Have you ever wondered how a lot of big business owners in America managed to keep their empires afloat and their properties intact even after a major trial or setback? With the help of highly capable legal and financial professionals, they have learned to master the art and science of sound asset protection planning.
Sadly however, here in the Philippines, most of our countrymen have been lax when it comes to keeping their money and property safe. Usually, Filipinos have the following mindset when it comes to asset protection planning:
-“I don’t need those sophisticated asset protection stuff, anyway, I only have a simple sari-sari store! Let’s just leave that to the rich and famous like Henry Sy or John Gokongwei!”
-“Lawyers are expensive! Why would I need to spend so much when I only have so little?”
-“This business has been passed on and survived for many generations. So why would I need asset protection now when they didn’t need it before?”
The people who think this way, whether they know it or not, are actually more at risk of losing everything they have worked so hard for.
The goal of asset protection is to shield assets from the reach of creditors, especially the government in the form of taxes.
Asset protection should simply be about structuring the ownership of one’s assets to safeguard them from potential future risks. Most asset protection structures are commonly used business and estate planning tools, such as corporations, limited partnerships, trusts and the like. Properly implemented asset protection planning should be legal and ethical. It should not be based on hiding assets or on secrecy. It is not a means or an excuse to evade taxes.
Asset protection will not work to insulate the proceeds of crime. Only properties that have been legally acquired are covered by asset protection methods. If an asset protection plan is implemented, it should be for legitimate business purposes, not as an instrument to defraud creditors.
There is no one “magic bullet” in asset protection. The term “asset protection” encompasses a number of planning and structuring mechanisms that may be implemented by a practitioner to minimize a client’s exposure to risk. For each client the asset protection solution will be different, depending on (i) the identity of the debtor; (ii) the nature of the claim; (iii) the identity of the creditor; and (iv) the nature of the assets. These are four threshold factors that are either expressly or implicitly analyzed in each asset protection case. The analysis of these four factors determines what planning would be possible and effective for a specific client.
A. Identity of the Debtor
In analyzing the identity of the debtor, one should consider the following initial issues:
1. Is the debtor an individual or an entity?
a. If the debtor is an individual:
i. Does he or she have a spouse, and is the spouse also liable? For example, the spouse may be liable as a co-signor of a personal guarantee or as a co-owner of community property assets.
– If the spouse of the debtor is not liable, is it possible to file an action in court in order to transmute the assets from community property to the respective separate property of each of the spouses?
ii. Are the spouses engaged in activities that are equally likely to result in lawsuits, or is one spouse more likely to be sued than the other?
b. If the debtor is an entity:
i. Did an individual guarantee the entity’s debt?
ii. How likely is it that the creditor will be able to pierce the corporate veil, or otherwise get at the assets of the individual owners?
iii. Is there a statute that renders the individual personally liable for the obligations of the entity? Often, clients assume that if assets are placed within a limited liability entity, such assets are shielded from lawsuits. Another common assumption is that a lawsuit against such an entity cannot reach the owners of the entity. These assumptions are frequently erroneous.
B. The Nature of the Claim
It is not sufficient to know the identity of the debtor. The practitioner will also need to know what type of a claim will be brought against the client. Here are some variables:
1. Are there any specific claims against the client, or is asset protection being undertaken as a result of a general fear of lawsuits and the desire to insulate the client from lawsuits?
2. Has the claim been reduced to a judgment? If the claim has been reduced to a judgment, what assets does the judgment encumber? For example, a lien will cover only those assets that are titled in the name of the defendant. If there is any variance, the judgment lien will not attach. Similarly, a notice for a debtor’s examination will impose an automatic lien only on those assets which are titled in the name of the debtor.
3. Has the claim matured to the extent that any transfer of assets will constitute a fraudulent transfer?
4. Is the claim brought against the debtor a tort claim? Tort claims are generally covered by liability insurance. To the extent that asset protection is desired, it is because the plaintiff will deem that the insurance coverage is not sufficient, and will seek to get the defendant to contribute to a settlement with the defendant’s own funds.
5. Certain debts are subject to pre-judgment attachment, if: (i) they arose in the context of the debtor’s business, and (ii) the amount owed is readily ascertainable. In this case the plaintiff does not need to wait until he obtains a judgment in order to encumber the asset. However, the amount of the debt must be evident from the face of the instrument sued upon, such as a promissory note or a liquidated damage provision.
6. An always relevant question is the dischargeability of the claim in bankruptcy. If the claim is dischargeable in bankruptcy, and the debtor’s debts are exempt or otherwise unreachable, then asset protection planning may not be warranted – a bankruptcy discharging the claim will be sufficient.
a. The fact that a claim is dischargeable provides leverage when negotiating with creditors.
b. Asset protection planning and bankruptcy planning usually go hand-in-hand. Often the goal of asset protection planning is to structure the debtor’s assets so that upon the filing of a bankruptcy the debtor’s claims are discharged and assets are retained.
7. What is the statute of limitations for bringing the claim?
8. What is the size of the potential claim? Creditors become more aggressive if the liability is greater. In addition, certain asset protection strategies are more expensive than others.
C. Identity of the Creditor
The third factor to be considered before implementing an asset protection strategy is the identity of the creditor. Here we are referring to certain creditor traits:
1. How aggressive/lazy is the creditor? How smart/knowledgeable is the creditor and the creditor’s counsel? Accurately answering these questions will help us determine the scope of collection activities that the creditor is likely to engage in. This tells us how much protection the debtor requires.
2. Is the creditor a government agency? Taxing authority? Some government agencies possess powers of seizure that other government agencies do not. For example, the Bureau of Internal Revenue and Bureau of Customs, with due process, have the power to seize assets that it deems are used to defraud the Government.
3. Is the potential creditor a spouse in an action for annulment of marriage or declaration of nullity of marriage that has not yet been filed?
D. The Nature of the Assets
The final factor that needs to be analyzed is the nature of the assets we are seeking to protect. This factor, to a much greater extent than anything else, will determine what may be done and what needs to be done to protect the debtor:
1. To what extent are the assets exempt from the claims of creditors?
2. How are the assets titled? If assets constitute community property, it is usually irrelevant that the assets are titled in the name of one spouse. The creditor can attach all of the community property, even if only one spouse is the debtor, provided that the debt inured to the benefit of the family. This may hold true even if the debt arose prior to the marriage.
Each of the issues presented above should be carefully considered by the legal counsel or financial planner before structuring and implementing an asset protection plan. Consult a specialist for adequate and sound asset protection planning.