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What Assets Are At Risk When Trustee Is Sued?
Old 03-19-2006, 08:13 AM   #1
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What Assets Are At Risk When Trustee Is Sued?

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Re: What's The Best Way To Hide/Protect Assets
Old 03-19-2006, 08:36 AM   #2
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Re: What's The Best Way To Hide/Protect Assets

SO needs lawyer fast.

So much depends on the state the trust was set up in, how the trust was set up, what the suit is based on and where the basis for the suit occurred.

My FIL was one of several trustees of a trust set up by his brother's will to keep the assets of the company from being plundered by his beneficiaries. They got an unbelieveable amount of income but were to be kept away from the "golden goose." They sued the trustees who rolled over to avoid personal liability. The company went bankrupt in about 4 years under their control. I'm surprised they never sued my FIL for giving them the company.



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Re: What's The Best Way To Hide/Protect Assets
Old 03-19-2006, 08:38 AM   #3
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Re: What's The Best Way To Hide/Protect Assets

Why is the trust being sued? Did the trust do something bad?

If she is sued solely as trustee of the trust and not in her individual capacity, then only trust assets are at risk.

If she is sued in her individual capacity and loses, then certain of her assets will be exempt from creditors. What assets are exempt depends on a mix of federal and state law. ERISA qualified retirement plans and pensions are not subject to creditor claims, except for claims of the federal government (for example, taxes) and except for claims of a spouse in a divorce action. IRAs, including both Roth IRAs and traditional IRAs are exempt up to $1,000,000, plus any rollover amounts from ERISA plans like 401ks. However, the IRA exemption only applies if she files bankruptcy. If she doesn't file bankruptcy, then what is exempt in her IRA depends on state law, which is all over the board, from fully exempt to not exempt at all.

If she doesn't file bankruptcy, the only way to know what is exempt is to consult the law of her state. For example, Minnesota has a $250,000 homestead exemption. Florida has an unlimited exemption. Wisconsin has a $40,000 exemption. There are even a couple of states that have no homestead exemption.

Putting assets in a trust to protect them from creditors is a strategy that may or may not work. First of all, the trust better be created before there is a creditor claim or the creation of the trust may be considered a fraudulent transfer. If a person is the beneficiary of a spendthrift trust that was created by someone else, then the trust assets are probably safe. If a person forms their own revocable trust, the assets probably are not safe from creditors. If you form an irrevocable "asset protection trust" in a state that offers such a trust, then the answer is maybe yes, maybe no. These trusts are put in place to try to safeguard assets from creditor claims, as well as an estate planning tool. An amendment to the bankruptcy code was proposed to specifically deny protection of these trust assets in bankruptcy. The amendment was defeated. By defeat of the amendment, I suppose you could argue that Congress was indicating its intent not to include in the debtor's bankruptcy estate the beneficial interest in a properly formed domestic asset protection trust.

However, I see nothing to indicate that the trust would be protected from a bankruptcy trustee's claim that the trust was a fraudulent transfer. I also think that a trustee in bankruptcy could easily argue that a trust reserving excessive control to the debtor (or arguably any control) is property of the bankruptcy estate which could be liquidated to pay creditor claims.

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Re: What's The Best Way To Hide/Protect Assets
Old 03-19-2006, 08:51 AM   #4
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Re: What's The Best Way To Hide/Protect Assets

I missed the part of your question about whether the spouse of the sued person might have their assets at risk. Again, a complicated question. If you live in a community property state liability is possible, but not certain. If you live in a state like Minnesota which does not have community property, your assets and your share of joint assets would not be subject to creditor claims unless the claim was for "necessities of life." For example, if your wife ran up a big credit card bill for junk, for a card only in her name, and she didn't pay it and got sued, only her non-exempt assets could be taken to pay the bill and only her wages garnished. If the asset was jointly owned with you, then the asset could be sold, the creditor gets your wife's share and you get your share. On the other hand, if your wife was in Wisconsin, arguably both your assets could be taken to pay the credit card bill and both your wages garnished. Blah blah. There are many exceptions to these general principles.

