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  Avoiding Asset Protection Disasters

How to Avoid an Asset Protection Disaster - A Few Tips

Remarks at the First Annual Asset Protection Forum

Las Vegas, Nevada

1 October 2007

Sponsored by The Asset Protection Society

Asset protection is no more than simply trying to hang onto what you’ve got.  Over the history of the U.S., several tools have developed in order to facilitate this goal and to give incentives for taking risks without the potential of devastation.  These tools include insurance, statutory exemptions (such as homestead exemptions), limited liability business entities (LLCs, limited partnerships, corporations), trusts and others.  Thus, the protection of assets is a legitimate and necessary pursuit for anyone’s life.

It is thus necessary for everyone to have some sort of asset protection plan – even if that plan only consists of carrying state-mandated automobile liability insurance.  For most of us, of course, our asset protection plan is – or at least should be – more involved, and should always take into consideration the possibility that it will ultimately be challenged in court.

After over 25 years as a trial attorney, I’ve learned a few things about what kind of case will stand up before a judge or jury.  I’ve seen cases that looked great on paper get destroyed like a box of Krispy Kremes at a Weight Watchers convention, and I’ve seen cases that didn’t look too flashy or exciting hold up quite well under attack.

Of course, the true test of any asset protection plan is not how good it looks on high-quality paper in an expensive leather binder.  Instead, the measure of an asset protection plan is whether it can survive a challenge in court.  As a litigator, I’ve been accused of being the guy who, after the battle is over, gets to walk around and shoot the wounded.  To some extent, it’s true.  After a few dozen trials, one gets a sense of what kind of a case is going to fly and what won’t get off the ground.

It’s with this in mind that I offer these practical general tips on asset protection.

1.         AVOID ANY ASSET PROTECTION PLAN THAT’S BASED ON SECRECY.

Over the past 15 years or so, an entire “industry” has grown up around what I call “hide the ball” asset protection.  The premise behind this type of “asset protection” is the assumption that if a plaintiff’s attorney or a judge can’t find your assets, you’re safe from harm.  After all, the idea seems to go, plaintiff’s attorneys are lazy greedheads who, if they can’t locate your goods on a quick Internet search, will simply drop a claimant’s case and go on to the next poor schmuck who wasn’t bright enough to hide his assets.

Foremost among the promoters of this type of “asset protection” was Bill Reed, a disbarred Colorado lawyer who, along with his right-hand henchman, convicted felon Rick Neiswonger, heavily promoted his Las Vegas-based Asset Protection Group (APG), on talk radio, soliciting asset protection “representatives” who would pay almost $10,000 each for the privilege of selling Reed’s “bulletproof asset protection” program throughout the nation.  Reed’s “program,” such as it was, was founded on a combination of Nevada “bearer share” corporations, offshore companies, nominee officers (usually Reed and cohorts), “friendly liens,” and a host of other shady dealings.  Reed and company took full advantage of a video cut by none other than Robert Wagner, the “Hart to Hart” actor who was once married to Natalie Wood.  The video, which featured Reed, warned of the “litigation explosion” which could be used as a hook for selling Reed’s services.

Reed’s program was based almost entirely on secrecy and “hide the ball” tactics, as he described in his book, “BULLETPROOF A$$ET PROTECTION.”  It would be hard to find a more wrong-headed and just plain stupid basis for asset protection, but, unfortunately, people ate it up (almost 2,000 “representatives” got taken in before the FTC finally shut Reed down).

Here are a few telling excerpts from Reed’s book:

“Camouflaging your assets is the first step in implementing any asset protection plan.  Remember, if a federal judge can find an asset, he can seize it.  Conversely, what he can’t find, or doesn’t know about, he can’t touch.  Although I enjoy advertising bulletproof asset protection, the prescription for making an asset bulletproof is first to make it invisible.

***

“The second possible response to the question on the location of your assets [“Where are your assets?”] goes like this: “I don’t have any assets.”  This is the response I prefer.  Short, clean, and direct.  Like a perfect murder, the questioner may have a dead body, but in no way is it connected to you.

***

“Only with bearer shares can a corporate officer or its nominee answer honestly and truthfully, “I have no idea who owns the company.”  Bearer shares are just like cash and can change hands just as quickly.  As a nominee officer for hundreds of Nevada corporations, I’ve been asked this question many times under oath, and my answer is always the same, “I don’t know who the owners of the company are and I can prove it.”  When we form a corporation and issue bearer shares, I specifically ask my client in writing not to tell me what he intends to do with the share certificates.  What I don’t know I can’t tell anyone. 

