DIY Asset Protection Failure
Friday, February 01
Do-it-yourself asset protection planning has grown in popularity with sites such as legalzoom, and rocketlawyer, et.al. These sites tout cost effective personalized planning but bury disclaimers such as (We are not a law firm or a substitute for an attorney or law firm. We cannot provide any kind of advice, explanation, opinion, or recommendation about possible legal rights, remedies, defenses, options, selection of forms or strategies). Like everything tax and asset protection oriented, “the more you know the less you will owe.” A recent case in California is illustrative of why do-it-yourself asset protection planning seldom works; some people do not understand the subtle aspects of asset protection planning.
In this case our do-it-yourselfer, Stillman, was an engineer who designed residential construction. Concerned about liability in his profession and personal exposure to potential lawsuits, he created his own asset protection structure for his assets. In this particular situation, Stillman created a Nevada asset protection trust with an initial trustee, his brother as the beneficiary, and himself as the “managing director” i.e., he wanted to maintain control of the assets he transferred into the trust and the trustee had no powers.
Several years later Stillman’s fears were realized when he was sued by a homeowner and a settlement was entered in favor of the homeowner. Stillman never paid so the homeowner filed a fraudulent transfer claim to pierce the trust. This is a typical claim used by many plaintiffs to pierce a defendant’s asset protection structure. A plaintiff can succeed on this claim if he can show the defendant set up his plan and transferred his property with the intent to hinder, or delay a creditor, or to put such property beyond his reach. At the hearing, Stillman testified he set up the trust for asset protection purposes – OUCH!
This testimony coupled with the following findings regarding how Stillman managed his plan resulted in the court ignoring Stillman’s plan and seizing his assets.
- * Stillman operated his business out of the property owned by the trust, rent free;
* Stillman and his trustee lived in another property owned by the trust, rent-free;
* Stillman was the “managing director” of the trust (whatever that means) - “He makes deposits and withdrawals; writes checks; opens bank accounts; buys, sells and trades real property and other property of” the trust; he “lends or borrows money in the name of” the trust; he buys, sells and trades stocks and bonds; he selects tenants and signs leases for the rental of trust property.
* Stillman’s brother is the beneficiary of the trust (but not Stillman himself);
- Even though Stillman was not the beneficiary, “Stillman used [trust] funds to pay his personal expenses, including his XM radio bills, newspaper and National Geographic subscriptions, and personal attorney fees; and
- * Stillman had not been in contact with the original trustee since 2005.
There are a few lessons here. Never state in your trust, LLC operating agreement, or other entity your purpose in creating the plan was asset protection. Always state a legitimate business purpose e.g., asset consolidation, real estate investing, hard money loans, etc. Similarly, never testify this was your purpose. Do not set up a structure lacking economic substance i.e., it does not serve a legitimate purpose. Be attuned to how your entity should be operated to maintain its separate existence. Finally, follow the terms of your trust or operating agreement. Acting outside or contrary to what is stated in your documents will give a court reason to pierce your plan. Finally, don’t try to do this yourself- it’s harder than it looks. I am sure Stillman had confidence in his plan up until the end because he didn’t know any better. Unfortunately, ignorance of the law is not a defense.