Why Trusts Don’t Work for Asset Protection

A trust is the right to enjoy property that is lawfully owned by another person; A property interest owned by a person (the trustee) at the request of another person (the settlor) in favor of another person (the beneficiary). Trusts have different names depending on their purpose, such as: land trusts, residual charitable trusts, irrevocable trusts, etc.

Trusts are usually promoted by attorneys or non-lawyers who work under their supervision. There are two-hour seminars conducted in small hotels across the country that promote the use of Trusts and Family Limited Partnerships for ‘final asset protection’. In law school, there is a class called Trusts, so many lawyers (mistakenly) believe this is the best entity available for privacy and asset protection. Although they may have some value for estate planning purposes, they are completely worthless as asset protection tools. The problem is that any visible entity or asset can be attacked by at least private attorneys or, in the worst case, immediately confiscated by a federal judge.

Let me give you a real-life example to prove the flaws of trust funds. In the 1990s, Stephen Hilbert served as CEO of Conseco, Inc. , the insurance and financial services giant. He had it all, a walled 33-acre Indiana ranch, racehorses in Kentucky, and an 18,500-square-foot vacation home in Saint Martin in the Caribbean. When all was going well at the height of the bull market in the 1990s, Mr. Hilbert, with the approval of his board of directors, borrowed more than $175 million to load up his company’s stock. His company secured most of these loans.

Things began to unravel when Conseco agreed to acquire Green Tree Financial Corp., a mobile home builder in Minneapolis, for $6.4 billion in stock in 1998. The mobile home market and Conseco’s stock immediately plummeted, losing 90% of its value. The board 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 entirely. His silk warehousing lawyers advised him to set up a series of funds to “protect his assets” from a possible collection lawsuit by his former company. They suggested that he name his wife as the trustee to control the assets in the trusts. They cost him several hundred thousand dollars for this insightful advice.

Mr. Hilbert was divorced five times, had no wife, so he soon married the stripper who appeared at his adult son’s farewell party. Her name is Tomisue. (In Las Vegas, any woman with two first names is presumed to be in the adult trade, but let’s not be mean.)

Tomisue became a trustee of several family trusts that named his minor children as beneficiaries. From 2001 to 2003, Mr. Hilbert transferred more than $100 million in assets to his wife individually and to the trusts she controls. Conseco’s lawyers were not amused. They sued Hilbert, Tomiso and his two minor children to recover the unpaid portion of the loans. The suit alleged that Mr. Hilbert fraudulently transferred assets to his wife and her trusts to “avoid payment” to his creditors. It sought to invalidate these transfers and foreclosures on his primary residence. They named his two minor sons as defendants “just because they have beneficial interests” under the family trust called the Helper Residence Trust. In response to the suit, Mr Hilbert lamented, “I feel that what they did to me and my family – sue my 9-year-old, sue my 13-year-old – was just an attempt to intimidate me.” (Do you think his lawyers advised him of this possibility?)

A tight collection attorney, Mr. Uslan, was brought on board by Conseco to assist in their collection efforts against the Hilberts. Mr. Uslan stated soberly, “Our view is that they are either fraudulent transfers, or that Hilbert maintains sufficient control over the assets so that they do not represent real transfers. And she (Tomisue) is not free to do with the assets what he sees fits. It maintains control. The funds are a sham. “.

You may ask, where is Mr. Hilbert’s lawyer during this complicated situation? They’re smiling all the way to the bank! At first, they sold Hilbert the Trusts for hundreds of thousands of dollars (and the idea that they would give him asset protection) and then charge thousands more each month to defend him, Tomisu, the Trusts, and his children. Their double dipping is totally ethical.

The outcome of this litigation has not been resolved. Mr. Hilbert voluntarily gave up some of his assets to the plaintiff as an olive branch to try to settle the matter without success. Mr. Uslan works on an emergency basis knowing there is more meat left on this bone, so he grinds in the courts hoping to get more meat under his fingernails. Mr. Hilbert continues to pay his defense counsel.

The point is that both Trusts and Family Limited Partnerships are visible, both of which typically employ family members, and can be attacked by private attorneys such as Mr. Uslan or taken over directly by any federal judge. When I was a collection attorney, I would always sue Trusts, Trustees, Beneficiaries, Spouses, Family Members, Children, Children, Everyone. I wasn’t always successful in getting a judge to cancel the trust or invalidate all transfers, but at least I usually came to a great compromise. With any litigation, a defendant has to measure what they spend in attorneys’ fees to defend a lawsuit against what they can pay the plaintiff to end the litigation (and the pain). It is a purely economic decision. The facts and merits of the case are not relevant.

For these reasons, we advise our clients that to protect your assets, you should have complete financial privacy and that family members should never be used as part of any asset protection strategy. Trusts and Family Limited Partnerships violate both of these principles.