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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. |
