By Mark Kellogg
Frequently when meeting with clients and assisting them with the development of an estate plan, the estate planning attorney is invariably confronted with questions and issues regarding asset protection. This seems to be a more common occurrence with clients who are professionals, such as doctors and lawyers, due to the potential for malpractice claims, clients who own their own business, or owners of commercial real estate, as there is a perceived, and usually rightfully so, greater risk of being sued. Given our litigious society, asset protection planning has become an increasingly integral part of estate planning for clients.
Asset protection planning is essentially the debtor's side of creditor-debtor law. While creditors are concerned about the strategies and techniques of collection, debtors are interested in the strategies and techniques for protecting their assets from potential creditors. And of course, with regard to asset protection planning, the client desires to insure, to the greatest extent possible, that their assets are placed out of reach of creditors while, at the same time, maintaining maximum control over their assets, oftentimes an impossible task.
There are some general concepts that are crucial in the asset protection arena. These include:
- Planning must be engaged in before a claim or potential liability arises. I am sure that most attorneys have received that frantic call from a client that he or she has been sued or that a lawsuit is imminent, and he or she needs to protects his or her assets. Planning after potential liability or a claim rises can be undone pursuant to most states fraudulent transfer or fraudulent conveyance laws.
- Asset protection planning and estate planning are not always easily coordinated. Making gifts to children or heirs may make sense in the estate planning context, but may constitute fraudulent transfers if made for asset protection purposes.
- Avoid commingling personal assets and business assets. With regard to asset protection planning, business entities such as corporations, partnerships and limited liability companies are meant to be vehicles for commercial operations, and are not intended to be a personal bank account. Also, avoid placing personal assets into a business entity. For a business owner, it is imperative that he or she respect the separate identity of the business entity and maintain the integrity of the company. Failure to maintain a certain separation between business assets and personal assets will increase the risk for the business entity to be pierced by a creditor, such as on an alter-ego theory.
The following are some common steps that one can take to protect various assets under Michigan law:
1. With respect to automobiles or other motor vehicles (including watercraft), the title to the motor vehicle should not be held jointly by both spouses, but should be in the name of the spouse who primarily drives or operates the motor vehicle. Similarly, it is not recommended that a parent's name be on the title to motor vehicles primarily used by children.
2. Tenants by entireties protection. Under Michigan law, with the exception of federal tax liens, a creditor of only one spouse cannot reach the debtor spouse's interest in entireties property. This applies to all ownership of real property (and certain real property interests such as a land contract vendor's interest or mortgage interest) and certain types of personal property, including certain investment type assets such as bonds, stock certificates, and brokerage accounts. With respect to real property, absent an expression of contrary intent, a Michigan grantor of real property to a husband and wife will be deemed to have created a tenancy by the entireties. Note, however, that upon the death of one spouse, the property will become the sole property of the surviving spouse and become subject to all pending judgments and other claims that may exist against the surviving spouse.
3. Maintain sufficient liability insurance, which should include automobile insurance (and other motor vehicle or watercraft insurance), homeowners' insurance, insurance related to the risks associated with your profession or business, if applicable, and consider an umbrella insurance policy.
4. Shelter as much assets as possible in a qualified retirement plan. After the U.S. Supreme Court case of Patterson v. Shumate, 504 U.S. 753 (1992), it is well settled that assets in a qualified ERISA plan are outside the reach of a participant's creditors. Note that assets in Individual Retirement Accounts do not receive the same protections as an ERISA qualified plan. Pursuant to most recent case law, IRAs are not protected outside of bankruptcy, due to the preemption of federal law as it applies to non-ERISA plans, such as IRAs. In the bankruptcy context, IRAs are offered limited protection under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Public Law 109-8, April 20, 2005.
5. Life Insurance can be a vehicle within which to protect and pass assets on to beneficiaries. Under Michigan law creditors cannot reach a beneficiary's interest in policy proceeds except to the extent necessary to recapture premiums paid on the policy which were paid with the intent to defraud creditors.
Clients with significant wealth and/or extraordinary risk may wish to consider more sophisticated asset protection planning methods, such as the establishment of a "family" limited liability company or creation of domestic or offshore asset protection trusts. A thorough discussion of the relative advantages and disadvantages of these planning methods is beyond the scope of this article. Domestic or offshore asset protection trusts are frequently expensive to establish and can be costly to maintain. Some commentators consider the domestic asset protection trusts to be a better option than a foreign asset protection trust, particularly if the trust is established at a time when there are no known creditors or anticipated claims based on facts which have already occurred. More and more states are enacting legislation for the establishment of domestic asset protection trusts.
Attorneys practicing in the area of estate planning in today's society should be prepared to discuss the subject of asset protection planning with their clients.
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Mark E. Kellogg, an attorney and CPA, is a shareholder with Fraser Trebilcock. Mark has devoted his 28 years of practice to the needs of family and closely-held businesses and estate and succession planning. For more information or to discuss estate planning needs, e-mail mkellogg@fraserlawfirm.com or call 517-377-0890.
Published: Fri, Apr 17, 2015
