Why trusts don't work for asset protection

A trust is the right to effective enjoyment of assets over which another person has legal title; a property interest held by one person (the trustee) at the request of another (the settler) for the benefit of another (the beneficiary). Trusts go by different names depending on their purpose, i.e. land trusts, charitable remainder trusts, irrevocable trusts, etc.

Trusts are usually promoted by lawyers or non-lawyers working under their supervision. Two-hour seminars are held at small hotels across the country promoting the use of family limited partnerships and trusts for “ultimate asset protection.” In law school, there is a class called Trusts, which is why many lawyers 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 completely useless as vehicles for asset protection. The problem is this: any entity or property that is visible can be attacked by private attorneys at 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 high-flying CEO of Conseco, Inc., the insurance and financial services giant. He had it all, a 33-acre walled estate in Indiana, the racehorses in Kentucky, and the 18,500-square-foot vacation home in St. Martin in the Caribbean. When all was going 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 top up his company’s stock. His 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 out in 2000 and gave him until the end of 2003 to pay off at least part of his loan package. He paid about $7 million and then stopped paying altogether. His silk stocking lawyers advised her 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. He was charged several hundred thousand dollars for this prescient advice.

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

Tomisue became a trustee of various family trusts, naming his minor children as beneficiaries. From 2001 to 2003, Mr. Hilbert transferred more than $100 million in assets to her 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 claimed that Mr. Hilbert fraudulently transferred assets to his wife and his trusts to “avoid paying” his creditors. He tried to void those transfers and foreclose on his primary residence. His two minor children were named as defendants “solely because they have charitable interests” in a family trust called the Hilber Residence Trust. In response to the lawsuit, Mr. Hilbert lamented, “I feel like what they did to me and my family, suing my 9-year-old son, suing my 13-year-old son, was purely an attempt to intimidate me.” (Do you think his lawyers warned him of this possibility?)

Conseco brought in a tight-fisted collection lawyer, Mr. Oslan, to help with their collection efforts against the Hilberts. Mr. Oslan matter-of-factly stated, “Our view is either that these are fraudulent transfers or that 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 wants”. she sees the settings. She stays in control. Trusts are a sham.”

Where are Mr. Hilbert’s lawyers during this imbroglio? They smile all the way to the bank! First they sold Hilbert the Trusts for millions of thousands of dollars (and the idea that they would provide him with asset protection) and then they charge him thousands more each month to defend him, Tomisue, the Trusts and his children. His double dipping is completely ethical.

The outcome of this litigation has not been resolved. Mr. Hilbert has voluntarily relinquished some of his assets to Claimant as an olive branch to try to settle the matter to no avail. Mr. Oslan is working on a contingency basis and knows there is more meat left on this bone, so he is cruising the courts hoping to get more meat under his fingernails. And Mr. Hilbert continues to pay his lawyers to defend him.

The point is this: both family trusts and limited partnerships are visible, both typically employ family members, and can be targeted by private attorneys like Mr. Oslan or seized outright by any federal judge. When he was a collection attorney, he would always sue the trusts, the trustee, the beneficiaries, the spouses, the family members, the children, the babies, everyone. I wasn’t always successful in convincing a judge to void the trust or void all transfers, but at least I usually got a substantial settlement. With any litigation, a Defendant has to weigh what he is spending in attorneys’ fees to defend a lawsuit 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 your assets you must have complete financial privacy and never use family members as part of an asset protection strategy. Family trusts and limited partnerships violate both principles.

Vesounus.com

Why trusts don’t work for asset protection

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