Asset Protection Checklist

By Paul E. Deloughery, Esq.

September 2019

In the course of reviewing a potential client’s legal documents, I find it helpful to have an Asset Protection Checklist such as this. This list helps provide the potential client with a more objective “grade” of his/her current situation.

This Asset Protection Checklist is really intended as a tool for an experienced asset protection attorney. If you want to see how prepared you are for lawsuits, divorce, bankruptcy, and other legal problems that can arise, give us a call at 602-443-4888 or email me at paul@magellanlawfirm.com. Keep in mind that laws change all the time, so this Asset Protection Checklist may not be up-to-date by the time you read it.

I fully realize that this list is not comprehensive. However, I couldn’t find any other lists like it on the internet. If you can think of anything to add to this Asset Protection Checklist, please email me at paul@magellanlawfirm.com.

  1. Is there a Domestic Asset Protection Trust (aka, self-settled spendthrift trust)? (This should be avoided because DAPTs are not valid in states that don’t recognize them. Plus, the assets transferred within 10 years of bankruptcy are part of the bankruptcy estate in ALL states in the event you ever have to file bankruptcy, or if future creditors force you into an involuntary bankruptcy. However, the statutes in many DAPT states make it difficult for a creditor to pierce the veil based on a beneficiary’s dominion and control over the trust.)
  2. Is there a Foreign Asset Protection Trust? (This should generally be avoided unless you are willing to move out of the U.S. in the event of a judgment against you and the Court insists that you repatriate assets to pay the creditors. Otherwise, you could be held in contempt of court and made to pay fines or go to jail. Also, here is a string of court cases defeating offshore trusts.)
  3. Do you have a professional company with significant assets? (It generally makes sense to avoid having assets build up inside of a professional company because if it ever gets sued, the creditor can take those assets to pay a judgment.)
  4. Is there significant excess income going to you? (This should generally be avoided. Not only do you have to pay income tax on it, but a future creditor can garnish your wages.)
  5. Is there significant excess income going to your professional practice? (This should generally be avoided. First, you have to pay significant income tax on it. Also, if a creditor takes you to court and wins a judgment against you it can do a bank levy, which is the same as a bank garnishment. They freeze your account for the amount of the judgment and any money recovered goes toward the payment of your past due debt. There are ways that you can protect the money in your bank account from creditors.)
  6. Are risks separated? (This is important because if one business entity gets sued, the assets of the other entities won’t be liable. Instead of putting all your eggs in one basket, you use several baskets to insulate assets from risk. For example, if a business is conducted in separate locations, each can be owned by a separate LLC. Also, if you own “risky” assets such as a rental property, office building or boat, those should be in separate LLCs.)
  7. Are some assets in someone else’s name as a “cheap” way of protecting them? (This is almost always a bad idea. The person who owns or possesses the asset could get sued, or divorced, or commit a crime, or use the assets as collateral for a loan. Your chances of getting them back would be slim to none.)
  8. Are questionable tax avoidance techniques used? (For example, a Nevada corporation is often promoted as a way of avoiding state income tax. However, unless you are a Nevada resident doing business in Nevada, you would still owe state income tax to the home state’s taxing authorities.)
  9. Do you have “replacement cost” type of homeowner’s policy? (This is important because if something does happen, your home may have appreciated in value and your policy may not cover this increased cost of replacement.)
  10. Is your automobile insurance adequate? (Increasing the deductible may be prudent. Be sure if you are using automobiles for work and for personal use that your policies cover both work and personal use.)
  11. Is there an umbrella policy? (Don’t over buy liability insurance. Have an “umbrella” policy that covers extra risk.)
  12. Is there adequate life insurance? (This can provide an “instant estate” with which to handle certain very real needs. Even though you may not like the thought of paying for this, it is a unique planning tool, and most people are underinsured or not insured at all and not using insurance properly.)
  13. Is there an estate plan? (This is important because it helps show that you had an intent other than to hinder, delay, or defraud a creditor — which is one of the main ways that an asset protection plan gets blown up in court.)
  14. Is probate going to be avoided? (This is important because otherwise your loved ones will need to pay legal fees and take six months or more to complete the process.)
