but outside the 10-year limitations period your transfers may be unchallengeable if you take bankruptcy. Essentially, this will codify the "old and cold" rule-of-thumb that planners have traditionally applied to SSSTs.

However, I do not see this as having a significant effect on the state SOLs, simply because this Act applies solely, only, and exclusively when there is a bankruptcy filing. In many cases, the issue may become whether the creditor has the ability to force or maneuver the debtor into a personal bankruptcy filing.

Forcing an individual into bankruptcy has never been easy, and the irony of this legislation is that it makes it more difficult for a person to take bankruptcy anyway. If the individual never takes bankruptcy, then this legislation never applies and state law is supreme. That puts us back into the issue about whether a non-DAPT state will recognize a DAPT -- but that issue doesn't eixst for persons resident in DAPT states. So, if I had a client in a DAPT state, I might still suggest to them that they form a DAPT for a portion of their assets, but caution them about what might happen in bankruptcy if they are forced into it. Certainly, if the client is resident in a DAPT state and gets past the 10 years, then the assets that you transferred over 10 years ago are probably totally untouchable by creditors because then you could just file for bankruptcy and wash them out (but query whether being a beneficiary of such a trust would force you into Chapter 13 instead?).

2. Fraudulent transfers to entitites are discussed. What about fraudulent
transfers to persons.

That is an interesting question, as it might mean that you are better with an individual trustee instead of an institutional trustee. But that seems like a "wait and see" as to how the bankruptcy courts will interpret the issue. I would suspect that a transfer to an individual in trust will be construed to be a transfer to the trust as an entity for this purpose.

3. The class of future creditors is severely limited. You can not set aside
transfers unless a creditor can prove the settlor had actual intent to set aside
this future creditor.

I don't read it that way, but rather read the same way that UFTA is interpreted, which is generally that if you planned to hinder or delay Creditor A but later Creditor B's claim arises, that your activities would be in defraud of Creditor B as well. At first, I thought that the language resulted as you suggested, but after staring at it awhile (and also looking at the next sentence which relates to securities fraud that certainly applies to unknown future creditors), I'm pretty sure that it will be interpreted that planning done for one creditor will be fraudulent as to other creditors.

We as practitioners would never engage in a transaction where this was the
case.

You and I wouldn't -- but we both know that there are too many sleazy asset protection planners out there who would, and have. They are starting to show up in the civil conspiracy cases, too. The bad thing is that it is the cases of these yayhoos who blow up and end up making law under egregious circumstances that is later applied to the rest of us. That's why my tendency is to presume that legislation will be construed in the most unfavorable fashion that I can reasonably anticipate.

Constructive fraud claims, based upon the UFT solvency definition, against
future unknown creditors where the settlor lacked actual intent to defraud may
have been eliminated as a basis for attack. However I worry about the hinder or
delay language.

Again, I just don't read it that way. It also wouldn't surprise me if a court didn't look to analogous fraudulent transfer law to interpret that planning to defeat one creditor is in defraud of unknown future creditors as well. I've read the amendment about a dozen times now trying to ferret out a subtlety that would lead me to the opposite conclusion, but I just don't see it.

But I do agree that we shouldn't agonize over this until we see what the (goofy) House does. For all we know, this amendment will come right back out, which will itself create interesting issues.

-- Jay