Step 1 - your assets Step 2 - levels of protection Step 3 - timing


TimingTiming is everything, especially when it comes to asset protection. A simple structure set up well in advance of a lawsuit will do a lot more to shield your assets than a complex structure set up at the last minute. That is all because a creditor can challenge what you do when you act at the last minute.

Asset protection is based on the simple principle that assets that you do not own cannot be taken from you. Hence we commonly transfer assets to third parties, LLCs and irrevocable trusts. However, if we were allowed to do that with impunity, no creditor would ever collect on a judgment. To combat last minute transfers, our legal system has developed the so-called fraudulent transfer laws.

Fraudulent transfer laws are often seen as the 800-pound gorilla of asset protection planning. The fraudulent transfer laws in most states are based on the Uniform Fraudulent Transfer Act (the "UFTA"). The UFTA provides that in certain circumstances a transfer of assets by a debtor may constitute a "fraudulent transfer." Many believe that if a creditor ever utters those two foul and evil words, the skies will darken, and the children will run for the cover of home.

As there is no shortage of spilled ink discussing what is a fraudulent transfer and how one should be avoided, let us examine the consequences of making a fraudulent transfer. A fraudulent transfer, under the UFTA, does not equate to fraud. It is a term of art describing a type of a transfer that can be challenged by a creditor.

If a creditor brings a successful fraudulent transfer action under the UFTA, then the creditor is given the right to recover the assets from the transferee. That is the sole remedy available to a creditor.

This is where the law and the practical aspects of asset protection planning come to a head. Having a legal right to recover an asset is not necessarily the same as having the ability. Also, having a legal right to recover does not mean that the recovery process would be cost effective. For example, debtor transfers cash to a Brazilian corporation, which in turn uses that money to fund a bank account in Paraguay. The creditor successfully proves that the transfer of cash to the Brazilian corporation was a fraudulent transfer (which in itself can be a lengthy and expensive process, especially in federal court). The creditor now has the legal right, under U. S. law, to recover the cash.

Legal right notwithstanding, most creditors will not go through the exercise of trying to get a Brazilian court to recognize the U. S. judgment and then trying to enforce that judgment against said corporation. That would be time consuming, expensive and impractical, and only a very large dollar amount would justify such an undertaking.

Fraudulent transfer laws, despite all the statutes and cases, do boil down to the practicalities. The debtor is never at risk of facing jail time (there is no debtor's prison in the U. S.), and there are no compensatory or punitive damages available to the creditor in the event of a fraudulent transfer. The debtor is therefore faced with a very simple choice: make no transfer of assets and lose the assets to the creditor, or make the transfer of assets and only possibly lose the assets.

Taking into account the practical aspects of asset transfers, the UFTA no longer appears to be the 800-pound gorilla. The worst that can happen is that the transfer will be set aside and the debtor will be placed into the same position as if no transfer took place. So, other than the transaction costs, what do you have to lose?

If you are looking for a more detailed explanation of asset protection, with the full substantive legal foundation, visit
Klueger & Stein, LLP
16000 Ventura Boulevard
Suite 1000
Encino, California 91436

Phone: (818) 933-3838
Fax: (818) 933-3839
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