  15. Is estate plan illustrated on one page so you (and your heirs) can easily understand it? (This is important because otherwise important steps get missed, and this can cause unintended consequences such as accidentally disinheriting heirs, family conflict, or tax penalties.)
  16. Does living trust permit the deferral of asset distributions? (This type of trust does not protect your children’s inheritances. This is only appropriate for people with small estates and little concern that his/her children need their assets protected from creditors or divorce.)
  17. Does living trust have substance abuse provisions? (This is one of the many ways a trust should protect children and other heirs from themselves.)
  18. Does living trust provide a way of incentivizing children and other heirs to be productive? (Without this, the trust beneficiaries could become lazy, unproductive, or worse. “Idle hands are the devil’s workshop,” as the saying goes.)
  19. Does living trust provide for discretionary distributions? (These can make sense. However, there should be a way of fixing situations that can arise. For example, resentment or suspicion can flourish when the trustee makes “unequal allocations” of income between beneficiaries and/or the allocations made do not meet expectations of all beneficiaries. That being said, the strongest asset protection plan will utilize a fully discretionary trust.)
  20. Does trust provide for (and have you implemented) a letter of wishes? (To guide a trustee’s discretionary decision-making authority, a settlor can execute a letter of wishes. This letter can guide (but is not binding on) the trustee.)
  21. Does trust provide for a trust protector? (The protector operates as a check on the trustee’s actions. The protector has the power to remove the trustee and direct the trustee in matters relating to the trust, and the protector will do so if he believes the letter of wishes is not being followed.)
  22. Does trust protector have broad (preferred) or limited powers? (The trust protector is like a knight with the responsibility for watching over trust activities. The protector can have powers ranging from very simple veto powers to extremely broad powers allowing for adding beneficiaries and virtually re-drafting the trust. Settlors may want to delegate certain powers to the trust protector to make the trust more flexible and to adapt the trust for future changes that were not foreseen at the time the trust was drafted.)
  23. Is the trust protector independent? (It is preferable that the trust protector be an independent party and not the settlor.)
  24. Is layering used? (This refers to placing one entity within a second. This is generally a good thing and is a component of asset protection planning. For instance, your LLC is a general partner of your family limited partnership. If the creditor pierces your FLP, the LLC as a general partner isolates you from liability. The next layer may be liability insurance or umbrella insurance coverage. The third layer may be a domestic asset protection trust.)
  25. Are there any “badges of fraud”? Badges of fraud are actions that, by their nature, indicate they were undertaken with the intent to fraudulently convey assets. Among these indicators are:
  26. Transfers to a family member.
  27. You were sued or suit was threatened before the transfer was made.
  28. Transfer was of substantially all of the debtor’s assets.
  29. Transfer was concealed.
  30. Value of consideration received was not reasonably equivalent to the value of the asset transferred.
  31. Debtor was insolvent or became insolvent shortly after the transfer was made.
  32. Did you commit a fraudulent transfer? (If you make a transfer with actual intent to hinder, delay, or defraud a creditor, or if you make a transfer at a time and under circumstances that appear to be a fraudulent transfer, then a creditor can obtain a judgment against the trust regardless of how well the trust is designed and drafted.  Countless court cases make it unmistakably clear that no asset protection trust, domestic or offshore, can be relied upon to protect assets if the transfers are made at a time and under circumstances that are likely to result be considered a fraudulent transfer.)
  33. Have assets been commingled? (The alter-ego doctrine is that a separate entity will be respected unless it was so dominated that it had “no separate mind, will or existence of its own.” A court will generally uphold an irrevocable trust as a separate and distinct legal entity unless the debtor exerts so much dominion over the trust that it has no separate identity.)
  34. Are gift and estate taxes reduced or eliminated? (The unified gift and estate tax exemption for 2019 is $11.4 million per person.)
  35. Is equity in home protected? (Most people feel psychologically safer by having a home paid off. However, this can be a juicy source of payment for a future creditor. There are ways of eliminating equity such as “friendly liens” from your family limited partnership.)
  36. Are “safe assets” such as stock investments in a protective entity? (This is important because not only does it avoid protect the asset from future creditors, it is also a way of shifting income taxes to other family members in a lower tax bracket.)
