As we enter the last quarter of 2009, and look forward to the new year with the hope that 2010 will see a true economic recovery, it is important from an asset protection and estate planning perspective to fully absorb the lessons that the past two years have provided.  I know from working with my clients over the past year, in particular, that it is easy when a good economy provides abundance, for people to minimize the importance of estate and asset protection planning.  One of the fundamental precepts of both estate planning and asset protection planning is that it be done before you need it, or its too late.

The year 2009, at least as far as my practice is concerned, has been a rapid fire series of clients who want to do asset protection planning, because the business is doing poorly, their investments have gone bad, or, even worse, things have reached the point where the banks are foreclosing loans and pursuing personal guaranties.  Clients with significant net worth are facing personal bankruptcy because their personal guaranties exceed their pre-2007 net worth, which net worth has diminished dramatically during the recession, or in some cases completely disappeared.  Most are confused, frightened, and operating in totally unfamiliar financial territory.

The lead in question, or some variation of it, is that things are bad, I think they are going to get better, but I need to protect what I have because if things don't work out right the banks (or credit card companies, or IRS, or vendors, or investors, or malpractice claimants, or whoever the unfulfilled creditor might be). are going to come after me.  IS THERE ANYTHING I CAN DO TO PROTECT WHAT I HAVE LEFT?

The answers to the questions are never easy or straightforward, and vary depending on the individual circumstances.  But, there is one truism that applies to each and everyone who wants to engage in asset protection planning after the storm.  This truism is one of the few times in the law that one can say that it always applies to everyone, without exception.  That truism is:  It is always more effective to do asset protection planning (or estate planning) before the need arises!

The minute the creditor's claim arises, many of the most effective asset protection tools are taken off the table.  There almost always will be some tools remaining, but any action taken after the claim has arisen will be subject to the fraudulent transfer or fraudulent conveyance (and in Florida the fraudulent conversion) statutes.  Those statutes restrict your ability to transfer assets without concern.  There are several elements of the fraudulent conveyance and fraudulent conversion statutes that must be met to comply with the statues.  If you fail to comply with the fraudulent conveyance and fraudulent conversion statutes, the transfer is subject to being unwound by a wronged creditor.  All that is accomplished, effectively, by a transaction that falls within the fraudulent conveyance or fraudulent conversion statute, is to increase the amount of attorneys' fees that will be paid by the parties to the transaction when the creditor(s) come calling.

Structuring transactions to avoid the fraudulent transfer and fraudulent conveyance statutes must be done very carefully and there always is some additional cost associated with the structuring process.  And, you can be reasonably sure, that notwithstanding the care taken in structuring the transaction, it will be attacked by the creditor(s) at some point.

The difference between the fraudulent conveyance statute and the fraudulent conversion statute is the nature of the assets that are the subject of the transaction.  The fraudulent conveyance statute says, in simplistic terms:  If you transfer to a third person an asset (or an interest in an asset) for less than fair consideration, at a time when creditors' claims are pending against you, and the purpose of the transfer was to delay, hinder or defraud your creditors, then your creditors have the legal right to follow that asset and recover it from the hands of the third party to whom you have transferred that asset.  The fraudulent conversion statute says that if you "convert" and asset that is not exempt from creditors (i.e., cash) into an asset that is exempt from creditors' claims, at a time when you have creditors' claims pending against you, and the purpose of the conversion was to delay, hinder or defraud creditors, then your creditors have the right to avoid the exemption on that asset and recover the asset to satisfy their claim.

Florida has very generous exemption statutes (Chapter 222, Florida Statutes).  The exemption statutes provide that certain assets are exempt from the claims of creditors.  Among those assets are retirement accounts (including IRAs, Roth-IRAs, and SIMPLE-IRAs), annuities, life insurance, a wage account, and others).  Obviously, the fraudulent conversion statute requires that you not wait until your creditors are at your door to utilize those exemptions from creditors claims.  To effectively use the exemptions, you must have them in place before the creditors' claims are made, or you must structure the acquisition of those exempt assets in a way that avoids the fraudulent conversion statute.

Another relatively "easy" asset protection tool in Florida is a form of ownership of an asset by husband and wife called tenancy by the entireties ("TBE").  There are certain elements that are required to be present when title is taken by a husband and wife as TBE.  If these elements are not present, then the form of ownership will be "joint tenants with right of survivorship."  It is a very important distinction.  The creditors of one spouse are precluded by law from attaching assets owned by husband and wife as TBE.  However, if husband and wife own assets as joint tenants with right of survivorship, a creditor of one spouse has the right to pursue that spouse's "equitable interest" in the jointly held asset.  So proper structuring of TBE ownership is important.

It also is important that the TBE ownership be established before the creditors' claims arise, if possible.  A transfer by one spouse to both spouses as TBE may constitute a fraudulent conveyance if accomplished during a period of time in which the transferring spouse has outstanding creditors' claims.  When creditors' claims are pending, it is necessary that the transaction be structured to avoid the application of the fraudulent conveyance statute.

Another important consideration in asset protection planning using TBE is the nature of the asset involved.  If spouses own real property, or any other asset that can create liability (such as a working interest in an oil well, for instance), ownership by both spouses' as TBE is not good.  An asset owned by both spouses as TBE that creates liability will result in both spouses being equally liable for whatever liability is involved.  Quite often I find clients who have titled their real property as TBE for "asset protection" purposes.  If that real property is rental property or commercial property, they have now subjected all of their separately owned assets, as well as their jointly owned assets, to any party injured on the premises (premises liability).  So, indiscriminate use of TBE titling can be a dangerous thing (see our earlier discussion of automobile liability issues).

The use of irrevocable trusts, domestic asset protection trusts, and many other asset protection tools are eliminated from consideration (or severely limited in application) when creditor claims are outstanding.  Even the use of family limited partnerships, limited liability companies, and other entities can be limited when creditor claims are outstanding.  It is important for those concerned with asset protection (which should be practically everyone who owns anything) engage in asset protection planning before they are in a position where the asset protection planning is actually needed.

The same is true of estate planning.  Another impact of the recession that is not documented in the media is the number of will contests and trust challenges that have arisen over the past couple of years.  Our involvement in probate litigation and trust litigation over the past year has skyrocketed.  In almost all of the cases, the probate or trust litigation could have been avoided through proper estate planning prior to the death of the decedent.  In some cases there was no will or trust in place.  A properly designed will or trust would have avoided the conflict.  In other cases, the will or trust was out of date, and was not updated with changed circumstances.  A codicil to the will or an amendment to the trust may have avoided the litigation.  Two of the probate litigation matters involved what was essentially choosing the wrong person as the personal representative (executor) of the estate or successor trustee of the trust.  Proper consideration of the responsibilities and activities of the personal representative or successor trustee is appropriate in deciding upon the fiduciary who is going to administer your estate.  One should not be chosen for that position merely because they are a close friend or family member.  The failure to choose the right person(s) for that position can cause much anguish and cost to your loved ones and your estate.

The lessons of the recession of 2007-2009 is that good times can, and do, come to an end, or at least a pause.  Don't let the good times cloud your view and keep you  from planning for the less than good times that follow.  Good, and effective, estate planning and asset protection planning should be an ongoing effort that is never ending.