Asset Protection - Another Tool
| Publication year | 1993 |
| Pages | 14 |
| Citation | Vol. 6 No. 9 Pg. 14 |
Paul J. Barton, Esq.
"Protection is not a principle, but (inexpedient. " — Disraeli, Speech, 17 March, 1845.
"It is folly to bolt a door with a boiled carrot."
ENGLISH PROVERB.
It is the purpose of this article to explore a potentially effective tool in "Asset Protection" which may be unknown to some of its readers. While erosion of asset protective devices seems to be the trend, it is the role of the counselor to use his or her imagination and dream up a better mouse trap which can bring to the client utility, not futility. Erosion of protective devices takes many forms. Piercing the corporate veil makes corporate assets available to creditors. The judicial setting aside of an irrevocable trust places the beneficiary's future lifestyle in jeopardy. Titling property in the name of another can be reached by the Fraudulent Conveyances Act. Assets in the spouse's name can be impacted by the Medicaid "spend down". It had generally been thought that IRA's and retirement plans were beyond the reach of creditors. Now IRA's are reachable by creditors. The divorce courts dealt a blow to the sovereignty of the IRA and the retirement plan by forcing the plan's payout to be shared with the spouse. The national hall mark of security was to be found in the Pension Plan; it appeared that the U.S. Supreme Court had decided only last year that all pension assets were protected in bankruptcy and were not reachable by creditors. Patterson v. Shumate, 112 S.Ct. 2242 (1992). But even the safety of the sacred Pension Plan has come under attack. Three recent cases have again eroded the walls of protection. See In re Hall, No.GK91-81542 (Bankr. W.D. Mich. 1993); In re Lane, 149 Bankr. 760 (Bankr. E.D.N.Y. 1993); In re Witer, 148 Bankr. 930 (Bankr. CD. Cal. 1992). These cases indicate that retirement plans of the professional, the solely owned corporation, the closely held corporation, and professional partnerships are now reachable by creditors.
The Supreme Court of Utah has held that property conveyed into an irrevocable trust for the use of the person creating or making the same, (i.e., the settler, trustor or creator thereof) shall be void against existing or subsequent creditors. Leach v. Anderson, 535 P.2d 1241 (Utah 1975). Presumably the case had many facts favoring a beneficiary. The trust was irrevocable. There was a neutral and independent trustee, Valley Bank. There was no fraudulent intent in the creation of the trust. When the grantor created the trust she was solvent and had no eminent or reasonable expectation of being threatened by creditors, either present or future. In creating the trust the grantor did not intend to use the trust as a protective shield to hinder, delay or defraud her creditors. The purpose of the trust was to protect the grantor and her children from the improvident requests of her son. The trust contained a spendthrift clause. However, and notwithstanding the facts wherein there was no intent to defraud, the Court relied heavily on the Fraudulent Conveyances Act, Utah Code Ann. § 25-1-11 (1953) as it held for the creditors stating: "The intent and the effect of the statute is to prevent a person from using a trust as a device by which he can retain for himself and enjoy substantially all of the advantages of ownership and at the same time place it beyond the legitimate claims of his creditors." Leach, at 1243. The statute the Court relied so heavily upon has since been repealed and replaced with the Uniform Fraudulent Transfer Act. Utah Code Ann. §§ 25-6-1 — 25-6-13 (1988). The new statute requires more than a finding that the creator of the trust has use or benefit of said properties. However, it is doubtful that the new statute...
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