  37. Do you have a non-qualified plan? (Non-qualified plans are generally not protected by ERISA, and therefore you can generally not expect to have any kind of asset protection over them unless you are fortunate to live in a state that provides substantial protection to these types of plans or accounts. Most states do not give substantial protection to non-qualified plans.
  38. Do the LLCs have Operating Agreements? (This is the equivalent of corporate by-laws to control operation of the LLC.  It is important that all issues/topics are covered in an operating agreement, such as what happens if one member wants to be bought out, or if a member dies or becomes incapacitated.)
  39. Do the documents specify how disputes will be resolved? (For instance, the LLC and trust documents could specify that all disputes will be resolved with an alternative dispute resolution — having a meeting, then mediation, then arbitration — rather than having to settle all disputes in court).
  40. Trusts and other documents have a way of forcing heirs and non-parties to the documents to comply with alternative dispute resolution provisions. (For example, since your kids and other heirs are not parties to the trust, there is no way to require them to comply with ADR provisions. However, you can say that they only receive distributions from the trust if they sign or otherwise agree to the ADR provisions.)
  41. Are asset transfers documented? (For example, if furniture is considered owned by the trust, is this documented?)
  42. Are lease or loan arrangements documented? (Even though the bookkeeper is treating money contributed to a company as a loan, this may not hold up in court without documentation.)
  43. Are there employment agreements for members and non-members of LLCs? (Without an employment agreement, 
  44. Do you have a corporation? (Corporations can protect your personal assets from the creditors of a corporation that you own. However, your personal creditor can get the stock you own in a corporation.
  45. If you have a corporation, are you maintaining annual shareholders and Directors meeting minutes? (Most corporate bylaws have strict requirements for maintaining such meeting minutes. If these aren’t maintained, it provides a basis for a court to disregard the corporate entity and allow your personal creditors to get the assets of the corporation that you own. It also allows a creditor of the corporation to get your personal assets.)
  46. Is there a No Contest provision in the Will and/or Trust? (Such a provision says that if a beneficiary contests any provision in the Will or Trust, he is disinherited. Complaining about a trustee’s misconduct can be considered a violation of the No Contest clause. A No Contest clause greatly restricts a beneficiary’s ability to assert a claim against a trustee who is mismanaging the trust. There should be other checks and balances to an irresponsible or criminal trustee, such as a trust protector who can demand accountings and remove/replace a trustee.)
  47. Do the business entities include a way out? (In either the Operating Agreement or a separate Buy-Sell Agreement, you need to define an exit strategy that allows either party to walk away or buy each other out, without destroying the business.)
  48. Are personal assets (e.g., car, home, personal bank accounts) maintained in personal name? (They should not be in a business, because this would probably be considered commingling, which could justify everything — business entities and personal assets — being available to pay personal creditors.)
  49. Is manager of LLC a person or a trustee of a trust? (Some banks do not allow an LLC to be managed by a trust. However, if this is not done, when the manager dies or becomes incapacitated, the LLC could be unable to conduct business until someone gets appointed by a court. This could cause delay and greatly interfere with the ability to maintain the business.)
  50. Do the trusts require annual accountings by the trustees? (If not, the beneficiaries have no idea what hanky panky the trustees are up to.)
  51. Are there enforcement provisions to require the trustees to provide annual accountings and otherwise do what they are supposed to? (I’ve seen too often that trustees allow family members to move into the deceased parents’ house, and the beneficiaries can’t do anything about it other than go to court. This is especially problematic if there is a No Contest Clause. See above.)

Disclaimer:

The information in this Asset Protection Checklist is of a general nature and is not intended to provide specific legal advice. No attorney-client relationship has been created by providing this Asset Protection Checklist. If you want legal advice, you must sign a written fee agreement with Magellan Law, PLC and pay an agreed-upon legal fee.

This Asset Protection Checklist is primarily intended for use by an experienced attorney. The various points are intended to to raise potential issues that can be further investigated. I do not suggest that a non-attorney rely on this Asset Protection Checklist. Also, this checklist is certainly not comprehensive. It is a merely starting off point for use by a trained legal professional.