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ASSET
PROTECTION
The purpose of this
article is to explain some principles of asset protection and how one
can help protect his or her estate.
I. ASSET PROTECTION
DEFINED
"Asset
protection" is an advanced form of estate planning. The purpose of
asset protection and estate planning is to: (1) protect the assets and
property that you have accumulated; and (2) shelter your assets and
income from contingent liabilities.
Your assets and their
proceeds can be protected to provide for your family, to provide for
your children's college education, reduce income and estate tax burdens,
provide sufficient moneys for retirement, and to plan for, and minimize,
the hardships in the event of severe illness or disability.
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II. GOOD INTENTIONS
ALONE ARE NOT SUFFICIENT TO
PRESERVE YOUR ESTATE
In order to protect
your hard earned assets, you must plan ahead for possible contingencies.
Failure to create an estate plan could be subject you or your estate to
significant losses or taxes. Good intentions alone cannot substitute for
professional estate planning.
The law allows you to
protect your family and assets pursuant to a properly adopted estate
plan. You must however execute the proper documents before the
occurrence of a financial derailment otherwise your actions could be
considered by a court to be a fraudulent transfer.
Additionally, the investments and decisions made in asset and
estate planning must be shown to have a viable, worthwhile purchase.
For instance, if you
are sued tomorrow (before enacting an estate plan) and then took all of
your cash assets and paid off your home to take advantage of the
homestead exemption, a creditor could argue that you have violated the
Fraudulent Transfers Act and defrauded your creditors.
Paying off your home
is a legitimate asset and estate planning protection tool. It is
supported most frequently on the reason that the motive for paying off
the homestead was to take care of a spouse and family, reduce living
expenses, and reduce payment of interest. This must be done before, not
after the occurrence of a contingency.
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III. SOME COMMON
PITFALLS:
If you or your spouse
has not filed income tax returns, or has income tax levies against him
or her, then the other spouse (including one from a new marriage) is now
liable for the tax deficiency. Your (community) property is at risk in
that situation.
If you are named on a
corporation's Board of Directors, or serve as an Officer of a
corporation, you may find yourself liable for the corporation's
withholding 941 tax deposits which have not been made.
Transfers of business
property or stock can back-fire if not done properly. An owner of a
well-established business, for estate planning purposes, transferred
stock in his business to his children. Unfortunately, one of the
children subsequently became divorced, and all of the stock was awarded
to the other party in the divorce. That interest in the business is now
owned by strangers.
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IV. FRAUDULENT
TRANSFERS
The Texas Uniform
Transfers Act is designed to protect creditors from fraudulent transfers
when debtors seek to hide their assets, hinder, or defraud a creditor.
The Act prevents
hindering, delaying or transferring properties if a court determines
that the purpose of a transfer was to defraud a creditor. The Act has a
four year statute of limitations time period from when the transfer was
made, or one year statute of limitations time period after a transfer
was, or could have been, recently discovered.
The Act protects
creditors whose claims arise within a reasonable time before, or after,
the transfer was made. Unfortunately, the language of the Act makes it
very difficult to ascertain what transfers will be considered a
violation of the law, and which ones will not be.
It may be up to a jury
to have each individual transaction determined. In determining the
intent of whether a person intended to defraud creditors, the following
evidence may be considered:
1). If the transfer
was made to an insider, such as another member of the family,
2). If the debtor
retained possession or control of the property transferred, even after
the transfer was made,
3). If the transfer
was concealed or removed from the jurisdiction of the Texas courts,
4). If the transfer
was made after the debtor was sued or threatened with a lawsuit, and if
the transfer was substantially all of the debtor's assets, and
5). If the debtor is
now insolvent as a result of the transfer.
The Texas Fraudulent
Transfers Act does not look at the solvency of the financial condition
of the transferor, but rather looks at the intent of the person making
the transfer at the time the transfer was made as the basis for
determining whether or not the conveyance was fraudulent.
The statute provides
that a transfer is deemed fraudulent if a debtor makes a transfer
without receiving a reasonably equivalent value for the exchange, and
the debtor was:
1). engaged in, or was
about to be engaged in, a business or transaction for which his
remaining assets were unreasonably small, or
2). intended to incur
or believed to have incurred debts beyond his ability to pay the same.
A transfer is also
fraudulent if a creditor has a pre-existing claim and the debtor
transfers property without receiving a reasonably equivalent
consideration for the transfer, and the debtor was insolvent at the
time, or became insolvent because of the transfer.
In addition to the
Texas Fraudulent Transfers Act, Section 528 of the United States
Bankruptcy Code prohibits fraudulent transfers. Transfers made by a
debtor within one year before the date of filing a bankruptcy petition
may be overturned if the transfers are made with actual intent to
hinder, delay or defraud any creditor, or made for less than fair market
value.
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VI. PROTECTING YOUR
RETIREMENT PLANS AND INSURANCE POLICIES
You should protect
your retirement and insurance benefits. These two types of property are
often the most valuable assets in your estate. Accordingly creditors
have sought to obtain the cash value of those assets.
