April 27, 2020

By H. Joseph Price, Jr. 

For new readers, the answer to the above question will be, “What is an asset protection trust?”

For longtime readers, the answer will be, “Oh yeah, now I remember that you told me that I should set up an asset protection trust before I had problems; if I did that, I would have a better chance of withstanding creditor attacks if problems arose later. Well, I didn’t set one up because I thought that I would have more warning that things were about to go south. Is it too late to set up that trust now?”

Let’s answer the “what is an asset protection trust” question first.

Missouri and 18 other states – not including Kansas – have passed laws allowing you to transfer assets to irrevocable trusts, maintain indirect control over those trusts and put the assets beyond the reach of your creditors. Those laws differ somewhat from state to state. Missouri has one of the better laws in terms of protecting the debtor. In fact, in a recent ranking of asset protection statutes, Missouri ranked fourth, only slightly behind third.

Does the possibility of establishing such a trust and protecting your assets from creditors sound too good to be true? Bear in mind that there are a number of conditions that have to be met before your Missouri Asset Protection Trust will actually “work,” but the bottom line is that the conditions aren’t overly burdensome, especially considering what you stand to lose without such a trust.

If you want a little more background on the topic, take a look at my other articles on the topic: Covering Your Assets: A Primer on Asset Protection or Asset Protection Trusts: Expensive for You, Cheap for Your Children.

Now on to the second question: Is it too late for you to establish an asset protection trust and make it “work”? The answer will depend on your particular circumstances and how those circumstances stack up against the guidelines listed in the Missouri Uniform Fraudulent Transfers Act (MUFTA). Why am I bringing up the Fraudulent Transfers Act? Because the Missouri Asset Protection statute states,

“With respect to an irrevocable trust with a spendthrift provision, a spendthrift provision will prevent the settlor’s creditors from satisfying claims from the trust assets except … where the conveyance of assets to the trust was fraudulent as to creditors pursuant to the provisions of the Fraudulent Transfers Act.”

So, what does the MUFTA state about this situation? It states,

“A transfer made … by a debtor is fraudulent as to a creditor … if the debtor made the transfer … with actual intent to hinder, delay or defraud any creditor of the debtor … In determining actual intent … consideration may be given, among other factors, to whether:

  • Before the transfer was made, the debtor had been sued or threatened with suit.
  • The transfer was of substantially all the debtor’s assets.
  • The debtor was insolvent or became insolvent shortly after the transfer was made.
  • The transfer occurred shortly before or shortly after a substantial debt was incurred.”

How would the law apply to you if your situation is not dire at the moment but could get a lot worse if commerce doesn’t return to pre-March 2020 levels in the near to mid-future?

There is no “one size fits all” answer to that question but, in general, the greater your financial cushion and the sooner you act before your financial picture and the nation’s financial picture get worse, the better your prospects of success are.

For example, if your business can survive for eight months with greatly reduced revenues and you have had only one bad month so far, you can probably make a credible argument that you are not insolvent and you are not going to be insolvent shortly after you transfer some but not substantially all of your assets to an asset protection trust. So as long as there are no other “bad facts” in your situation, you would have a reasonably good chance of surviving a creditor’s challenge to your asset protection trust.

On the other hand, if you wait six months to do anything and at the end of that time, there is a pretty broad societal consensus that things won’t return to the “old normal” for at least 12 more months, your case will be a whole lot weaker than it is now.

What if you don’t live in Missouri? Can you still set up a Missouri Asset Protection Trust and make it “work” for you? That’s a topic for a future article.

Contact Joe Price at 816-714-3024​ or jprice@dysarttaylor.com for assistance with tax and estate planning issues.