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Why Trusts Don’t Work For Asset Protection

A trust is the right to the beneficial enjoyment of property over which another person has legal title; a property interest held by one person (the trustee) at the request of another (the settlor) for the benefit of another (the beneficiary). Trusts have different names depending on their purpose, that is, land trusts, charitable remnant trusts, irrevocable trusts, etc.

Trusts are usually promoted by attorneys or non-attorneys who work under their supervision. Two-hour seminars are being held in small hotels across the country promoting the use of Family Trusts and Corporations for “maximum asset protection.” In law school, there is a class called Trusts, which is why many attorneys think (wrongly) that this is the best entity available for privacy and asset protection. Although they may have some value for estate planning purposes, they are absolutely useless as vehicles for asset protection. The problem is this: Any entity or visible asset can be attacked by private attorneys at the very least or, in the worst case, instantly seized by a federal judge.

Let me give you a real life example to demonstrate the pitfalls of trusts. In the 1990s, Stephen Hilbert was the top-flight CEO of Conseco, Inc., the insurance and financial services giant. He had it all, a 33-acre walled Indiana property, the racehorses in Kentucky, and the 18,500-square-foot vacation home on St. Martin in the Caribbean. When all was well at the height of the bull market in the 1990s, Mr. Hilbert, with the consent of his Board of Directors, borrowed more than $ 175 million to recharge his company’s stock. Your company guaranteed most of these loans.

Things began to unravel when Conseco agreed to acquire Green Tree Financial Corp, a Minneapolis mobile home builder for $ 6.4 billion in stock in 1998. The mobile home market and Conseco’s stock plunged rapidly, losing 90% of its share. its value. The Board of Directors forced Hilbert to retire in 2000 and gave him until the end of 2003 to repay at least part of his loan package. He paid around $ 7 million and then stopped paying altogether. His silk stocking attorneys advised him to form a series of trusts to “protect his assets” from any potential collection lawsuits from his former company. They suggested that he appoint his wife as Trustee to control the assets in the Trusts. They charged him several hundred thousand dollars for this prophetic advice.

Divorced five times, Mr. Hilbert had no wife, so he quickly married the stripper who appeared at his adult son’s bachelor party. His name is Tomisue. (In Las Vegas, any woman with two names is supposed to be in the adult business, but let’s not get malicious.)

Tomisue became the Trustee of several Family Trusts and named his minor children as beneficiaries. From 2001 to 2003, Mr. Hilbert transferred more than $ 100 million in assets to his wife individually and to trusts controlled by her. Conseco’s lawyers were not amused. They filed a lawsuit against Hilbert, Tomisue and their two minor children to recover the unpaid portion of the loans. The lawsuit alleged that Mr. Hilbert fraudulently transferred assets to his wife and her trusts to “avoid paying” his creditors. He sought to reverse those transfers and foreclose on his primary residence. They named their two minor children as defendants “solely because they have beneficial interests” under a family trust called the Hilber Residence Trust. In response to the lawsuit, Mr. Hilbert lamented: “I feel that what they did to me and my family – suing my 9-year-old son, suing my 13-year-old son – was simply an attempt to intimidate me.” (Do you think your lawyers advised you of this possibility?)

Conseco hired a tight-fisted collection attorney, Mr. Oslan, to assist with their collection efforts against the Hilberts. Mr. Oslan stated quite naturally: “Our opinion is that either they are fraudulent transfers, or Hilbert maintains enough control over the assets that they are not true transfers. She (Tomisue) is not free to do with the assets what she sees fit. He’s in control. Trusts are a sham. “

Where are Mr. Hilbert’s lawyers during this mess? They are smiling all the way to the bank! First they sold Hilbert the Trusts for hundreds of thousands of dollars (and the idea that they would provide asset protection) and then charged thousands more each month to defend him, Tomisue, the Trusts, and their children. His double immersion is completely ethical.

The outcome of this litigation has not been resolved. Mr. Hilbert has voluntarily transferred some of his assets to the plaintiff like an olive branch to try to resolve the matter to no avail. Mr. Oslan is working contingently and knows there is more meat left on this bone, so he is going through the courts in hopes of having more meat under his nails. And Mr. Hilbert continues to pay his attorneys to defend themselves.

The point is this: both trusts and family limited partnerships are visible, generally both employ family members, and can be attacked by private attorneys like Mr. Oslan or directly seized by any federal judge. When I was a collection attorney, I was always suing Trusts, Trustee, Beneficiaries, spouses, family members, children, babies, everyone. I wasn’t always successful in convincing a judge to annul the Trust or set aside all transfers, but at least I usually got a major settlement. With any litigation, a Defendant has to gauge what he is spending in attorney fees to defend a claim against what he can pay the Plaintiff to end the litigation (and the pain). It is a purely economic decision. The facts and the merits of the case are irrelevant.

For these reasons, we advise our clients that to protect their assets you must have complete financial privacy and that you should never use family members as part of an asset protection strategy. Trusts and family limited partnerships violate both principles.

(C) 2006 William S. Reed, JD

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