The exact nature of these type benefits will determine whether it
is exempt from claims of creditors, however, the Texas Property Code
Section 42.0021 exempts qualified retirement plan benefits and
insurance benefits from seizure by creditors.
This includes but is not limited to, the cash value of the
insurance policy, as well as the death benefit awards or proceeds from
the insurance. Therefore, insurance enjoys the same protection that the
homestead has enjoyed. Accordingly,
qualified permanent life insurance cash values, death benefits and
annuity values are protected and may be used as asset protection
vehicles.
Section 541 of the
Bankruptcy Code defines property of the bankruptcy estate to include all
legal and equitable interests of the debtor in property as of the date
that the bankruptcy is filed. This is subject to the exemptions which may be claimed by the
debtor. This is also subject to a restriction on the transfer of the
interest that a debtor had in a trust.
Therefore, based on current law, under Section 541, a debtor's
interest in a valid, spendthrift trust is not property of the bankruptcy
estate, and creditors may not seize the debtor's interest in a trust
with a valid spendthrift provision.
The retirement plan at
its creation must receive a determination letter from the Internal
Revenue Service indicating that the plan is qualified. Unless the plan
is audited by the IRS, it will continue to be a qualified plan even
though it may have been used for activities that might result in
disqualification. And
remember, creditors still may be able to attach pension or insurance
proceeds if a debtor has violated the Texas Uniform Fraudulent Transfers
Act.
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V. WHAT TYPES OF
INSURANCE SHOULD I HAVE TO PROTECT ME AGAINST LAWSUITS?
A. You should
consider four types of insurance:
1). Homeowners
Insurance: Your homeowner's policy is absolutely essential: (a) to
protect the value of your home, and, (b) to provide liability coverage
for contingencies that may happen at your homestead. We recommend that
you talk to your insurance broker and consider getting the largest
liability protection amount that is available. Generally, the cost is
quite reasonable.
2). Automobile
Insurance: Although Texas law requires drivers to have auto insurance,
many people do not have insurance or only have the lowest limits of
liability. You should consider discussing your coverage with your agent,
and consider purchasing the maximum coverage that is allowed. You should
obtain the highest limits that are available for the following types of
coverage: (a) personal injury protection; (b) uninsured coverage, and
(c) underinsured coverage. The cost is quite reasonable in exchange for
the protection that the above coverage offers.
3). Umbrella
Liability: This is an important insurance product that you should have
since your homeowner's, automobile and boat or recreational vehicle
policies have limits in the event that you are liable for a judgment
that is larger than the policy limits, you would be liable to pay the
difference. Umbrella
insurance covers that liability. It expands the total amount of
liability coverage and dollar amount for usually a relatively small
premium. It may also increase liability coverage to other areas that are
not covered by traditional home, auto or boat policies. For example,
liable and slander may be covered.
4).
Negligence/Malpractice/Errors and Omissions Insurance: Most professional
business people are aware of this type of insurance and have had the
same for quite some time. This
type of insurance has become increasingly expensive in recent years, and
due to the large amount of verdicts that have been assessed against
professionals, one can not continue to rely on malpractice insurance to
protect them from all of the contingencies that may arise in their
business.
One big mistake that
people make is relying too heavily on insurance, not realizing that the
company may not cover you in a given situation, or the company may go
out of business. Accordingly, one needs to look at other ways to protect
assets.
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VI. TYPES OF PROPERTY
THAT IS EXEMPT FROM SEIZURE BY GENERAL CREDITORS AND THE TEXAS HOMESTEAD
EXEMPTION
A. Definitions Of
Property Categories
For the purpose of
this discussion, property is categorized as follows:
1). Personal
Property and Real Property. Real
property consists of land, buildings, real estate, oil and gas
interests, easements and non personal property.
Personal property consists of property that is not real property.
Examples include: furniture, money, tools and various other
property rights including, but not limited to, intellectual property
rights, patents, copy rights and other rights.
2). Exempt and
Non-exempt Property. Exempt
property is property that a general creditor cannot seize or take to
satisfy a judgment (unless that property has a valid lien placed on it
to secure a debt typically a purchase money debt).
Non-exempt property is property which a creditor may seize to
satisfy a judgment or a debt.
B. Exempt Real
Property In Texas: The Texas Homestead Exemption
The following types of
property are included under the term exempt property in Texas:
1). A homestead:
a. An urban homestead
consists of one or more lots that do not exceed more than 1 acre of land
together with any improvements on the land regardless of whether it is a
family homestead or a single adult.
b. A rural homestead
consists of, for a family, not more than 200 acres which may be in one
or more parcel with improvements thereon and 100 acres for a single
adult.
c. A homestead and one
or more lots used for the place burial of the dead are exempt of seizure
for the claims of creditors except for encumbrances or liens properly
fixed on the homestead property.
Remember though,
encumbrances or liens may be attached on homestead property for the
purchase of the property (purchase money), taxes on the property or work
and material used in constructing improvements on the property (materialmen
& mechanic's liens). Also
be aware that the temporary renting of a home does not change its
homestead character if the homestead claimant has not acquired another
homestead. Further, if the homestead claimant is married the homestead
cannot be abandoned without the consent of the spouse.
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