Although courts have ruled that certain types of asset protection are legal, such as using the limited liability and charging order protection statutorily guaranteed when using an LLC or LP, there are instances when setting up an entity purely for asset protection is ipso facto a fraudulent transfer. This fact is confirmed by quoting an excerpt from U.S. v. Bryce W. Townley (East Washington U.S. Distr. Court, No. CS-02-0384-RHW, 07/29/2004), which says:
“Plaintiff asserts that Mr. Townley’s statements that he intended to protect his assets from anyone who might get a judgments against him is conclusive, direct evidence of intent to hinder, delay, or defraud. The Court agrees.”
This and other cases lead us to the conclusion that the best asset protection programs have an ostensible purpose other than just asset protection in order to hold up in court.
Such alternate purposes include:
- Having a valid business purpose (which could be as simple as investing, although if investing is a claimed purpose, the investing should be “active” rather than “passive”. This means that trades and investment activity should be done at least every month or two within the entity.)
- Estate planning.
- Tax planning.
- Retirement planning.
Integrating such purposes into your plan requires skill, but an expert asset protection planner (of which there are only a few nationwide) usually has little trouble doing so.
It must also be noted that the proper use of attorney/client privilege prevents a client from having to testify that his program was set up with asset protection in mind.