***

“In Nevada, however, with bearer shares, the identities of the owners of any shares are completely protected.  In fact, as a nominee officer for hundreds of Nevada corporations, I have been subpoenaed on numerous occasions by collection attorneys, divorce lawyers, and branches of the federal government in their attempt to learn the actual owners of the corporation that I serve as an officer.  Forget the attorney-client privilege or asserting your Fifth Amendment privilege against self-incrimination.  A judge can set these aside with a wave of his hand, and if you still refuse to talk, you can end up in jail.     Your best and only true protection from a prying question is to be able to answer honestly and truthfully that you don’t have the answer.  When I’m asked for the names of the owners of any corporation, I can answer cleanly and quickly that bearer shares were issued and I have no idea who has them.  It would be like asking me who has the $100 bill that I spent at the grocery store.  I gave it to the checkout girl, but I have no idea what happened to it after that.  Bearer shares are the key to privacy.  You can’t disclose what you don’t know.

            ***

“Federal judges don’t make big money, but they make up for it in power, prestige, and their ability to deliver pain.  And every one of their orders is backed up and enforced by the full weight of the federal law enforcement and military power.  And … federal judges are appointed for life.  Forget contested elections, power-hungry politicians, or any bar association, federal judges cannot be removed from the bench short of egregious, felonious conduct.  A federal judge is as close to a god as a democracy dares allow. … If a federal judge could locate an asset, he could seize it.  A rational person would argue that this is illegal, unconstitutional, or at least, immoral.  And they would be right.  But federal judges are appointed for life; to appeal their decision takes years, and it costs a fortune!”

I can’t think of a better way to “bait” a federal judge into wanting to figure out a way to pop open the lid of one’s so-called “bulletproof” asset protection plan than to not only tell him that he’s a low-paid, power-hungry and immoral deliverer of nothing but pain to innocent citizens, but to also thumb your nose at him and say, “nyah, nyah, nyah, you can’t touch me because you’re not smart enough to figure out where my assets are.” That was exactly what Reed did.  Dumb.  Really dumb.  Almost as dumb as describing an asset protection plan as “a perfect murder,” in which an investigator can find a dead body, but can’t connect it to you.  But at this point, no one is going to accuse Reed of acting really smart.

Reed and his company were shut down in 2006 by a Missouri federal court at the behest of the FTC, which was soon followed by the IRS, which one would have hoped would have put an end to the “hide the ball” asset protection scams.  Of course, it hasn’t. Despite the fact that in early 2007, the Nevada legislature outlawed “bearer shares” and  required more stringent cooperation by Nevada corporate owners with criminal investigations, the “hide the ball” scams continue to flourish.  (Just do a quick Google search under the key words “Nevada corporations bearer shares” or “Nevada nominee services” and you’ll get the idea).  The focus may have moved to Wyoming or Alaska or Delaware, but the concept of being able to engage in “bulletproof” asset protection by simply keeping your assets secret is still alive and well.

But “hiding the ball” can’t work.  Any plaintiff’s attorney worth his salt (and regardless of what you may think of the profession, there are a great number of plaintiff’s attorneys – including yours truly – who are worth their salt) is not going to be deterred by the fact that your assets aren’t readily ascertainable.  At a deposition or in court, you’ll be asked under oath whether you are the beneficial owner of any companies, corporations, partnerships or other business entities, whether you are the grantor, trustee, protector or beneficiary of any trust or other similar entity (such as a Panamanian foundation or other foreign entity), whether you have transferred money into any bank accounts or whether any money has been transferred on your behalf, and a whole host of other questions about your financial dealings.  At that point, all of the “hide the ball” tactics in the world won’t help you.  You’ll have to answer, under oath, or risk committing perjury, an option I don’t recommend.  If your entire asset protection plan was based on the idea that somehow no one would be able to figure out what you had, you’ll be in some serious trouble at that point.

Secrecy isn’t asset protection, any more than sticking one’s head in the sand is a sane way to deal with threats.

This leads to tip number two:

2.         AVOID ANY ASSET PROTECTION PLAN THAT’S BASED IN NEVADA … UNLESS YOU LIVE IN, DO BUSINESS IN, OR WORK IN NEVADA.  THE SAME IS TRUE OF ANY OF THE SO-CALLED “ASSET PROTECTION” HAVENS (WYOMING, DELAWARE, ALASKA, ETC.).

