Asset Protection Trusts & The Attorney Client Privilege

For over 20 years, lawyers from around the country have been implementing foreign and domestic asset protection trusts (APTs) for their clients in an effort to create “firewalls” surrounding their assets to combat the explosion of lawsuits in the United States, especially during the Great Recession.

While the comparison of foreign and domestic APTs is beyond the scope of this article, in the author’s law practice, he has observed an alarming trend in the nature of how these trusts are being drafted for their clients. This article will examine this trend and suggest (no implore) lawyers who are engaging in this design to consider changing their approach, and to repair those APTs in which such structural designs exist, especially before they find their client’s APT subject to legal challenge.

In the past year or so, the author has reviewed a number of domestic and foreign APTs in which the client creating the APT serves as both “legal counsel” and as “a co-trustee” of the client’s APT. The author can only speculate as to why this disturbing trend is occurring, namely, it is an attempt to assuage the client’s concern about the “loss of control” of the assets being vended into the trust, as the client will feel more at ease if his or her lawyer is also serving as the co-trustee and even as the “protector.”

The “law of unintended consequences” will likely prove to snare well intended lawyers. The author, who has practiced law for over 30 years, 25 years of which in the field of asset protection planning, is of the opinion such dual capacities will open the “proverbial “crack in an otherwise well drafted APT, that a skilled creditor’s lawyer could drive a Mack truck through, and cause such angst, the trustee might be forced to capitulate and settle the claim for a more significant sum then would otherwise be the case.

Attorney-Client Privilege (ACP) is one of the most important benefits shared between a lawyer and his client. The client is the one who holds the privilege and so it is only the client who can waive this ACP. A critical requirement for the ACP to apply is the communication must be between the client and his attorney. No privilege exists between the client and the trustee of a trust. Therefore, discerning when the communication and work product (written or verbal) takes place between the client and his attorney, or between the client and the trustee, is never a “bright line” and therefore, no certainty if and when the ACP attaches.

When the creditor challenges the ACP based on the dual capacity of the lawyer, the burden for refuting the challenge to the existence of the ACP will fall on the lawyer, not the creditor. We know it is next to impossible to prove a “negative.” Whether the creditor’s lawyer is ultimately successful in eliminating the ACP, the creditor will have achieved a significant tactical advantage in attacking the efficacy of the APT structure. This development could likely result in the debtor’s APT trustee having to settle the lawsuit or face the dissipation of the APT assets in defense fees and costs, and therefore, settle for larger sum than would otherwise be the case. Most certainly, the costs to defend this assertion will be significant, the expenses of which being borne by the APT, and not the lawyer/co-trustee.

As a practical matter, the situation will arise when a creditor is seeking to establish the “state of mind” of the debtor at the time the APT was created. The debtor’s “intent” is always a critical aspect of the efficacy of an asset protection plan, for if the creditor can establish the debtor’s intent was to hinder, delay or defeat the creditor, known as Fraudulent Transfer or Fraudulent Conveyance (within the statutory period to assert the debtor intended to defraud the creditor), the court can invalidate the transfer of assets upon the APT. If the APT is a foreign APT, as a practical matter, such invalidation might not have any practical impact. With a domestic APT, the consequences could be more profound.

The creditor’s counsel could assert any number of legal challenges against the debtor’s lawyer, asserting the privilege was waived, assert that some or all of the communications and work product was produced when the lawyer was serving as the co-trustee, requiring the lawyer to prove otherwise, all the while putting the lawyer through the proverbial “ringer” all at the expense of his client or the trust, holding the assets.

The author will concede there will be occasions when the client’s lawyer serving as a trustee or co-trustee is necessary for trust administration purpose. For example, where the client is concerned about mismanagement of the trust or the family requires the lawyer to take on a more active role in managing the trust’s affairs to referee family disputes relating to the APT. If the client is establishing the APT for asset protection reasons, a thorough discussion with the client of the risks associated with the lawyer serving as a trustee should occur and the decision documented in the client’s file.

Conclusion: There is very little strategic or tactical advantage to be gained by the lawyer serving in the dual capacity as “co-trustee” and a great deal of damage can be done in doing so. This author suggests (no implores) those lawyers who have created APTs and serve in this dual capacity, should immediately resign as the co-trustee of the APT.

*The author is the managing member of Jeffrey M. Verdon Law Group, LLP, a boutique Trusts & Estates law firm with over 25 years of practice experience in the area of asset and lifestyle protection planning. He is also Of Counsel to a prominent Las Vegas based estate planning and asset protection law firm and represents high net worth families throughout the United States.

For more information about any of the information discussed in this Client Alert, or any other income or estate tax planning or asset protection planning assistance, please contact Jeffrey M. Verdon Law Group, LLP at jeff@jmvlaw.com or (949) 263-1133.