Discussion of new developments in Asset Protection and related debtor-creditor issues, primarily from the viewpoint of planning for those who are concerned about unforeseen contingent liabilities, but also some news from the creditors' side as well. Hosted by Jay Adkisson and Chris Riser, authors of "Asset Protection: Concepts and Strategies" with supporting website at http://www.assetprotectionbook.com
My Response to Stephen Greer Regarding Tenant Amendment Stephen Greer is a member of the American Bar Association's Asset Protection Planning Committee, and a regular poster on the ABA-RPPT listserv which discusses trust and related issues. His comments are in the following post.
From : Jay Adkisson -- jay_adkisson [at] MSN.COM Reply-To : The Estate Planner's and Administrator's Discussion Sent : Friday, March 11, 2005 10:18 AM Subject : Re: [ABA-PTL] Bankruptcy Act -- Talent Amendment vs APTs
Stephen,
I wholeheartedly agree with your thoughts that a healthy and objective debate will be needed to fully flesh out the impact of this legislation.
1. The 10-year limitations provision is a two edged sword. Within the 10-year limitations period you'll be concerned about transfers to a SSST, but outside the 10-year limitations period your transfers may be unchallengeable if you take bankruptcy. Essentially, this will codify the "old and cold" rule-of-thumb that planners have traditionally applied to SSSTs.
However, I do not see this as having a significant effect on the state SOLs, simply because this Act applies solely, only, and exclusively when there is a bankruptcy filing. In many cases, the issue may become whether the creditor has the ability to force or maneuver the debtor into a personal bankruptcy filing.
Forcing an individual into bankruptcy has never been easy, and the irony of this legislation is that it makes it more difficult for a person to take bankruptcy anyway. If the individual never takes bankruptcy, then this legislation never applies and state law is supreme. That puts us back into the issue about whether a non-DAPT state will recognize a DAPT -- but that issue doesn't eixst for persons resident in DAPT states. So, if I had a client in a DAPT state, I might still suggest to them that they form a DAPT for a portion of their assets, but caution them about what might happen in bankruptcy if they are forced into it. Certainly, if the client is resident in a DAPT state and gets past the 10 years, then the assets that you transferred over 10 years ago are probably totally untouchable by creditors because then you could just file for bankruptcy and wash them out (but query whether being a beneficiary of such a trust would force you into Chapter 13 instead?).
2. Fraudulent transfers to entitites are discussed. What about fraudulent transfers to persons.
That is an interesting question, as it might mean that you are better with an individual trustee instead of an institutional trustee. But that seems like a "wait and see" as to how the bankruptcy courts will interpret the issue. I would suspect that a transfer to an individual in trust will be construed to be a transfer to the trust as an entity for this purpose.
3. The class of future creditors is severely limited. You can not set aside transfers unless a creditor can prove the settlor had actual intent to set aside this future creditor.
I don't read it that way, but rather read the same way that UFTA is interpreted, which is generally that if you planned to hinder or delay Creditor A but later Creditor B's claim arises, that your activities would be in defraud of Creditor B as well. At first, I thought that the language resulted as you suggested, but after staring at it awhile (and also looking at the next sentence which relates to securities fraud that certainly applies to unknown future creditors), I'm pretty sure that it will be interpreted that planning done for one creditor will be fraudulent as to other creditors.
We as practitioners would never engage in a transaction where this was the case.
You and I wouldn't -- but we both know that there are too many sleazy asset protection planners out there who would, and have. They are starting to show up in the civil conspiracy cases, too. The bad thing is that it is the cases of these yayhoos who blow up and end up making law under egregious circumstances that is later applied to the rest of us. That's why my tendency is to presume that legislation will be construed in the most unfavorable fashion that I can reasonably anticipate.
Constructive fraud claims, based upon the UFT solvency definition, against future unknown creditors where the settlor lacked actual intent to defraud may have been eliminated as a basis for attack. However I worry about the hinder or delay language.
Again, I just don't read it that way. It also wouldn't surprise me if a court didn't look to analogous fraudulent transfer law to interpret that planning to defeat one creditor is in defraud of unknown future creditors as well. I've read the amendment about a dozen times now trying to ferret out a subtlety that would lead me to the opposite conclusion, but I just don't see it.
But I do agree that we shouldn't agonize over this until we see what the (goofy) House does. For all we know, this amendment will come right back out, which will itself create interesting issues.
Jay - Actually my comments were made not to summarize whether a DAPT works or doesn't work. It is far too premature to arrive at any conclusions of this sort. My initial reaction was quite the opposite of yours, that the statute now blesses DAPTs except in very limited circumstances. However these healthy debates always facilitate the learning process. I would hope you would join with me in a disinterested manner in the forthcoming weeks as we analyze the new bankruptcy code and its legislative history to arrive at some conclusions people can rely on. In other words I want to elevate the discussion. (In a similar vein I totally share the opinion of D. Stein in a recent post that people, and law professors as well, too often shoot from the hips. I only have to be reminded of an initial response by Prof. English under the blessing of the Commision to Mark Merric's comments, wherein Prof. English, singularly pointed out Alaska's DAPT laws, intimating that because Alaska did it, it must be bad. Comments and conclusions without more don't help anyone.)
Here are some observations and unresolved issues in my mind.
