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Calfee, Halter & Griswold LLP,2800 First Financial Center, 255 East Fifth Street, Cincinnati, Ohio 45202 Cincinnati | Cleveland | Columbus | Calfee.com

Asset Protection: Mitigating Risks to Protect You, Your Family and Your Business

Are we living in the midst of a litigation and liability explosion?

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Inflammatory Headlines

• Predatory plaintiffs• Frivolous lawsuits• Jackpot justice• Runaway verdicts

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The Reality: Most of us are at risk for personal liability

• Professionals• Entrepreneurs• Corporate owners, directors and officers• Property owners• Personal guarantees• Others


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The Drawbacks of Traditional Protections

• Catastrophic mistakes/losses happen• Piercing the corporate/LLC veil• Officers and LLC members personally liable for

tortuous conduct• Corporate bankruptcy• Inadequate insurance limits, exclusions, punitive

damages


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Asset Protection Techniques

General Limitations:• No technique is bulletproof• There is always a combination of cost and lost

control


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Fraudulent Transfer Laws:• Prevent using techniques to avoid known creditors• Provide protection for unsecured or undersecured creditors

from transfers designed to avoid collections• Various remedies include the right to avoid the transfer,

undoing the transfer, and others on a case-by-case basis• Actual Fraud - Intent to hinder, delay or defraud• Constructive Fraud - Economic effect is to hinder, delay or

defraud:• Lack of reasonably equivalent value• Insolvency


• Invest in Exempt Property:• ERISA “Qualified Plans”: 401(k), pension, profit-sharing• Inherited Accounts: IRAs, Roth IRAs and 529 plans• Homestead Property: Up to $132,900• Life Insurance: Payable to a spouse, child or dependent


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• Purchase Liability Insurance• Gifts of property to a spouse or others• Disclaimers:

• What is a disclaimer?• Old Rule: Disclaimer is a fraudulent conveyance • New Rule: Disclaimers are not subject to fraudulent

transfer rules


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• Limited Liability Company (LLC):• Charging order is a creditor’s sole remedy• Creditor may be left with taxable income even if

distributions are not made• Creditor is not entitled to vote or participate in

management


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• Domestic Asset Protection Trust:• What is Domestic Asset Protection Trust?• Old Rule: May not form a trust to benefit yourself and

have the assets protected • New Rule: Ohio residents are now allowed to use an Ohio

Trustee• Due Diligence is required to avoid a fraudulent

transfer


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• Offshore Asset Protection Trust:• Primary advantage over a domestic trust is that foreign

jurisdictions do not have to recognize the judgments of American courts

• Economic burden to the creditor associated with litigation in a foreign jurisdiction is a significant factor in deterring or settling claims

• Expensive and complicated to set-up


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• The Ohio Legacy Trust:• What is the Ohio Legacy Trust?• New Rule: Trust creator may be a trust beneficiary and

protect trust assets from their own future creditors• Cannot protect against court-ordered spousal and

child support, or division of marital property• Definition of “spouse” does not include a future

spouse


The Ohio Legacy Trust

Who Should Consider Forming a Legacy Trust?• Any person seeking protection from future creditors• Owners of closely held businesses• Individuals in high-risk occupations or professions• Others contemplating marriage and looking for added

protection from divorce or claims by their future spouse



Key Requirements of the Legacy Trust:• In writing• Irrevocable• Ohio law governs• Assets transferred to a “qualified trustee” cannot be the

“transferor”• Under the statute, the “transferor” is the person who

transfers assets to the trust• The “transferor” is also the person who creates the trust

• Specified creditor protection (“spendthrift”) provisions• Transferor must attest:

• To remain solvent after the transfer and to not attempt to defraud any creditor



Who Can Serve as Trustee?• Cannot be the transferor• Statute requires a “qualified trustee”:

