I. INTRODUCTION

The purpose of asset protection planning is to insulate and shield your clients' against the inherent dangers of lawsuits and business risks. If done in a proper manner, the assets protection method employed will insure the assets preservation for your clients and their families.

Business clients face a constant exposure to malpractice lawsuits, negligence and product liability claims, and governmental challenges. Many of these attacks or claims are frivolous and are brought merely because the client is a perceived "deep pocket". This often results in "nuisance" settlements to protect from runaway jury verdicts. Even if the claims are genuine, our clients still face being held jointly and severally responsible for the actions of their partners and inadequate liability coverage. Outside the business arena, our clients encounter risks associated with daily life that could wipe out a lifetime's worth of work. Unforeseen medical expenses, automobile accidents, property liability damages, divorce and even the Internal Revenue Service are real threats that could lead to financial calamity.

II. OBJECTIVES OF AN ASSET PROTECTION PLAN

1. THOROUGH LEGAL FOUNDATION
   
   All asset protection plans must be based on a thorough legal foundation of established principals of law. The plan should not and cannot involve concealing assets or defrauding creditors in any manner. Asset protection planning requires there to be a be firm understanding of all the applicable legal disciplines: fraudulent transfer laws, debtor-creditor laws, ethics, criminal law, estate and gift taxation, trusts, partnerships, conflicts of laws, retirement plans, family law, Social Security, medicare and Medical. A properly constructed asset protection plan will accomplish the objective honestly and legally and will not result in a need for concealment of your clients' financial condition.
   
   
2. DISCOURAGING LITIGATION
   
   Asset protection planning is intended to dissuade claims or lawsuits before they are brought. An attorney representing the plaintiff will want to insure that there are sufficient assets from which a successful claim or suit can be paid. Many attorneys will run asset checks on a potential defendant before a claim or suit is filed. If the assets have been properly protected from collection, or will be difficult to reach, the plaintiff's attorney may be discouraged from taking the claim or suit. At worst, it will force the plaintiff to possibly settle his/her claims early at a substantial reduction of what was originally sought. Neither the attorney nor his/her client will want to spend time and money on a case where the likelihood there will be little or nothing to collect at the end.
   
   
3. ACCESS TO FUNDS
   
   One of the greatest concerns of a defendant in litigation is that his/her funds will be restrained from use during the pendency of the case. Pre-trial writs of attachment, temporary restraining orders and preliminary injunctions can result in your client's inability to access funds necessary for business and personal expenses, as well as funds needed for a legal defense. Whatever the merits of the case, these legal maneuvers may often result in your client settling a case early on in the litigation for the simple reason that they access to their funds and do not have the financial means to wait one or more years for a case to conclude.
   
   Not all plaintiff's and their attorneys will be intimidated by their asset investigation and may forge ahead with a suit. Assuring that your client's assets are protected in a manner that prevents the assets from being frozen during litigation is therefore another important objective in the asset protection plan.
   
   
4. SIMPLE AND UNCOMPLICATED METHODS OF OPERATION
   
   The more complicated the asset protection plan, the more difficult it will be for your client's to use and understand. In addition, a court asked to review the legal validity of a complicated plan might not find it difficult to determine that it was established for an improper purpose. The client should be able to deal with his/her property with relative ease after the plan is implemented without any difficult, burdensome or expensive restrictions.
   
   
5. ASSET CONTROL
   
   Asset protection planning will be easy if your client is willing to give up control over his/her assets. However, very few of our clients are willing to relinquish control over their property even if it means leaving the property vulnerable to potential creditors. Asset protection planning will therefore require you to establish vehicles for your clients that will not only deter creditors but will also provide control over your client's assets.
   
   
6. COMPATIBLE WITH CLIENT'S ESTATE PLANS
   
   A properly designed asset protection plan will be devised with the client's preexisting estate plan in mind. If the client has requested you to prepare an estate plan, then planning for the protection of the client's assets should be one of your objectives. Either way, design the asset protection/estate plan in a manner that minimizes or avoids estate taxes, as well as costly (public) probate procedures.
   
