Asset Protection Shysters

By Marc Fox
December 18, 2015
Comments Off on Asset Protection Shysters

This web page directly addresses the seedy side of the asset protection industry, including those people who run scams in the guise of providing asset protection structures, or who mislead people about their organization or qualifications, or who themselves are unqualified and/or misguided to assist clients with asset protection issues.

The Crooked

Pure Trust Scam
a/k/a Constitutional Trusts,
Common Law Trust Organizations

The most widespread asset protection scam is the Pure Trust scam, which involves a non-existing form of trust and – in attempt to keep one step ahead of law enforcement – goes by a variety of aliases, including Constitutional Trust, Patriot Trust, Common Law Trust, Business Trust, Common Law Trust Organization (COLATO), Foreign Common Law Trust Organization (FOCOLATO), and a bunch of other names

While the scam artists who push these have a lot of neat-sounding reasons why they should defeat creditors, the truth is that Pure Trusts are easily blown up by creditors under a bunch of theories, including that they are “self-settled spendthrift trusts” (expressly disallowed by all but a couple of states), that they have an illegal purpose (tax evasion), that they are a sham, that transfers to the trusts are fraudulent conveyances, and a bunch of other reasons.

Pure Trusts are often part of a three-tier trust structure, which purport to hide the existence of the trust (and also make the structure tax free). In reality, it doesn’t do anything except make it seem like the structure is worth the cost (it isn’t).

On top of everything else, the IRS goes after Pure Trusts like the proverbial heat-seeking missle, because the IRS has never lost a case against the Pure Trust and knows that it can easily grab the assets to satisfy the taxes, interests, and usually heavy penalties which are awarded by the court (using a Pure Trust really is like waiving a red blanket at a mad bull – while your feet are stuck in concrete; something very bad is bound to happen and usually does).

We could talk all day about this scam, but this gives you a flavor of how they work: http://www.quatloos.com/taxscams/contrusts.htm

Asset Protection Consultants Scam

A new scam being marketed is the “Asset Protection Consultant”. Basically, you pay thousands of dollars for some rudimentary information worth maybe $12 which talks about the benefits of Nevada corporations. You then launch yourself as the “Advisor to the Stars”, never mind that your lack of a law license will both subject you to criminal penalties for the Unlicensed Practice of Law (UPL) as well blow the attorney-client privilege for whatever your client says to you or whatever information they give you.

Then, you charge your clients thousands of dollars to set up Nevada corporations that could be set up for a couple of hundred bucks, tops. You tell your clients that these are “foolproof” structures, and that creditors will be thwarted by the “Bearer Shares”, even though ownership can be imputed even when the bearer shares can’t be found, and Nevada law probably doesn’t even apply when the person and their assets are in another state.

Then, you have to hire your own lawyer when: (1) the tax bill for the entity comes due, and you didn’t know how to advise your client about how to correctly structure and fund these entities; or (2)  your client actually gets sued by a creditor, who adds you as a co-defendant on a civil conspiracy claim, or, worse, your client gets sued by the U.S. government who then files money laundering charges against you.

And you get all this for just a few thousand bucks? Shrewd, shrewd. But, hey, even when you blow up you can be comforted in the knowledge that you paid for all of this stuff in advance, and whoever sold you this stuff is gone, long gone.

Asset Protection Seminars & Materials

Lot’s of good planners give “asset protection” seminars – we hold “The Summit” once per year, and various other respected asset protection planners give seminars.

Unfortunately, we are in the minority. You see, the planners doing the best work are actually working for their clients, and don’t have time to be out on the seminar circuit. I’ve pretty much limited my appearances to a half-dozen or less times per year (frankly, I’d rather be out on the boat or up in the mountains), and most of the best planners try to limit themselves to a dozen or so appearances per year.

So mostly who you see giving the asset protection seminars are the dregs of the sector, being people who make their money either giving expensive seminars ($1,500 or more per person – real value $300), or giving ultra-cheap seminars ($15 per person) where they sell nearly worthless books and other materials, partnership forms and trust forms, etc., for many thousands of dollars (like $2,500 for a “do it yourself asset protection kit”).

If you go to one of the cheapie seminars, when they announce that they are selling materials at the back of the room, you’ll see about 20 people jump up out of their seats and rush back there, checkbook in hand. Don’t be fooled; most of these people are “shills” who are paid by the seminar promoters to run to the back to make it look like there is a great interest in the worthless materials being sold (your invitation to “join the herd” – Las Vegas casinos are notorious for using shills to encourage people to bet and to make bigger bets than they should be making). Just remember that if 20 people run to the back of the room to purchase a set of materials for $1,800 yours might be the only check actually cashed.

The Misleading

“Institutes” Concerning Asset Protection

There are no “Institutes” where learned scholars sit around daily discussing asset protection issues. What you have instead are a bunch of marketers who put together the “Institute” to give this impression, but is really just the marketer trying to create a herd mentality for you to send them clients.

Is this practice illegal? No. Is it misleading? Can be, and often is.

Various Books on Offshore Trusts

Wanna know about offshore trusts and so-called “Foreign Asset Protection Trusts”? You’re in luck, as there are a lot of books readily available for your casual perusal. Yessir, books (and even do-it-yourself kits) on offshore trusts are all the rage. Seems like everybody and their dog has written one book or another extolling the virtues of offshore trusts.