Aside from being the home of the APG scam, Nevada simply has a bad name in asset protection right now.  It has been cited by USA Today – along with Wyoming and some others – as one of the states engaged in a “race to the bottom,” vying to set minimal corporate information requirements that enabled companies to hide the identities of their owners and thus make it difficult for law enforcement agencies to track suspected tax evasion, money laundering and other crimes.    http://www.usatoday.com/money/companies/regulation/2007-02-23-tax-havens-usat_x.htm).  This confirmed earlier reports from both the IRS (http://hsgac.senate.gov/_files/STMTBurgessIRS.pdf ) and the multi-agency Money Laundering Task Force (http://www.ustreas.gov/offices/enforcement/pdf/mlta.pdf) that Nevada was among the worst offenders when it came to being a haven for scammers, money launderers and tax evaders.

And despite the fact that Nevada has made a few cosmetic changes to its corporate laws, as mentioned above – outlawing bearer shares and requiring that corporate owners keep more detailed records – the fact remains that Nevada is still suspect and will be for some time.

In this regard, it is interesting to note a change to Nevada’s corporate laws that accompanied the 2007 “bearer shares” changes referenced above.  In an apparent effort to “save” Nevada’s “corporate industry,” the Nevada legislature pushed through a change to Nevada’s corporate laws to allow charging order protection to Nevada corporations, something that no other state in the nation allows – and which the uniform corporate codes do not provide.

In order to understand what this means, it’s important to have a basic knowledge of exactly what types of rights a creditor has with regard to different business entities.  If a creditor gets a judgment against an owner of corporate stock, the creditor can seize that stock – thus stepping into the shoes of the debtor – and can force a sale of the corporate assets or otherwise vote those shares to the creditor’s advantage.  On the other hand, if a creditor gets a judgment against a limited partner in a limited partnership or a member of a limited liability company, the creditor doesn’t have the right to seize the ownership interest in that business entity.  The best the creditor can do is to get a “charging order” – a piece of paper that entitles the creditor to distributions from the limited partnership or limited liability company.  Of course, if the limited partnership or limited liability company decides never to make a distribution, the creditor is stuck waiting for a long time – perhaps forever – without satisfaction of the judgment.

Now, in theory, by the Nevada legislature’s allowance of charging order protection to be applied to certain types of corporations in Nevada, a creditor of a Nevada corporation would appear to be just as stuck in trying to get satisfaction from a Nevada corporation as the creditor would be in trying to get satisfaction from a limited partnership or a limited liability company.  But would it?  There’s a problem that arises from this new law – a problem that arises from the application of the United States Constitution’s “full faith and credit clause” within the context of conflicting state policies. 

Let’s suppose that a California creditor gets a judgment in California against a California debtor who happens to be a shareholder in a Nevada corporation.  Doesn’t the fact that the corporation is registered in Nevada mandate that Nevada’s “charging order protection” should apply?  Actually, no.  The full faith and credit clause doesn’t mean that each state is a sovereign nation that can legislate away the public policy of each other state (for example, forcing California to abandon its own corporate law in favor of conflicting Nevada law).  To the contrary, it generally provides that each state may enforce its own public policy unless there is a compelling reason not to.  In the situation that I described above, it is most likely that a California court would hold that the public policy of the state of California would mandate that the California corporate laws should apply between two California residents and that the California creditor could seize the California debtor’s corporate shares, regardless of what the law of Nevada may say about “charging order protection.”  Nevada’s “charging order protection” statute wouldn’t supersede California’s public policy. 

Of course, as to a beef between a Nevada creditor and a Nevada debtor suing in a Nevada court for shares of a Nevada corporation, the outcome may well be different, since the public policy of the state of Nevada should arguably be applied to that situation.  In fact, it appears that the new law may be requiring Nevada courts to apply an inconsistent “two-tier” system to dealing with corporations in Nevada courts – one in which Nevada corporations will be granted charging order protection but non-Nevada corporations will not.  It’s a mess, or at least a potential mess.  Because this law is so new, there is no case law or other guidance that we can look to in order to know exactly what the limits and the contours of this statute are.  Until then, it appears that Nevada’s new corporate statutes are in a state of limbo that makes it harder, not easier, to determine just what it means to be a shareholder in a Nevada corporation, and what types of protection a Nevada shareholder can rely on.