   
7. PROTECTION OF THE FAMILY'S ASSETS
   
   With all of the foregoing objectives in mind, the primary objective is still to securely shield your client's assets and preserve these assets for current and future generations.

III. APPLICABLE FRAUDULENT TRANSFER LAWS

1. INTRODUCTION
   
   Every asset protection plan must take into consideration the applicable fraudulent transfer laws. These laws were designed to void improper transactions that were designed to defraud creditors. Additionally, these laws often result in subjecting the parties to the transfers to civil and criminal liability. This includes the attorney who prepared and helped administer the plan. It is therefore imperative that there be a complete understanding of the relevant fraudulent transfer laws to each particular asset protection plan transaction. Most states have adopted either the Uniform Fraudulent Conveyance Act or the Uniform Fraudulent Transfer Act. California has adopted the latter.
   
   
2. UNIFORM FRAUDULENT TRANSFER ACT: Cal. Civil Code §3439 et seq.
   
   In California, as with the other states that have adopted the Uniform Fraudulent Transfer Act, there are two types of fraudulent transfers: actual fraudulent transfers and constructive fraudulent transfers.
   
   
   1. Actual Fraud: Cal. Civil Code §3439.04 provides that a transfer made or obligation incurred is fraudulent if the debtor made the transfer or incurred the obligation a) with the actual intent to hinder, delay or defraud any creditor of the debtor, or b) failed to obtain reasonable value for the property transferred at a time the debtor was engaged in a business transaction for which the remaining assets were unreasonably small in relation to the transaction, or the debtor intended to incur, or reasonably should have believed that he/she would incur debts beyond his/her ability to pay same as they came due.
      
      Actual fraud is very difficult to prove with direct evidence and is generally demonstrated through circumstantial evidence using one or more of the following "badges of fraud" (UFTA §4(b) and Comment (1):
      1. the debtor retained possession or control of the property despite the "transfer";
      2. the property transferred or obligation incurred was to an insider;
      3. the transfer or obligation was concealed or misrepresented;
      4. prior to the transfer, the debtor was informed of a potential claim;
      5. was the transfer of all or substantially all of the debtor's assets;
      6. the debtor disappeared;
      7. the debtor has hidden his assets;
      8. inadequate consideration received for the property transferred;
      9. the debtor was insolvent prior to the transfer or the transfer resulted in the debtor becoming insolvent;
      10. after the debt was incurred, the debtor rendered himself insolvent;
          
          
   2. Constructive Fraud
      
      
      1. California law: Cal. Civil Code §3439.05 provides that there is a fraudulent transfer, regardless of the transferor's intent, if the transfer is made without reasonable consideration and one of the following exist: a) the transferor was insolvent at the time of the transfer, or b) the transfer rendered the transferor insolvent.
      2. Factors to consider: In addition to the badges of fraud previously noted, other factors to consider whether there was fair consideration depends on various factors such as the nature of the transaction, assets involved, the circumstances of the transfer, whether there was any bargaining for the consideration received, its value to the creditor, the value of the asset at the time of the transfer.
         
         
   3. Insolvency Defined
      
      
      1. California law: Cal. Civil Code §3439.02 defines insolvency as follows: a) if, at fair valuations, the sum of the transferor's debts is greater than all of the transferor's assets, or b) a transferor who is generally not paying his/her debts as they become due is presumed insolvent.
         
         This code section also provides that the value of the transferor's assets do not include the value of those assets that have been transferred with actual intent to delay, defraud, hinder or delay a creditor, or that have been transferred in a manner making the transfer voidable. Thus, assets that have been transferred to others or overseas and held in foreign trusts may not be counted in determining solvency.
         
         
      2. Balance sheet test: The determination of insolvency is based on a balance sheet of the debtor's assets and liabilities.
         