Unfortunately, as I chronicle elsewhere, offshore trusts are a bottom-tier asset protection solution, falling into the Dissociation Methodology (“It’s Not Mine Because I Gave It Away”). And they have been blown up in a major sort of way in several federal court opinions. Unless you are interested in the (nominal) federal gift and estate tax benefits of offshore trusts, there’s a good chance that forming one of these entities could put you into a worse situation than if you hadn’t done anything at all.

The problem is that books sales mean dinero, and even though the law has changed, nobody is rushing to pull their books from the shelves to talk about how the main focus of their books is now walking the legal plank into the Abyss of Failed Strategies.

You might be interested to know that many of these books are “ghostwritten” by somebody else — I know because I have had other planners ask me to ghostwrite their books for them, and though I refused, I didn’t fail to notice that their books were still later published (and basically were a re-hash of somebody else’s book; you’ll find that there is a real shortage of original ideas out there, especially amongst the offshore trust crowd).

The Unqualified and/or Misguided

Accountants

A recent phenomenon is the entry of accountants into the asset protection planning sector. They are not only totally unqualified to engage in this sort of planning, but for reasons I will discuss their planning will often put you into much worse shape than if you had done nothing at all.

Fundamentally, if you really think about it, asset protection is “Pre-Litigation Planning,” i.e., doing things in anticipation of going to court and standing in front of a hostile judge with determined creditor’s counsel making arguments about how to get at assets. This requires knowledge and experience in the areas of debtor-creditor law, commercial law, civil procedure, conflicts of law, judgments & remedies, bankruptcy, etc.

Note that “tax” isn’t included in the foregoing. The only time that tax law is implicated in asset protection planning is in figuring out the tax treatment of certain transactions – but basically tax has nothing to do with asset protection planning, except that you don’t want to make a tax error while you are doing the planning.

Another way to say this is that you don’t let the anesthesiologist do the cutting.

What happens is that accountants have this terrible tendency to assume that because something is X for purposes of the Internal Revenue Code, that it must be X for purposes of civil law also – but this simply isn’t the case. With regard to asset protection issues, there is often inconsistent treatment of situations between civil law and tax law, and this is where accountants most often get into trouble.

Unfortunately, accountants are also unaware of criminal laws, and assume that if something is permissible in the Internal Revenue Code, that it must be legal. Thus, in two of the landmark asset protection disasters, Lawrence and Brennan, the plans in each case were put together by the client’s accountant, who got the clients indicted for bankruptcy fraud and money laundering, and the accountants themselves were also indicted on a variety of theories. Ugly.

Unless an attorney is directly involved and retains the accountant, communications between a client and an accountant are not subject to attorney-client privilege. This means that anything the client and the accountant discuss will be known to creditors, creating evidence of actual intent to defraud creditors.

Finally, by law attorneys are privileged to assist clients with certain types of transactions, but accountants are not – meaning that if the transaction goes south, the accountant and the client may have created the additional liability of civil conspiracy, thus making the client potentially worse off than if he had not engaged in the planning at all.

I have personally found that in collection cases where an accountant did the planning, the first thing to do is to add the accountant as a co-defendant under a civil conspiracy theory. Since the accountants Errors & Omissions insurance doesn’t cover intentional torts like civil conspiracy, it creates a tremendous amount of leverage on them to assist in unraveling the debtor’s asset protection plan, in addition of course to creating another (usually easy) source of funds to collect.

[Some accountants believe that they have something like an attorney-client privilege with their clients. They don’t, but rather have a very weak privilege as to actions brought by the IRS for taxes only, i.e., the privilege does NOT apply in civil lawsuits, bankruptcy hearings, etc. Really, this doesn’t help you as the client at all.]

Estate Planners

Most Estate Planners, to the extent they are attorneys, are usually competent to create some very basic asset protection for the Client, such as maximizing homestead exemptions, structuring limited partnerships, etc.

Unfortunately, too many Estate Planners will go to a couple of “asset protection” seminars, and suddenly decide that ten hours of legal training can substitute for a litigator’s years of actually fighting creditors. They go hog-wild, and start setting up entities and offshore trusts with abandon, and throwing lots of language into documents to “intimidate” a creditor, and thus deter any lawsuits.

The asset protection plans created by Estate Planners seem to almost always have two major defects: First, they involve a lot of “gifting” transactions, which may be good from a federal gift or estate tax perspective, but are usually easy to set aside as Fraudulent Transfers; and, Second, their planning is usually too overt, meaning it is easy for a creditor’s attorney to go to the judge and show that there was actual intent to subvert the interests of creditors.

Some (attorney) Estate Planners are very good asset protection planners, but most aren’t – the key seems to be whether they do much business planning also.

So To Whom Do You Turn?

First, you want to engage a Licensed Attorney — this is the ONLY way that attorney-client privilege can attach to your communications, or that Work Product Immunity has a chance of applying to the documents that you produce to him, and that he drafts for you.

Second, you’ll want to find someone who is a real-world asset protection planner, and not just a member of some Institute (which only means that they part of somebody else’s referral network). Probably the best way to do this is to talk with one of the attorneys on the American Bar Association’s Asset Protection Planning Committee. While membership in the Committee is no guarantee of special competence — since any attorney who pays dues to the ABA can join — generally the “best and brightest” of the asset protection planners are on this Committee. See http://www.abanet.org/rppt/committees/pt/j3/home.html or contact us by e-mail to falc@falc.com and we’ll put you in touch with a member in your area.

Comments: 0

Comments are closed.