• An Ohio resident• An Ohio bank or trust company

• Recommend trustee be an independent individual, a bank or trust company

• Not a spouse• Preferably not a child

• Guiding principle: The more independent, the better



Benefits and Rights the Transferor Retains:• Can receive income and principal distributions at the trustee’s

discretion• Right to direct the trustee to distribute trust assets to another

person• Use property held by the trustee• Right to veto distributions• Can remove the trustee and select a permissible successor

• Same right extended to spouses, children or descendants• Ability to remove the Investment Advisor and/or Distributions

Advisor and select permissible successors• Ability to direct investments



Common Tax Consequences:• Incomplete (nontaxable) gift when the trust is funded• Grantor trust for income tax purposes, transferor liable for tax

on trust income• On death, trust assets included as part of transferor’s taxable

estate



Statutory Protections for Trustee:• Creditor has no cause of action against the trustee of a Legacy

Trust• Even if a transfer is avoided, a trustee who has not acted in bad

faith• Is entitled to its fees and costs• Has a first lien for the entire cost of defending the action to

avoid the transfer



Creditor Challenges:• Statute gives creditors the ability to challenge a transfer to a

Legacy Trust only if it was made with the specific intent to defraud the creditor bringing the action

• Time limitations (“statute of limitations”) for creditor challenges:

• Existing creditors have within 18 months of transfer• Creditors with underlying claims within 3 years of the

transfer have 6 months after the transfer is discovered• Future creditors have 18 months from the date of transfer



Creditor Challenges: • Burden is on the creditor to prove the matter by clear and

convincing evidence• Standard of proof is a substantive rule, not procedural

• Transfer avoided only to the extent necessary to satisfy the transferor’s debt to the creditor bringing the action

• Other creditor remedies include: • Fraudulent transfer rules• Lien follows the collateral• Transferor lacked good title to the assets placed in trust• Sham trust



Solvency Analysis:• Comparison of all assets and liabilities, fairly valued• Exempt assets do not count as assets, such as:

• Retirement assets • Home equity exemption

• Assets subject to a lien (up to the lien amount) do not count• Independent appraisals may be required for significant assets

without ascertainable value



Solvency Analysis:• Supports determination of amount of assets which can be

transferred, and those which are needed as a “reserve” for current or foreseeable liabilities

• Future transfers will require additional Affidavits of Solvency• Solvency tests:

• Cash flow• Balance sheet• Thin capital



Qualified Affidavit:• Required if transferor is a beneficiary• Signed before or when making a transfer to the Legacy Trust

(“qualified disposition”)• Transferor must attest that:

• S/he will not be rendered insolvent• Does not intend to defraud any creditor by making the

transfer• Has no pending or threatened actions other than those

identified• S/he is not contemplating bankruptcy



Additional Due Diligence:• Search for relevant disclosures• Review public records for judgments, bankruptcies pending

actions• Contact the client’s accountant for a review of the Affidavit of

Solvency


Calfee has been providing meaningful legal counsel in matters that are critical to the success of our client since 1903. Our focus is primarily on business services, business transactions, government relations, intellectual property and commercial litigation. Our lawyers routinely represent a wide spectrum of private and public organizations, entrepreneurs, Fortune 500 companies, governments and individuals.

James A. [email protected]

John A. Mongelluzzo [email protected]

Matthew S. [email protected]


This presentation is provided by Calfee, Halter & Griswold LLP for education and information purposes only. This presentation is not intended to provide legal advice on specific subjects. The resolution of legal issues depends upon the specific facts of a particular situation and the laws involved. This presentation may be considered advertising under applicable laws. Nothing contained herein or in any attachment hereto is intended to be used, or can be used, to avoid penalties imposed under the Internal Revenue Code.

2800 First Financial Center255 East Fifth StreetCincinnati, Ohio 45202513.693.4880

The Calfee Building1405 East Sixth StreetCleveland, Ohio 44114216.622.8200

1200 Huntington Center41 South High StreetColumbus, Ohio 43215614.621.1500

Calfee, Halter & Griswold LLP www.Calfee.com

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