         In calculating assets, do not include assets that are being transferred, that are exempt, or that are not subject to the court's jurisdiction. However, do include current assets, future income, debts owing the debtor such as loans or promissory notes, capital such as corporate stock or partnership interests, and contingent assets (taking into account the value based on the contingency).
         
         In calculating liabilities, contingent liabilities must be taken into consideration, although they may be discounted to reflect the probability of the contingency. Thus, guarantees and pending lawsuits must be valued and are subject to being discounted. (Note this is not true under the UFCA where the contingent liability is taken at its full value.)
         
         
   4. Creditor and Claim Defined
      
      
      1. Cal. Civil Code §3439.01 defines a creditor as a person who holds a claim. This section defines a claim as a right to payment, whether or not the claim is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured. Thus, even a person who has not yet filed a lawsuit against a client has a claim that requires consideration when making asset protection plan transfers.
         
         
   5. Consequences of Fraudulent Transfers
      
      
      1. Statute of limitations
         1. Actual fraud
         2. Cal. Civil Code §3439.09(a) provides that there is a four (4) year statute of limitations for actual fraudulent transfers beginning after the date of the transfer, or if later, within one (1) year the transfer was or could have been reasonably discovered.
         3. Constructive fraud
         4. Cal. Civil Code §3439.09(b) provides a four (4) year statute of limitations that begins after the transfer was made.
         5. Maximum limitations period
         6. Cal. Civil Code §3439.09(c) provides that notwithstanding these two limitations periods, there can be no action for violation of the fraudulent transfer laws that is brought any more than seven (7) years after the transfer was made.
      2. Remedies for violation of the relevant fraudulent transfer laws: Cal. Civil Code §3439.07 and .08 provide the following remedies: avoidance of the transfer, attachment or other provisional remedy against the property transferred or its proceeds, an injunction against further transfers, appointment of a receiver, and/or a judgment against the transferee of the asset who did not take the asset in good faith and for a reasonably equivalent value (the amount of the judgment will be the value of the asset received).
      3. Criminal prosecution: Fraudulently concealing property or transferring property in the context of a bankruptcy is a crime. 18 U.S.C. §1, 152. The violation of the fraudulent transfer laws in California may also be charged as a crime. Cal. Penal Code §531. Counsel must therefore be careful to avoid fraudulent conduct because it might subject a client to criminal prosecution.
      4. Attorney discipline: Attorneys who advise or assist their clients to engage in conduct that violates the fraudulent transfer laws are subject to discipline. See, Coppock v. State Bar of California, 44 Cal. 3d 665 (1988)(attorney suspended and required to make restitution despite the fact that he did not benefit from the fraudulent transfers); Townsend v. State Bar of California, 32 Cal. 2d 592 (1984)(attorney suspended for three years).
      5. Attorney civil liability: Co-conspirators are jointly liable to the creditor they intended to defraud if there are damages sustained by the creditor. (Damages are available if the property cannot be returned, for example.) An attorney who provides legal advice given with the intent to defraud a creditor may be sued and held liable as a co-conspirator. This is true even if the attorney did not expect any benefit from the conspiracy. Revert v. Hesse, 184 Cal. 295 (1920). The degree of activity is not relevant. Black v. Sullivan, 48 Cal. App. 3d 557, 566 (1975). Punitive damages may also be awarded against an attorney under these circumstances. Attorneys must therefore be careful not to assist a client to engage in a tortious or criminal activity.
         
