California Court Throws Out Case Against Our Trust – Client Very Satisfied

Posted by McCullough

On June 19, 2012, the Superior Court for the State of California for the County of Los Angeles sustained our motion to dismiss a lawsuit by Wilmington Capital LLC against The Big Whale Trust (an irrevocable trust created by McCullough).

The grantor had funded the trust with cash and real estate prior to the time the liability was incurrred. The grantor’s spouse and children were the trustees and beneficiaries of the trust. The trustees had made several distributions to the grantor’s spouse, but the grantor was not a beneficiary and the grantor had personally received no benefits from the trust.

Wilmington Capital LLC sued the trust because it had been unable to collect against the grantor and the grantor’s spouse. Wilmington Capital LLC had no evidence to claim that the trust was invalid, that the transfers to the trust were fraudulent, or that the grantor was the alter ego of the trust. Wilmington Capital LLC argued that they should have access to the trust because the grantor had retained a special power of appointment over the trust.

Because California law protects the assets of an irrevocable non self-settled discretionary trust (even when the grantor retains a special power of appointment), our client was able to have the case summarily dismissed without incurring significant legal fees.

The Big Whale Trust is a perfect illustration of the best way to create, fund and operate an asset protection trust. Copies of the court pleadings (including our Memorandum of Points and Authorities) are available upon request.

Bankruptcy Court – Our Trust Protects Client’s Home and Trust Assets

Posted by McCullough

In 2009, our client, Todd H., transferred his home and some cash to one of our carefully drafted irrevocable trusts at a time when they were solvent and had no foreseeable liability problems. Todd’s wife was the trustee, and his wife and children were the beneficiaries. In 2010, Todd’s business went downhill along with the rest of the US economy. In 2011, Todd’s small business went bankrupt and he was also forced into personal bankruptcy. The transfer of the home to the trust was fully disclosed to the bankruptcy court, but the bankruptcy court excluded the trust and its assets pursuant to the federal bankruptcy code which provides that this type of trust is excluded from the bankruptcy estate. After losing everything else they owned in the bankruptcy, Todd’s family continues to live in the paid-off home that is owned by the trust.

Asset Protection Test Case

Posted by McCullough

I had a client named Bill who was a wealthy physician. In 2003, he created a 541 Trust® for his wife Jenny and their four children.

He put $2,000,000 into the 541 Trust® where it was invested in income producing real estate. In 2005, Bill died. In 2007, Jenny married a successful real estate developer named Paul. Paul needed a loan for a large project and the bank required both Paul and Jenny to guarantee the loan. When the real estate market crashed in 2008 and 2009, the project failed. The bank sued Paul and Jenny on their personal guaranty. Paul and Jenny were both forced into bankruptcy. The bankruptcy court declared that the 541 Trust® was not includible in the bankruptcy estate and that the creditors have no claim on the 541 Trust®. The 541 Trust® is now Jenny’s only source of income. The income and principal of the 541 Trust® is available to Jenny, but protected from her creditors or from a divorce. When Jenny dies, the assets will be held for her children for life and they will receive the same asset protection.

Asset Protection for Doctors

Posted by McCullough

Doctors have several unique characteristics that require specialized asset protection planning. First, doctors cannot take advantage of the corporate shield that protects other business owners from the liabilities of their business. In all fifty states, doctors are personally liable for malpractice claims regardless of whether their practice is operated within a corporation. Second, malpractice insurance for many doctors is prohibitively expensive. Many doctors choose to underinsure or even go without malpractice insurance due to the outrageous expense. Third, a doctor’s most valuable assets often consist of accounts receivable and future earnings which are more difficult to protect than a current asset.

Because doctors have unique needs, they need a unique solution. The best solution for a doctor consists of the following entities: (1) a professional corporation (taxed as an S corporation) to operate the medical practice, (2) a 541 Trust® to remove assets from the doctor’s personal ownership, (3) a Delaware LLC that is owned by the 541 Trust to own cash and other investments, and (4) an effective equity stripping plan that allows the Delaware LLC to put an enforceable lien on the doctor’s home, accounts receivable and other assets which are personally held by the doctor. If you would like a diagram and detailed explanation of this plan, send me an email at lee@lsmlaw.net.

The purpose of the professional corporation is to save money on employment taxes and keep the employees and other non-malpractice liabilities separate from the doctor and his assets. The purpose of the 541 Trust is to remove assets from the doctor’s personal ownership so they cannot be discovered or attached in a lawsuit or other legal proceeding. The purpose of the Delaware LLC is to own and manage cash or other liquid assets. The purpose of the equity stripping plan is to ensure that the doctor’s home and accounts receivable cannot be attached by a third party.

This plan is simple to implement, easy to maintain, and impervious to attack if it is implemented in advance of a problem. However, individual circumstances require individual plan design and this site should not be construed to create an attorney-client relationship or provide legal advice for any particular situation. If you would like to discuss your situation, please give me a call.