Traci R. Gentilozzi, The Daily Record Newswire
Many tools are at a lawyer’s disposal when it comes to protecting the assets of those clients who are exposed to lawsuits, creditors or significant tax liabilities.
However, practitioners caution there is a distinction between legitimately protecting clients’ wealth and overzealously suggesting that there are ways to make them so-called “judgment proof.”
According to Grandville tax attorney Wayne D. Roberts, careful asset planning is a worthwhile objective. “Fundamentally sound tax planning, for example, is done by ethical lawyers everywhere,” he said.
But Roberts said there is a distinction between good lawyering and unethical strategies. “Does it make sense that a wealthy person one day can, through a series of documents or strategies, become judgment proof and penniless the next day? I think the answer is no. I don’t think it can be done ethically or legally.”
Douglas G. Chalgian, an East Lansing estate planning lawyer, acknowledged that some asset planning seminars can indeed be marketing ploys. For example, he said that seminars offering ways to “avoid probate” are often selling living trusts as a type of asset protection, when in fact they really do no such thing.
John T. Piggins, a Grand Rapids bankruptcy and creditors’ rights attorney, said lawyers use legitimate methods each and every day to help protect their clients’ assets. However, which asset protection tool to pull from the toolbox depends on the client, he said.
“Do they have a lot of non-exempt assets? Do they have a lot of creditors?” Piggins asked. “Everything depends on a particular client’s situation. There are certain transfers I wouldn’t recommend to one client that I would certainly recommend to others.”
Put your trust in … a trust?
The key to using trusts as an asset protection tool is getting clients to give up total control. And this can sometimes be difficult, said Grand Rapids attorney Paul A. McCarthy.
“And other times there is an overlay of administrative hassle that clients may not want to undertake,” he said. “At the end of the day, it seems some clients want to have their cake and eat it, too. They want control, but also want protection.”
If a client reserves the right to use trust assets, like with a revocable trust, then control has not been forfeited. This means those assets can still be reached by creditors, said Chalgian, who is with Chalgian and Tripp Law Offices PLLC. And while these kinds of living trusts can be used as an estate planning tool, he said they really offer no meaningful asset protection.
There is one type of trust, however, that is specifically designed to protect assets, Chalgian said, and that is the self-settled asset protection trust, or SSAPT.
While the SSAPT is not currently allowed in Michigan, Chalgian said it could soon become a new tool because the State Bar Probate and Estate Planning Section is working on legislation that would legitimize it.
“The SSAPT is a novel idea … and it does work,” said Chalgian. “If Michigan passes legislation allowing it, it will definitely elevate us to a whole new level when it comes to protecting assets.”
An SSAPT is irrevocable and the trust creator, or settlor, is also the beneficiary. The settlor gives up all control because an independent trustee oversees all distributions. The trustee can make distributions to the settlor, but the trustee is not obligated to do so. And the trustee can stop distributions if a claim is made.
According to lawyers, the SSAPT is an appealing asset protection tool for those clients who may face lawsuits because of their profession, like physicians, business owners and attorneys.
Right now, the SSAPT is permitted in a handful of states, like Alaska and Nevada. Chalgian pointed out that clients in Michigan can still establish an SSAPT, but they have to do so in another jurisdiction that allows it. To do this, the trust investments must be held in the other jurisdiction and the trustee must also reside there.
“You also have to remember that, even if the state has laws that allow SSAPTs, there are still fraudulent conveyance statutes that can be enforced,” Chalgian said.
Taking the business route
Another way to protect clients’ assets is through business entities like limited liability companies (LLCs), according to McCarthy, a business lawyer with Rhoades McKee PC.
“Michigan law is quite beneficial from the perspective of the business owner and the ability to distance the value of the LLC from a creditor,” he said. “It’s a lead form of asset protection.”
The most a creditor can do is obtain a charging order or lien on interest against an LLC, McCarthy said. “In a typical situation, a creditor can liquidate personal property and then real property, including business interests, and essentially foreclose the stock.”
However, “a creditor cannot do that with an LLC,” he explained. “The rights of the creditor are limited to receiving distributions that the membership interest would reflect. They do not obtain any benefit or incidence of ownership. I’m unsure that’s common knowledge; that is, the distinct difference about collectability.”
Meanwhile, McCarthy also noted that assets can be protected simply through the titling of property.
“If clients title their house or asset with a spouse, as tenants of entirety, that provides protection,” he noted. “They can hold as many assets as possible in that form. The benefit of entireties property is that it can only be attached if the creditor has claims against both spouses.”
The bankruptcy bonus
When using bankruptcy to protect assets, a person always has the right to keep certain assets, Piggins pointed out. “At a minimum, allowing them to protect those assets and move the nonexempt to exempt is a service attorneys should provide their clients.”
But nothing prevents clients from transferring their assets however they want, noted Piggins, who is with Miller Johnson. “And once the client makes transfers, the laws also say certain transactions can be reversed.”
For clients with a significant amount of assets and debt who are looking at large judgments against them or collection activity, “it is certainly permissible to make any transfers that are deemed appropriate,” Piggins said. “But certain transfers, if made in the face of a large judgment or a lot of debt they know they can’t repay, may very well be reversed.”
Piggins also noted that estate planning transfers are different from transfers for creditor avoidance. “Many of the transfers done in estate planning are transfers that we would not advise a client to use to avoid creditors. It may actually get them in a situation that would be less favorable.
“The point is,” Piggins said, “the law allows individuals to retain certain exempt assets that creditors can’t get to — IRAs for instance, as well as certain equity in a home and a certain value in a car. Those are things the Legislature has determined it’s appropriate for someone to retain, regardless of what their debts are.”
The ‘dividing line’
When it comes to the ethics of asset protection, McCarthy said lawyers need to pay close attention to Michigan Rule of Professional Conduct 1.2(c).
MRPC 1.2(c) says, “A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is illegal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good-faith effort to determine the validity, scope, meaning, or application of the law.”
“That’s the dividing line — and it’s getting somewhat blurred for legal malpractice claims,” McCarthy noted. “For example, say you have a client who is the subject of a lawsuit and the lawyer helps retitle a bunch of assets in a way that violates the Uniform Fraudulent Transfers Act. The lawyer may be exposing himself to a claim.”
Piggins said he has no ethical issues with legitimate asset protection. “There is no concern when it comes to helping someone maximize the exemptions which the law has said are proper.”
Professor Christopher G. Hastings of Western Michigan University Thomas M. Cooley Law School pointed out there can be ethical concerns in any asset protection advice that a lawyer gives and a client takes. However, he said lawyers are seldom sanctioned under the ethics rules, “except in the context of hiding assets in their own trust accounts.”
Roberts, who is with Varnum LLP, emphasized that “if you mislead, then you are not lawyering — you are consulting.”
“And always remember,” Roberts noted, “if something sounds too good to be true, it probably is.”
