Austin, Texas Asset Protection Attorney
There is an old cliché in the insurance industry that says "You can only buy insurance when you don't need it". In regards to asset protection estate planning (APEP), the best time to get it accomplished is "when you don't need it". But what if you've procrastinated and suddenly you get a letter from a lawyer asking for your medical records for that patient who had less than stellar results from your medical services? Is it now too late to consider an APEP?
This article will explore the problems and possible solutions that confront the procrastinator who knew he or she should have accomplished an APEP but never got around to it until the request for medical records arrived.
The Texas Uniform Fraudulent Transfer Act (TUFTA) says that if a debtor transfers assets to hinder or delay existing or known future creditors, and after the transfer the debtor has insufficient assets to pay his debts, any creditor can have the transfers set aside and recover the assets from the persons or entities to whom assets were transferred. The statute also contains an extinguishment period after which transfers which are considered old and cold cannot be set aside. The basic extinguishment period is the greater of 4 years from the date of transfer or 1 year from the date a creditor could have discovered the transfers. TUFTA, however, will not allow unknown possible future creditors to set aside transfers made prior to their becoming actual creditors. One cannot defraud a creditor or potential creditor who does not exist at the time of the transfers.
While it takes 4 years for the concrete walls of an APEP to cure as to existing and known future creditors, the curing process for unknown, non-existing future creditors is immediate. In other words, if you have no knowledge of any pending or threatened claims today and you create an APEP today and get sued tomorrow, TUFTA does not matter … no 4-year waiting period. Therefore, the sooner an APEP is accomplished, the better.
If you have not created an APEP and then you are sued, what can be done at this midnight hour?
- Make an assessment of the worst-case dollar amount of liability.
- Determine if your liability insurance will cover this amount.
- If your liability insurance will not cover this amount, you will need to set aside some assets to cover the liability. You'll just have to accept the fact that since you chose to procrastinate, you won't be able to protect it all.
- Immediately create an APEP with the balance of your assets through a competent and experienced APEP lawyer.
- Consider paying down your mortgage on your principle residence or what the Texas constitution refers to as your homestead. Texas law exempts the homestead from most creditors (see previous article). Most creditors are prohibited from placing liens upon or attempting to foreclose on a homestead. Texas courts have held that the conversion of non-exempt assets like cash or investments to purchase a homestead or to pay off a valid lien on the homestead is not a fraudulent transfer.
- Because you have procrastinated, the following techniques may or may not work, but bear in mind that you have limited options:
- Establish a family limited partnership and transfer assets to it in exchange for partnership interest. TUFTA excludes transfers for full and adequate consideration. An argument can be made that the exchange of assets for partnership interest is full and adequate consideration.
- Establish an offshore trust. By placing assets offshore you can put them out of the reach of the Texas courts. However, a recent debtor by the name of Anderson tried using these offshore techniques after being sued and a U.S. court put them in jail for contempt when they refused to bring the assets back into the country. They sat in jail for several months until the court finally gave up. So if you have staying power you could outlast the court, but don't count on it.
- Purchase a cash value life insurance policy or an annuity. Section 21.22 of the Texas Insurance Code exempts cash value life insurance and annuities policies. But Section 22.21 contains its own fraudulent transfer provisions.
- Contribute to your qualified retirement plan or an IRA. As long as the contribution is within the normal contribution limits, an argument can be made that there was no intent to defraud creditors.
- Factor your accounts receivable and use the cash to pay down your homestead mortgage. The difficulty here is finding a factor that will buy your accounts receivable due to the uncertainty of amount of payment by third payers.
Procrastination limits your planning options, can result in losing your nest egg and affects your health during the stress of a lawsuit. By preplanning you can protect more of your wealth with much more certainty. So even though this article is about last minute planning techniques, it is much better to accomplish good planning sooner instead of latter.
The TMAIT has assembled a statewide network of competent and experienced attorneys who focus on APEPs. Not all APEPs are created equal and not all APEP lawyers have equal abilities, creativity and experience. This is an area of legal practice where the old cliché "You get what you pay for" is very applicable. Similar to how it is important to buy insurance that insures, it is even more important for you to acquire an APEP that assures you, your loved ones and your fortune the best protection.
Guest Author and member of the TMAIT Attorney Network: Peter J. Parenti, has his law office located a 300 Convent St., Suite 2500, in San Antonio, Tx. 78205-3716. His phone number (210) 220-1333. He is board certified in Tax Law, Estate Planning and Probate Law by the Texas Board of Legal Specialization. He was one of the first lawyers in the state of Texas to create APEPs for his clients.
Ken H. Vanway is the lead attorney for the TMAIT Attorney Network. He is Board Certified in Estate Planning and Probate Law. His firm practices in many areas of estate planning and lawsuit protection including Wills, Domestic Trusts, Offshore Trusts, Incorporations, and Family Partnerships.