Ethan R. Okura
Hawai‘i Herald Columnist
As you probably know, the United States is one of the most litigious countries in the world, with more people suing each other than almost anywhere else in the world. There is one lawyer for every 252 citizens in the U.S., as compared to only one lawyer for every 3,484 citizens in Japan — a huge disparity. As a result, more and more people are concerned about structuring their business and financial affairs to protect their assets from frivolous lawsuits.
Asset protection is a necessary and growing component of 21st century estate planning. In the not-too-distant past, a power of attorney, a will and a revocable trust were sufficient for most people; only doctors and wealthy business people were concerned about protecting their assets. Nowadays, however, whether it’s due to the threat of lawsuits or the threat of nursing home costs, proper modern estate planning incorporates a variety of additional techniques to protect a client’s assets. Oftentimes, these techniques involve transferring assets away to family members, to irrevocable trusts and/or to business entities, such as limited liability companies.
Our regular readers are probably familiar with the five-year lookback period, which applies to assets transferred before applying for Medicaid for nursing home costs. The transfer of assets during that period without adequate compensation can result in a penalty before qualifying for Medicaid.
However, there is another law that can affect the safety of your assets even after you have transferred them out of your name to your family members, a business entity or to an irrevocable trust. It is the Uniform Fraudulent Transfer Act found in Hawai‘i Revised Statutes Chapter 651C.
Normally, we think of criminal fraud when we hear the word “fraudulent.” That isn’t necessarily the case with fraudulent transfers. This law is designed to protect creditors in a situation in which a debtor gives away assets for less than fair market value in order to avoid paying off debts owed to creditors. When the creditor files a lawsuit against the debtor, they can usually “claw back” any assets that were given away as fraudulent transfers one year (or, in some cases, four years, and sometimes even longer) before the time of the lawsuit.
It’s hard to prove actual fraudulent intent by the debtor, so the courts have developed a test that looks for “badges,” or signs of fraud. The more badges present, the more likely the court will find the transfer to have been a fraudulent one, undo it by taking it back from the recipient and then use it to pay off the creditor. These are some of the main “badges” of fraud:
• The transfer was to an insider;
• The debtor kept possession of the property after transferring legal title;
• The transfer was concealed rather than disclosed;
• The debtor was sued or threatened with a lawsuit before the transfer;
• The transfer was substantially all of the debtor’s assets; and/or
• The debtor was insolvent at the time of, or shortly after, the transfer.
In 2014, the Hawai‘i Supreme Court decided in Schmidt vs. HSC Inc. that the one-year statute of limitations on some fraudulent transfers does not begin until the creditor not only knows about the transfer, but also knows that it was fraudulent! In other words, it is not enough that the creditor knew that the transfer happened to start the statute of limitations — the creditor must also have known or had reason to believe the transfer was fraudulent in order to start the one-year clock ticking.
However, in some cases, the court can look back much farther than the statutory one (or, for some transfers, four years). For example, in the Florida bankruptcy case re: Donald Jerome Kipnis (case number 1:14-bk-11370), the court decided that if one of the creditors is the IRS, then the 10-year statute of limitations (“claw back” period) allowed under IRC Section 6502(a)(1) applies to transfers made by debtors. This makes it much harder to plan ahead to protect assets if one of the future creditors might be the IRS. (And, let’s face it, when people run into financial trouble and can’t pay their creditors, the IRS is usually one of them.)
All of this underscores the main point: You must do asset protection planning well in advance — before a claim ever arises from a creditor. Unfortunately, most clients come to seek legal advice for asset protection after they learn of a lawsuit or a creditor claim. Once you’ve incurred a liability, been sued for malpractice, caused a car accident or become unable to pay your debts, it might be too late. If you have been thinking about asset protection, you really should consult with an expert sooner than later — and that means now!
© OKURA & ASSOCIATES, 2017
Honolulu Office (808) 593-8885
Hilo Office (808) 935-3344
Ethan R. Okura received his doctor of jurisprudence degree from Columbia University in 2002. He specializes in estate planning to protect assets from nursing home costs, probate, estate taxes and creditors.
This written advice was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax practice.)
This column is for general information only. The facts of your case may change the advice given. Do not rely on the information in this column without consulting an estate planning specialist.
See more articles by Ethan by visiting https://okuralaw.com/blog/