In any case, there’s little evidence that Nevada provides the best domestic asset protection.

For example, the U.S. Chamber of Commerce’s State Liability Systems Ranking Report for 2007, in which a survey was taken not only of each state’s statutes, but also of the competence of its judges, the likelihood of summary judgment being granted in favor of a corporation, the state’s history with regard to upholding corporate veil protection, findings on class action suits, awards of punitive damages and a number of other factors.  Nevada ranked 28th in the survey.  (Delaware ranked first, where it’s been for some time).  See http://www.instituteforlegalreform.com/lawsuitclimate2007/best_to_worst_poster.pdf

Looking at this, one might come to the conclusion that Delaware – not Nevada – is the perfect place to incorporate your business.  But this misses an important point.  At least nine times out of 10, the best place to incorporate one’s business is generally in the state in which your business is headquartered.  Thus, if your corporate headquarters are in Delaware, you are probably best off incorporating (or establishing a limited liability company – LLC) in Delaware.  If your business is headquartered in Nevada, you are probably best off establishing your business in Nevada.  If in Missouri, Missouri … and so on.  There are at least three reasons for this.

First of all, the statutes of each state can usually be superseded or at least advantageously augmented by a well-written operating agreement (in the case of a LLC) or, to a lesser degree, carefully drawn corporate by-laws (in the case of a corporation).  Thus, regardless of how a state’s business entity code is written, the defining documents for a business entity can usually establish what the owners want to accomplish – and provide excellent asset protection – without resort to that state’s “default” statutes. 

Second, as mentioned above, when courts are trying to determine whether to pierce a business’ corporate veil, they will generally apply the law of their jurisdiction – not the laws of the jurisdiction where the entity was established – to figure out whether the owner will be held personally liable for a business entity’s actions.  Thus, if you happen to get sued in California, for example, don’t count on Nevada’s laws to protect your Nevada corporation from attack in California.  Your California judge will most likely be looking to California law and California public policy to decide whether your Nevada corporation will be protected.   Establishing your corporation in Nevada generally isn’t going to help you much if you happen to live in – and get sued in – another state.

Third, it’s an administrative and financial hassle to establish and maintain a corporation in another jurisdiction.  If, for example, you live in Utah but your corporation is established in Nevada, you’ll have to qualify your Nevada corporation to business in Utah.  You’ll have to pay fees in both Nevada and Utah, and there will be some other filings you’ll have to make as well (I don’t have space to get into the tax ramifications of this arrangement except to say that you may end up spending far more in tax planning and filing fees than you could ever hope to save by this “multiple filing” scenario).

This leads to the next tip:

3.         AVOID ANY ASSET PROTECTION STRATEGY THAT PROMISES A REDUCTION IN TAXES.

At best, an asset protection plan will be “tax-neutral” – meaning that it will not save taxes nor will it cost more in taxes.  Most asset protection plans are not “tax-neutral,” however.  Most are going to cost you more in taxes and in time dealing with taxes and compliance.  That’s just the way it is.  Live with it.

Now, I have a confession to make here.  I’m not a tax lawyer, nor am I a tax accountant.  I hire professionals to look at the tax ramifications of any asset protection plan and, once in a while, they can find an angle that might save someone taxes somewhere.  The point here isn’t to engage in a technical review of tax rules that apply to obscure and complicated asset protection plans.  Instead, the point is that if anyone promises as part of an asset protection plan that you can save taxes or, worse yet, completely avoid the payment of taxes, my advice is to run the other way, because you’re about to start down a one-way street named Trouble.  Any asset protection plan that gets you into trouble with the tax authorities can hardly be characterized as protecting assets.

In my experience, any plan that has as its primary goal the reduction in taxes is almost automatically a scam.  Two immediately come to mind.  The first involved a fellow in Utah who promised his clients that if they would just hand their money to him as part of his “asset protection program,” he could somehow “wash” it through a series of offshore trusts and then return it to the U.S., tax-free.  The IRS shut him down – and for good reason – and undertook investigations of his clients who had fallen for his scam.  His clients spent some quality time with IRS agents, explaining how they fell for the tax evasion scam.  He spent some quantity time in federal prison for tax offenses.   The second is the above-mentioned Bill Reed, whose APG scam appears also to have been used as a front for tax evaders – at least that’s what the IRS is alleging.  Both of these folks apparently tried to push tax savings as a major component of their “asset protection” programs.  Both of them had elaborate plans as to how their particular “plans” worked.  Both went down in flames.

