When is Asset Protection Too Late?

I occasionally get calls from physicians in the middle of litigation, asking whether they can shield vulnerable assets in the event they lose their professional liability case. Such doctors may not have professional liability coverage. Or they may be underinsured, for example, having limits of $200k or $250k. Or they may want their day in court, but the damages are significant, for example, a young patient with quadriplegia, and a life care plan in the millions.

Asset protection techniques are designed to create a gap between assets and creditors. (A creditor is someone a person owes money to. A debtor is the person who owes the money).

There are a number of legitimate asset protection techniques. As in much of life, timing is everything. The time to initiate asset protection techniques is not when the jury has delivered a seven-figure verdict against you. We’ll discuss other periods where it’s too late.

If you attempt to transfer assets to defraud a creditor, you may run afoul of what is called a “fraudulent conveyance.”

A fraudulent conveyance is the transfer of property to intentionally hide it from creditors, hindering their ability to collect a debt. It can be a civil matter, where a creditor sues to void the transfer, or a criminal offense, depending on the jurisdiction and severity. Key elements include intent to defraud, hinder, or delay creditors, often when the debtor is insolvent.

At the very least, the fraudulent conveyance can be unwound. Meaning, if you transferred title of your house to your brother, to keep a creditor from attaching a lien, a court may force the new deed to be rewritten, giving the creditor a second bite at the apple. Plus, if your brother was aware of your intent, he may be beholden to civil penalties.

If the creditor is forced to work to unwind a fraudulent conveyance, a court may force you to pay the creditor’s attorney’s fees.

Note, if you have a legitimate business interest in transferring assets, it may pass the sniff test. For example, Florida and Texas both have generous homestead exemptions. In both states, a creditor cannot take your home. (This does not include the bank holding the mortgage as collateral for the loan on your house.)

OJ Simpson took advantage of Florida’s generous homestead exemption.

Simpson was charged with killing his ex-wife Nicole Brown Simpson and her friend Ron Goldman but was acquitted. A $33 million civil wrongful death judgment was obtained in 1997 against Simpson. The judgment was not paid in any meaningful way for the past 27 years and, with interest, has grown to over $100 million. 

Despite the Brown-Goldman judgment, Simpson lived a seemingly luxurious lifestyle. This is primarily due to two reasons. First, Simpson acquired his principal residence in the state of Florida. Article X, Section 4 of the Florida Constitution protects a Florida resident’s homestead from creditors. The Florida homestead exemption provides two types of creditor and family protection as follows:

Florida homestead protection. The creditors cannot force a sale of the homestead property before and at death. This exemption protected Simpson’s home from being targeted by the Brown and Goldman families pursuant to the wrongful death judgment. This protection had no valuation limit whatsoever. The entire value of the home was protected.

Restrictions on devise (inheritance) and alienation. This exemption seeks to protect spouses and family members living in the homestead. For example, the exemption impedes the owner from transferring the homestead to his mistress at death rather than his wife and children living in the homestead. During life, the consent of his spouse living in the property may be required for the sale of or a loan against the property.

Under Florida law, the protection is available only for property considered to be a primary residence. That property must be half an acre or less if located in the city. If the residence is not in the city, then the property cannot exceed 160 acres. Florida’s unlimited homestead exemption provided substantial protection for Simpson from the Brown-Goldman judgment. This exemption helped Simpson to maintain his lifestyle.

So, if you live in Florida, and want to buy a new giant house to shield your assets, you could liquidate your vulnerable investment portfolio and do it. You’d need to live in that house, though.

Jay Adkisson (attorney who blogs on asset protection, among other topics) recently wrote about when it’s too late to protect one’s assets from looming creditors.

So, when does asset protection go from being proper to improper?

To answer this question, one must first understand the concept of a claim. The word claim is a term-of-art in fraudulent transfer law which basically means a legal liability arising from some event. A creditor has a claim against the debtor. The claim can be contingent or unliquidated. A claim arises at the precise moment in time that the event giving rise to the liability occurs.

To answer the main question: Asset protection goes from being proper to improper at the time that the claim arises, i.e., at the time that the event giving rise to the liability occurs. This is the relevant point in time. Asset protection planning done before a claim arises is proper; asset protection planning after a claim arises is improper. It is a clear delineation.

In explaining this concept to folks who contact me, they’ll often say the following things:

• “The creditor doesn’t have a judgment against me yet.” This is irrelevant.
• “The creditor hasn’t sued me yet.” This is also irrelevant.
• “The creditor hasn’t sent me a demand letter yet.” Similarly irrelevant.
• “I just had an accident.” This is relevant, because it establishes when the claim arose. If you didn’t do asset protection planning before this moment in time, you can’t do it now.

So, timing matters. If it’s a med mal claim, the asset protection technique needs to have been implemented prior to the surgery you performed on the patient who will later sue you.

Jay Adkisson continued:

For asset protection planning to be effective, it must be done at a time when there are no significant creditors, either known or unknown, and great care must be taken to ensure that enough assets remain outside of the asset protection plan such that there are no arguments of insolvency at the time of the planning.

But therein lies the problem with asset protection planning, which is that most people don’t think of it until it is too late. Most folks are optimists in that they think they will not have a problem until the moment they do. By that point, however, asset protection planning can no longer be properly done.

So, don’t wait until you get the creditor flu to get the asset protection shot.

There are exceptions to these guiding principles. But the general message is the same. The longer an asset protection plan has been in place, the more likely it will be analyzed as having a valid business purpose, be treated as durable, and serve its intended purpose. Meaning, it will not be likely to be seen as defrauding a creditor, given that there was no creditor or potential creditor at the time such plan was implemented.

What do you think?