Mike’s lifelong dream of building his own house was about to come true.
After years of searching, Mike found the perfect tear-down on an amazing lot with views to die for. He worked closely with an architect to design a show-stopping, LEED-certified house that would boast everything from a wine cellar to a sauna in the master bath. It even had the perfect reading spot for his favorite hammock.
What started out as a modest house with killer views was about to be transformed into a spa-style estate. The construction bids tripled. Luckily, his newly formed LLC qualified for a large construction loan. Mike had the personal assets to support the personal guarantee the lender required to get the loan. Although the project and cost had grown so significantly, Mike was happy, his bank was happy, and his wife and kids, who benefited from a dream house complete with game-room and infinity pool, were really happy.
Several years later, his house was almost done and Mike started paying down the construction loan. His longtime business attorney attended a seminar on Asset Protection Planning. Following the seminar, the attorney thought it prudent for Mike to contact his estate planning attorney to implement asset protection planning to protect against the “what if’s” in life.
“Firewall planning”, or asset protection planning, can protect a person’s or business’s assets from unforeseen lawsuits, legal entanglements or future creditors when good times turn into “not such good times.” One only need be reminded of the Great Recession of 2008 and 2009 to recall how good times can turn on a dime. But such planning must be done before any legal claims arise. Mike’s estate planning attorney advised transferring a sizable portion of his liquid assets into an asset protection trust for the benefit of his family.
Can he? Should he?
Because Mike gave a personal guarantee on the loan, any assets he transfers as part of his estate and asset protection plan could impair the bank’s ability to collect on the loan if the borrower/LLC defaults. If Mike failed to notify the bank of the asset transfers, and later the borrower defaulted, the bank would be right to claim that he intended to make a fraudulent transfer. Mike imagines having to tell his wife and kids that the safety net he set up for them is being repossessed by the bank! He doesn’t want that.
While fraudulent transfer laws preclude “firewall planning” after the worst case scenario actually happens, in this case, that worst case scenario (Mike defaulting on the construction loan) hasn’t happened. And it probably never will. But over 50 million lawsuits were filed in the U.S. in 2013, and Mike remembers his college professor once proclaimed, “Chance favors the prepared mind.”
Mike and his attorney agree that his intent is not to deceive the bank but simply to protect his assets from the future creditors of his kids, such as divorcing spouses, bankruptcy, or civil liability. His attorney advises him if he doesn’t inform the bank prior to implementing any new asset protection plan the bank could consider it a fraudulent transfer under the law. So Mike sent his bank his updated personal financial statement disclosing his new estate plan.
While this scenario brings up several additional legal issues that should be considered with an attorney, comprehensive estate planning with asset protection could be a life-saving protection for a family and its legacy.
If you have made a personal guarantee on a loan and want to discuss “firewalling” your estate with a comprehensive estate and asset protection plan, call us for a complimentary consultation to discuss your options. Transparency with your lender now may save you the pain of a bank repossession of assets because of a fraudulent transfer claim in the future.