Which brings us to the next tip:

4.         AVOID ANY PLAN THAT CAN’T BE DIAGRAMMED ON A NAPKIN.

I’ve seen elaborate “asset protection” plans that involved domestic and foreign trusts, international business companies, domestic and international limited liability companies, limited partnerships and other entities and schemes, all of which required diagrams that involved pages of squares, circles, triangles and interconnecting arrows.  I frankly couldn’t follow them.  And I knew that if I couldn’t follow them, twelve people who were too dumb to get out of jury duty certainly weren’t going to be able to follow them.

Remember, the point of asset protection is to protect assets.  It’s not to confuse or to obscure the real point of what you’re doing behind a barrage of incomprehensible gobbledygook.  The point where the rubber hits the road in asset protection is whether a court – judge or jury – is going to protect what you’ve so carefully attempted to protect.  The harder a plan is to explain or understand, the more difficult it will be for a judge or a jury to decide that it’s not an elaborate scheme to avoid your obligations.

Every aspect of your asset protection plan should have a rational, easily-explainable purpose beyond trying to keep assets out of the hands of creditors.  If it can’t be set forth simply and convincingly, it’s too complicated.

This brings me to the next tip:

5.         AVOID “FAMILY LIMITED PARTNERSHIPS” OR “FAMILY LIMITED LIABILITY COMPANIES.”

Limited partnerships and limited liability companies are business entities.  They must have legitimate business purposes.  Families are not business entities.  A huge problem arises when clients attempt to mix the two – using a so-called “family limited partnership” to simply hold family assets in hopes that in the event there is a threat that the family’s holdings will be protected.

Now, don’t get me wrong.  I believe that limited partnerships and limited liability companies are essential structures for asset protection – so long as they are carrying out legitimate business.  If they are not, the chances that they may be pierced and collapsed increase.  Thus, any business entity, in order to be legitimately used for asset protection, must carry out business.  It may well be that the business is investment (some of the hardest work I’ve ever done was in investing), real estate development, or any number of other activities.  It’s rare that the so-called “business” is simply the holding of assets in a company as a safeguard against threats.  It’s even more rare that any legitimate business should be denominated as the “family business.”

In this regard, some promoters have pushed hard for clients to purchase a “family limited partnership”/trust combination for the protection of family assets.  Almost by definition, such a structure has no legitimate business purposes and may be very easily challenged and unwound.  In order for a limited partnership or limited liability company to have any legitimacy, it must have a legitimate business purpose.

Which leads to my final tip for this article:

6.         AVOID ANY COOKIE-CUTTER “ASSET PROTECTION” PLAN.

We start where we began, in a sense.  Bill Reed and APG are only one example of a “cookie-cutter” approach to “asset protection.”  Over the years, there have been a host of promoters – some of them lawyers – who claim to have unlocked the one true secret of protecting clients from predatory lawsuits, overeager tax collectors and an unresponsive judicial system.  (I don’t know why, but the word “bulletproof” often finds its way into the promotional materials of these guys).  Much of their promotional and other materials find their ways onto eBay or garage sales.  Unfortunately, some of that stuff is actually relied on by unsuspecting and desperate clients who have fallen for the scam.

The fact of the matter is that there exists no “cookie-cutter” one-size-fits-all asset protection plan.  It’s been said that “If the only tool you have is a hammer, every problem looks like a nail.”  The same is true of asset protection.  If a promoter has only mastered one particular approach to financial and asset planning, guess what they’re going to recommend.

In the asset protection toolbox, there exist many tools which, if used correctly and carefully, with attention to each client’s needs and requirements, may help navigate the shoals of a sometimes dangerous world out there.  Those tools include insurance, business entities, statutory exemptions, trusts, foundations, charities and, most importantly, common sense.  A good asset protection plan will utilize each of these tools judiciously and only where and when needed.  There’s no panacea.  There’s no magic pill.  Avoid anyone who tells you otherwise.

CONCLUSION: 

These are only a few, general tips, to which others could be added (but for which I don’t have time or space).  Obviously, any asset protection plan will involve detailed attention to each client’s needs, objectives and personality.  The important thing to keep in mind here is that a careful, skeptical and logical client has nothing to lose and much to gain in avoiding asset protection traps and problems.

Randall K. Edwards practices law in Nevada, Utah, California and Arizona, with his primary office located in Salt Lake City.

 

 

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