Powell Trachtman Logan Carrle & Lombardo

Design Professional's Practice Bulletin

Volume 5, Number 1 — May 2001

This Bulletin addresses recent developments affecting Design Professionals as well as business concerns as important as the specific professional and technical issues they face.

Editors: Richard J. Davies and Neil P. Clain

Asset Protection Made Affordable

By Thomas J. Bogar, JD, LL.M.

In light of today's litigious environment and unprecedented jury awards, it is not hard to understand why more clients are interested in protecting their personal assets from lawsuits and creditors’ claims against them or their firms. In this environment, the protection provided by incorporation of the firm may not withstand attacks on the corporate veil separating corporate from personal assets. Corporate entities have had that veil pierced in this aggressive environment leaving the firm’s shareholders and principles personally liable for claims and losses attributable to the firm. Insurance alone is not always sufficient to protect against this possibility of personal liability: some risks may not be insurable; available insurance limits may be inadequate; the insurance carrier may become insolvent; or the insurance company may deny or limit coverage due to certain exclusions or policy limits.

In the past, clients wanting to obtain additional protection from such claims (while at the same time preserving the ability to draw on income and principal of their assets) would place their assets into an offshore asset protection trust. However, by doing so they ceded control of their assets to a foreign trustee located thousands of miles away on some island-country. In addition to lack of control, concerns for the stability of the island-country, high start-up costs, and onerous U.S. income tax reporting requirements have dampened the appeal of an offshore asset protection trust.

Now there is an alternative for clients who want asset protection. but who do not want “to go offshore”. Since 1997, Delaware’s Qualified Dispositions in Trust Act (“Act”) has offered an alternative domestic asset protection trust (“APT”) in which a client may protect his assets while, at the same time, retain the right to access income and principal. To qualify under the Act, the APT must first have a qualified trustee, who should be an individual Delaware resident or an entity authorized by Delaware law to serve as trustee, subject to supervision by the Delaware Bank Commissioner, FDIC, Office of Thrift Supervision, or Comptroller of Currency. The Act also requires that the trust be irrevocable, that it be governed by Delaware law as to its validity, construction and administration, that the APT have a spendthrift clause, and that administration and custody of some or all of the assets be in Delaware.

Of course, no protective device is completely invulnerable. Although the APT may satisfy the requirements of the Act, a disposition or transfer may still be defeated if the disposition falls under either of two Uniform Fraudulent Transfer Act exceptions: (1) the claim arose before the disposition in trust and the creditor can prove that the disposition was intended to be fraudulent, and the creditor brings the claim within four years from the disposition or, if later, within one year after the disposition is or reasonably could have been discovered; or (2) the claim arose after the disposition in trust and the creditor brings the claim within four years from the disposition. For either exception, the creditor bears the burden of proving his claim by clear and convincing evidence.

Those who should be interested in creating an APT include: professionals or similar service providers exposed to malpractice claims or other negligence claims; corporate officers or directors; and real estate developers and owners (especially those concerned about environmental claims).

Part of the Act’s appeal is that it bars original actions and actions to enforce judgments against personal assets unless first brought in the Delaware Chancery Court where the creditor can reach only the personal assets if the transfer of assets to the trust falls under either of the Uniform Fraudulent Transfer Act exceptions or under one of the public policy exceptions (a claim arising under either an agreement/court order for child support, alimony, or property division, or a claim resulting from death, personal injury or property damage which arose on or before the transfer into the APT).

Besides providing conventional asset protection, the APT can also be used in lieu of the traditional prenuptial agreement, or in some instances to avoid state capital gains taxes. The APT can also be created so that the transfer of assets is a completed gift so that the assets are not included in the client’s taxable estate (for clients wanting to remove assets from their taxable estate and still retain some pecuniary interest).

If you are interested in learning more about the Delaware Asset Protection Trust, or if you are not sure if the APT is right for you and would like your business plan and/or estate plans reviewed, please let us know.

Thomas J, Bogar holds an LL.M. in taxation and his practice is concentrated in sophisticated estate planning, trusts, estates and taxation. Prior to joining Powell Trachtman, Mr. Bogar was Trust Counsel for Wilmington Trust Company. Mr. Bogar can be reached at 610-354-9700 or tbogar@powelltrachtman.com.

This bulletin is intended for general information purposes only and does not constitute legal advice. The reader should consult with legal counsel to determine how laws, suggestions and illustrations apply to specific situations.