Why Trusts Don’t Work for Asset Protection

A trust is the right to the beneficial enjoyment of property to which another person holds the legal title; a property interest held by one person (the trustee) at the request of another (the settlor) for the benefit of another (the beneficiary). Trusts have different names depending on their purpose, i.e., Land Trusts, Charitable Remainder Trusts, Irrevocable Trusts, and so on.

Trusts are usually promoted by lawyers or non-lawyers working under their supervision. There are two-hour seminars being conducted in small hotels all over the country touting the use of Trusts and Family Limited Partnerships for the “ultimate asset protection.” In law school, there is a class called Trusts, so many lawyers think (mistakenly) that this is the best entity available for privacy and asset protection. Although they may have some value for estate planning purposes, they are utterly worthless as vehicles for asset protection. The problem is this: any entity or asset that is visible can be attacked by private attorneys at the least or, in the worst case, seized instantly by a Federal Judge.

Let me give you a real life example to demonstrate the pitfalls of Trusts. In the 1990’s, Stephen Hilbert was the high-flying CEO of Conseco, Inc., the insurance and financial services giant. He had it all, a 33-acre walled Indiana estate, the racehorses in Kentucky, and the 18,500 square-foot vacation home on St. Martin in the Caribbean. When everything was going well at the height of the bull market in the 1990’s, Mr. Hilbert, with the consent of his Board of Directors, borrowed more than $175 million to load up on 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 promptly tanked, losing 90% of its value. The Board of Directors forced Hilbert out in 2000 and gave him until the end of 2003 to repay at least part of his loan package. He paid back about $7 million and then stopped paying altogether. His silk-stocking lawyers advised him to form a series of Trusts to “protect his assets” from any potential collection lawsuit by his former company. They suggested he name his wife as the Trustee to control the assets in the Trusts. They charged him several hundred thousand dollars for this prescient advice.

Divorced five times, Mr. Hilbert didn’t have a wife, so he quickly married the stripper that appeared at his adult son’s bachelor party. Her name is Tomisue. (In Las Vegas, it is assumed that any woman with two first names is in the adult business, but let’s not get catty.)

Tomisue became the Trustee for several family Trusts naming his minor children as the beneficiaries. From 2001 to 2003, Mr. Hilbert transferred more than $100 million in assets to his wife individually and to the Trusts controlled by her. The Conseco lawyers were not amused. They filed suit against Hilbert, Tomisue, and his two minor children to recover the unpaid portion of the loans. The suit claimed that Mr. Hilbert fraudulently transferred assets to his wife and her Trusts to “avoid paying” his creditors. It sought to void those transfers and foreclose on his primary residence. They named his two minor sons as defendants “solely because they hold beneficial interests” under a family Trust called the Hilber Residence Trust. In response to the suit, Mr. Hilbert lamented, “I feel like what they did to me and my family – suing my 9-year-old, suing my 13-year-old – that was purely trying to intimidate me.” (Do you think his lawyers advised him of this possibility?)

A tight fisted collection attorney, a Mr. Oslan, was brought on board by Conseco to assist with their collection efforts against the Hilberts. Mr. Oslan stated matter-of-factly, “Our view is that either they are fraudulent transfers, or 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 sees fits. He maintains control. The Trusts are a sham.”

Where are Mr. Hilbert’s lawyers during this imbroglio you might ask? They’re smiling all the way to the bank! First they sold Hilbert the Trusts for hundreds of thousands of dollars (and the notion they would provide him with asset protection) and then they get to charge him thousands more each month to defend him, Tomisue, the Trusts, and his kids. Their double-dipping is entirely ethical.

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

The point is this: Both Trusts and Family Limited Partnerships are visible, they both usually employ family members, and they can be attacked by private attorneys like Mr. Oslan or seized outright by any Federal Judge. When I was a collection attorney, I always sued Trusts, the Trustee, the Beneficiaries, the spouses, family members, kids, babies, everyone. I wasn’t always successful in convincing a Judge to void the Trust or set aside all the transfers, but at the very least I usually elicited a fat settlement. With any litigation, a Defendant has to measure what he’s spending in attorney’s fees to defend a lawsuit against what he can pay the Plaintiff to end the litigation (and pain). It’s purely an economic decision. The facts and 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 that you should never use family members as part of any asset protection strategy. Trusts and Family Limited Partnerships violate both of these tenets.

(C) 2006 William S. Reed, J.D.


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