1. Under all existing DAPT laws there is no state law statute of limitations for pre-existing creditors as they have an unlimited period of time to bring forward a fraudulent conveyance action against the settlor. Presently a bankruptcy trustee has 2 methods of proceeding on a fraudulent transfer; there is the statutory 1 year period for transfers to insiders as set forth in the B.Code. and they can also utilize state law. This exception gives the trustee a 3rd method of attack. Could this statute actually shorten the statute of limitations that might be available to a trustee that would otherwise be available under state law?
2. Fraudulent transfers to entitites are discussed. What about fraudulent transfers to persons.
3. The class of future creditors is severely limited. You can not set aside transfers unless a creditor can prove the settlor had actual intent to set aside this future creditor. We as practitioners would never engage in a transaction where this was the case. Constructive fraud claims, based upon the UFT solvency definition, against future unknown creditors where the settlor lacked actual intent to defraud may have been eliminated as a basis for attack. However I worry about the hinder or delay language.
4. Does (e)(2) limit the class of creditors to those creditors who can attack transfers to DAPTs? I don't believe it does.
Stephen E. Greer, Esq. P.O. Box 24-2903 Anchorage, AK 99524-2903 ph. (907) 561-5520/ fax (907) 563-5020
Amendment to Bankruptcy Act May Kill Asset Protection Trusts
The so-called Tenant Amendment was tacked on at the last second, and reads:
(e)(1) In addition to any transfer that the trustee may otherwise avoid, the trustee may avoid any transfer of an interest of the debtor in property that was made on or within 10 years before the date of the filing of the petition, if--
(A) such transfer was made to a self-settled trust or similar device;
(B) such transfer was by the debtor;
(C) the debtor is a beneficiary of such trust or similar device; and
(D) the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.
(2) For the purposes of this subsection, a transfer includes a transfer made in anticipation of any money judgment, settlement, civil penalty, equitable order, or criminal fine incurred by, or which the debtor believed would be incurred by--
(A) any violation of the securities laws (as defined in section 3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47))), any State securities laws, or any regulation or order issued under Federal securities laws or State securities laws; or
(B) fraud, deceit, or manipulation in a fiduciary capacity or in connection with the purchase or sale of any security registered under section 12 or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78l and 78o(d)) or under section 6 of the Securities Act of 1933 (15 U.S.C. 77f).' _______________________
Whether or not the House adopts this amendment is anybody's guess, so don't assume that it is a "done deal" that this will end up in the new Bankruptcy Act, which is scheduled to go to the House next week.
FOR IMMEDIATE RELEASE TAX TUESDAY, MARCH 8, 2005 (202) 514-2007 WWW.USDOJ.GOV TDD (202) 514-1888 JUSTICE DEPARTMENT SUES TO HALT ALLEGEDLY ABUSIVE TAX SCHEME SOLD TO MORETHAN 100 EMPLOYERS NATIONWIDE Former New York Resident Allegedly Sold Employee-Benefit Schemes toBusinesses WASHINGTON, D.C. - The Justice Department today sued Nicholas P. Magalhaes,of Altamonte Springs, Florida, formerly of Smithtown, New York, to bar hisalleged promotion of an abusive tax shelter for employers. The government'scomplaint, which was filed in the US District Court for the Eastern Districtof New York, contends that Magalhaes and his businesses -- AssetAccumulation, Inc., Pinnacle Wealth Group, L.L.C., Strategic Ventures, Inc.,and Pinnacle Wealth Concepts, Ltd. -- sell what they purport to bevoluntary employees' beneficiary association (VEBA) plans to employers. Thesuit alleges that Magalhaes falsely advises employers that his plans satisfya tax-law provision that allows employers to make unlimited tax-deductiblecontributions to certain qualified welfare benefit plans. The complaint alleges that Magalhaes falsely tells employers that the plansqualify as VEBAs or ten-or-more-employer welfare-benefit plans. If suchplans meet certain statutory requirements, employers may deductcontributions they make to the plans to fund certain benefits for theiremployees. But the Justice Department complaint alleges that Magalhaes'splans, rather than meeting the statutory requirements, are abusive taxshelters designed to enable employers to disguise as employee benefitssubstantial amounts of deferred compensation paid to select high-levelemployees. This allegedly enables the employers to improperly claimincome-tax deductions for the compensation and the selected employees toimproperly fail to report the compensation as taxable income. According to the complaint, the IRS has identified more than 100 employersacross the country that have participated in Magalhaes's plans. The suitsays the IRS estimates these schemes cost the Federal Treasury $ 6.7 millionfrom 1996 through 2001. "Law-abiding businesses deserve the assurance that their competitors arealso reporting and paying their correct taxes," said Eileen J. O'Connor,Assistant Attorney General for the Department of Justice's Tax Division."Stopping the promotion of abusive tax shelters and identifying and takingappropriate action against their participants are high priorities for theTax Division." Today's suit also seeks an order directing Magalhaes to give the JusticeDepartment the names, mailing and e-mail addresses, and taxpayeridentification and telephone numbers of all plan participants and personswho brokered or sold his plans. The Justice Department has sought and obtained injunctions against a numberof tax-scheme promoters. More information about these cases is available onthe Justice Department website at http://www.usdoj.gov/tax/taxpress2005.htm.More information about the Justice Department's Tax Division can be found atwww.usdoj.gov/tax.
