Asset Protection Is Key To The Estate Plan: AALU Panelists

What factors do bankruptcy judges weigh when determining whether gifted assets escape claims by creditors? How much creditor protection is afforded life insurance policies? Which states are most favorable to property owners and IRA account holders facing bankruptcy?

Answers to these questions, and more, were provided during an afternoon session of the Association for Advanced Life Underwriting, held here earlier this month. Titled “Incorporating Asset Protection in Your Estate and Financial Plan,” the session offered a checklist of creditor protection techniques that should be reviewed with clients during the planning process.

On one point, the panelists were emphatic: trying to shield assets through the use of stealth, trickery or deception is near-certain to backfire.

“Attempting to hide assets from creditors generally is not successful,” said Jeffrey Jenei, an assistant vice president for advanced markets at MetLife, New York. “If you move assets to a separate jurisdiction, or sell assets at below market value, the court will invalidate the transfer. The court may also hold the client in contempt of court if the transfer is especially egregious.”

Jenei added that courts will look at a range of factors–the amount of money being gifted or transferred, the client’s net worth and how much money remains in an estate to satisfy creditor claims–when deciding whether a client intended to conceal assets and defraud creditors. If, after gifting $1 million to children, the client has $5 million in liquid assets with which to satisfy a $1 million judgment, then the court would tend to rule the gift in the client’s favor, he said.

Courts will also review the client’s history of wealth transfers when determining intent to conceal, said Jenei. When, for example, a doctor makes an uncharacteristically large transfer of assets to a child soon after being sued by a patient for malpractice, then the court would likely view the gift with suspicion. But if the doctor can show a history of making such transfers, then amounts shifted subsequent to a lawsuit would probably be upheld.

A court would also be predisposed to rule favorably if the client sets up an offshore creditor protection trust as part of a well-documented estate plan. Jenei added that asset protection planning should always be incorporated into the estate plan so as to secure the court’s blessing and avoid run-ins with fraudulent transfer rules.

Kenneth Cymbal, a chartered life underwriter at Met Life, said the level of creditor protection offered on life insurance policies varies by state. While most states protect the death benefit, only some states fully insulate the cash value from creditor claims.

Similarly, he added, whereas death benefits of personal policies are protected for a surviving spouse and children, beneficiaries might not have first claim to the proceeds in cases involving businesses. Example: Two policies used to fund a cross-purchase, buy-sell agreement between owners A and B, wherein A owns a policy on B’s life, and vice-versa.