         
3. OTHER FRAUDULENT TRANSFER LAWS
   
   
   1. Uniform Fraudulent Conveyance Act : Nine states (Delaware, Maryland, Massachusetts, Michigan, Montana, New York, Pennsylvania, Tennessee, and Wyoming) have enacted the Uniform Fraudulent Conveyance Act. While this statute is similar to the UFTA, there are some differences such as the statute of limitations, in some circumstances it has eliminated the need to prove actual fraudulent intent, and provides that gifts are not presumed to be fraudulent.
   2. Bankruptcy Code: Under 11 U.S.C. §548, the trustee is permitted to avoid transfers made with the intent to hinder, delay or defraud creditors, or where there was a transfer for less than reasonable consideration and becomes insolvent as a result of the transfer. While this code section is very similar to the UFTA, one of the major differences is that the statute of limitations is one year from the date the bankruptcy petition is filed. §548(b). If this statute is missed, the trustee is permitted to utilize applicable state fraudulent transfer laws and may use that state's statute of limitations. §544(b).

IV. EXEMPTION LAWS

All states provide that certain assets of a debtor are exempt from the reach of creditors. Asset protection planning requires an understanding of what assets are protected by law from creditors as these assets will not require special consideration in the plan, nor are they considered in determining the value a client's assets.

1. California Law: Cal. Code of Civil Pro. §704.010 -.210 provides exemptions for several types of assets. See Exhibit A.
2. Bankruptcy Exemptions: Cal. Code of Civil Pro. §703.140 provides exemptions for several types of assets. See Exhibit A.
3. Retirement Plans: Retirement plans can often be one of the best asset protection vehicles for our clients. For example, ERISA qualified plans, such as a 401k plan, are fully protected from attachment and levy by creditors. See, Patterson v.Shumate, _____.
   1. public retirement benefits are protected by Cal.Code of Civil Pro. §704.110.
   2. IRA's are protected to the extent that the amount in the plan is necessary for retirement. Cal.Code of Civil Pro. §704.115
   3. private corporate plans are exempt under Cal.Code of Civil Pro. §704.115 while not exempt under ERISA. See, In re Cheng, 943 F.2d 1114 (9th Cir. 1991)(protected plan funds and distributed benefits of a private corporate retirement plan).
   4. note, that even with qualified plans, they are not exempt from the IRS
4. Prebankruptcy Transfer Considerations: There are sometimes pre-bankruptcy asset transfer possibilities available involving non-exempt property. That is, prior to a bankruptcy, there are opportunities that enable a debtor to convert non-exempt property to exempt property thereby protecting assets that were not otherwise subject to exemption protection. For example, prior to a bankruptcy, a client may have cash that is not exempt under state law. However, if that cash was used to pay down a mortgage on a personal residence, that pay down will result in additional equity in the property that could be exempt. There are concerns, however, that such transfers may not be permissible and some courts have avoided pre-bankruptcy transfers that were intended to take advantage of the unused exemptions where there were concerns of abuse of the exemption laws. See, In re Schwarb, 150 B.R. 470 (Bankr. MD Fla 1992)(avoided transfer and denied claimed exemption); In re Coplan, 156 B.R. 88 (Bankr. MD Fla 1993)(avoided transfer and denied exemption); In re Barker, 168 B.R. 773 (Bankr. MD Fla 1994)(avoided transfer and denied discharge). It would appear that the same concerns are also present in non-prebankruptcy transfers.

V. VARIOUS ASSET PROTECTION DEVICES

There are numerous examples of the asset protection vehicles that we should consider for for our clients. The following are just a sampling of the different possibilities that are available.

1. Revocable Living Trust: Generally, the revocable living trust provides little, if any, asset protection for the settlors or the beneficiaries. This is because Cal. Probate Code §18200 provides that while the trust is subject to amendment or revocation the trust property is subject to the claims of the settlor's creditors. However, upon the death of one of the settlors, there are some opportunities for asset protection for the surviving settlor and other beneficiaries. For example, the bypass or exempt trust can have discretionary income/principal distribution clauses with spendthrift provisions. In addition, for the marital deduction trust, if it is a QTIP, it will at least protect the corpus of the trust from creditors as it is an irrevocable trust. Non-QTIP trusts should also have spendthrift and discretionary income/principal distribution provisions.