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Re: What's The Best Way To Hide/Protect Assets
Old 03-19-2006, 09:06 AM   #5
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Re: What's The Best Way To Hide/Protect Assets

One more anwer. The UGMA and 529 plan. I assume these would be in the children's names. Therefore there are not your wife's assets, so they should not be taken to pay your wife's bills.

The exception: The transfer of your wife's assets into the UGMA/529 plan could be considered a fraudulent transfer. If it is done because your wife was being sued, then it looks fraudulent and could be undone. Also, transfers of assets without consideration which were made within a certain time period before a creditor makes a claim may be also undone as fraudulent transfers. For example, Minnesota and many other states have a 6 year lookback period for transfers without fair consideration.

EDIT: This reminds me of a potential client I had once. The person came in the file bankruptcy. He had a very lovely and expensive Steinway piano. I told him that it would not be exempt from creditor claims. He asked me "what if it was my child's piano"? I said that it wasn't his child's piano so it doesn't matter. He went away and ended up filing bankruptcy with a guy down the street. I looked at the bankruptcy petition--no piano.
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Re: What's The Best Way To Hide/Protect Assets
Old 03-19-2006, 11:25 AM   #6
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Re: What's The Best Way To Hide/Protect Assets


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Re: What's The Best Way To Hide/Protect Assets
Old 03-19-2006, 12:19 PM   #7
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Re: What's The Best Way To Hide/Protect Assets

Quote:
Originally Posted by Martha
The UGMA and 529 plan.* I assume these would be in the children's names.* Therefore there are* not your wife's assets, so they should not be taken to pay your wife's bills.
I thought 529 plans are never owned by the child.* The child would only be the beneficiary.

One of the parents would own the 529 plan for the child and have control.

I know the UGMA is an irrevocable gift to the child.
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Re: What's The Best Way To Hide/Protect Assets
Old 03-19-2006, 02:23 PM   #8
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Re: What's The Best Way To Hide/Protect Assets

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Re: What's The Best Way To Hide/Protect Assets
Old 03-20-2006, 08:06 AM   #9
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Re: What's The Best Way To Hide/Protect Assets

Right on the correction on the 529 plan. The 529 plan may or may not be protected from creditors. Since I am not practing much in this area anymore, I have not run into the situation where I would be interested in chasing done a 529 plan's assets.

EDIT: I checked. Whether a 529 plan is protected from creditors is a matter of state law. Many states seem to have passed laws that prohibit creditors from seizing money in a 529 plan. Issues will come from situations where the 529 plan was established in one state and you live in another. What state's laws will govern? Who knows.

Dantien, I assume a claim is being made against the PM who didn't do their job?

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Re: What's The Best Way To Hide/Protect Assets
Old 03-20-2006, 08:38 AM   #10
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Re: What's The Best Way To Hide/Protect Assets

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Re: What's The Best Way To Hide/Protect Assets
Old 03-20-2006, 11:28 AM   #11
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Re: What's The Best Way To Hide/Protect Assets

I'm making pancakes right now just in case we all get hypothetically called.
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Re: What's The Best Way To Hide/Protect Assets
Old 03-20-2006, 11:37 AM   #12
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Re: What's The Best Way To Hide/Protect Assets

We will all show up with bells on our toes and pancakes on our heads.
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Re: What's The Best Way To Hide/Protect Assets
Old 03-20-2006, 01:13 PM   #13
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Re: What's The Best Way To Hide/Protect Assets

I can think of no way to better establish credibility as witnesses...
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Re: What's The Best Way To Hide/Protect Assets
Old 03-20-2006, 03:24 PM   #14
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Re: What's The Best Way To Hide/Protect Assets

You could always get cash. Stuff the cash in your matress or use it to buy gold bullion. Bury the gold in the Nevada desert. Move and leave no forwarding address. Just kidding...
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Re: What Assets Are At Risk When Trustee Is Sued?
Old 03-20-2006, 06:08 PM   #15
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Re: What Assets Are At Risk When Trustee Is Sued?

This has sure trailed of to oblivion.
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Re: What Assets Are At Risk When Trustee Is Sued?
Old 03-20-2006, 06:10 PM   #16
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Re: What Assets Are At Risk When Trustee Is Sued?

How unusual and unexpected!
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