ASSET PROTECTION ISSUE:
Does simply creating an Asset Protection plan (and stating such) expose the Settlor to a fraudulent conveyance claim in California?
In 2000 Stillman, who was a soil engineer rendered services through a pool company to Kilker in the process of building their pool. Thereafter in 2004 Stillman set up a series of Domestic Asset Protection Trusts using Nevada as a jurisdiction. In 2008 the pool cracked and Stillman was in turn found liable for approximately $92K in damages. He attempted to use the Trusts to protect the equity in real property held by the trust.
At trial Stillman testified that the primary purpose of these trusts was to protect his assets since “soil engineers frequently get sued”. The court found that under the California Uniform Fraudulent Transfer Act (CUFTA) the transfer would be considered a fraudulent conveyance. This was true even though at the time of the funding of the Trust there was no claim made against the Settlor. The court analyzed present and future creditors and found that the Kilkers were “reasonable foreseeable” as creditors. This reasonably foreseeable thus qualified them as “creditors” for the court and hence protected under CUFTA – at least in California.
The case was appealed and the appellate court affirmed the trial courts ruling on the fraudulent transfer issue.
LINK TO CASE DOCKET: https://www.leagle.com/decision/In%20CACO%2020121126043
ASSET PROTECTION SUMMARY:
This case is yet another stellar example of why Domestic Asset Protection Trusts should not be relied upon in a true attack. While this ruling is limited to California, there is no doubt that it sets a major precedent and may tempt other courts to utilize this rationale to reach a desired result. This is a court stretching to achieve both a result and set a precedent which is designed to weaken asset protection in any form in California. It highlights the tension within and between the states and between the plaintiff’s attorneys and judges, who would like unfettered access to assets, and clients who would like to be allowed to take reasonable steps to protect their hard earned assets, especially from reasonably foreseeable creditors.
One take away would be to state reasons for the planning other than asset protection. However, it is doubtful that this is really going to be dispositive to a court. Asset protection plans have clear markers and whether you state or do not state asset protection as a reason for the plan, it is obvious when it is – especially if you use a jurisdiction with a specific statute which allows for such – domestic or foreign.
The real take away is – don’t rely on a fully Domestic Asset Protection Trust. Utilizing the U.S. as a jurisdiction for planning is both necessary and reasonable, but when push comes to shove, your planning must have the capacity to be fully foreign under the laws of a jurisdiction who is not beholden to any U.S. judgments or court orders. Further is you have real property, you will need to have a plan for stripping the equity out of the property or a willingness to sell the property to trust protect the equity. In either case you must have a place for that money to go which is both legal and safe from a U.S. court.