The Plight of the New Poor

MICHIGAN www.milawyersweekl y.com

Vol. 23, No. 13 February 9, 2009

The plight of the new poor

Once only a concern for physicians, asset protection planning is needed by builders, auto dealers By Carol Lundberg If Howard B. Young didn’t read a single newspaper, he’d still know that something was terribly wrong with the economy. He would know because the profile of his client is changing dramatically. For decades, the asset-protection attorney has served a certain type of client: doctors, particularly obstetricians, who can get only about $200,000 worth of insurance coverage, not nearly enough to cover their massive ex - posure to catastrophic claims. Without some protection, each faces being wiped out by a single lawsuit. During the past year, a new category of clients has been calling Young, of Weisman, Young & Ruemenapp PC in Bingham Farms. They are home builders and car-deal - ership owners hoping to salvage some of what they have earned. Young specializes in structuring client as - sets and in setting up offshore and spend - thrift accounts and trusts to keep creditors from cleaning out his clients’ personal bank accounts. He helps them legally squirrel away protected assets in trusts in Delaware, Alaska, Missouri, Rhode Island and Mon - tana. (See “Safe off shore,” opposite.) “Most people don’t think at all about asset protection, especially when times are good,” Young said. “But recently, I’ve been getting an onslaught of people who are in trouble. They’ve already been hit.” Everyone is vulnerable, said Geoffrey L. Silverman, of Silverman & Morris PLLC in West Bloomfield. One of Young’s clients is the typical busi - in his company’s holdings. And the client “Developments in the marketplace have up - nessperson he has been seeing regularly. made the No. 1 mistake builders make: He set everything,” said Silverman, who special - The client is a successful home builder. personally guaranteed his business debt. izes in bankruptcy and insolvency matters. His father also was a reputable and wealthy He fears ruin is imminent. “There is an increase in the type of clients who home builder now comfortably retired. That personal guarantee means business are now worried about if the sky falls.” But houses aren’t selling, nor are the lots creditors can come after family assets.

Truth is, the client Most clients in the builder’s shoes would never thought much work with bankruptcy attorneys to mini - about personal guar - mize the fallout, mainly because they’re un - antees. It’s the way he aware that they could protect some of their Safe off shore had always done busi - assets, and partly because there are so few ness; he thought he asset protection lawyers in Michigan. Some asset-protection tools have a was safe, Young said. Part of the reason so few seek out asset- bad reputation, said Howard B. Young, “Even in 2006, be - protection lawyers, Young said, is that Michi - of Weisman, Young & Ruemenapp in fore there were really gan clients tend to be conservative in their fi - Bingham Farms. But, Young said, they big problems on the nances. So they cringe when they hear about horizon, he got ap - such options as offshore accounts. are legal means of protecting his praisals from the “Somehow offshore accounts got a reputa - clients’ cash. “These are wealthy bank, and the banks tion for trying to sidestep the law, but that’s “There is a big difference between as - people who were valued his 15 active not what they do, and that’s not what set protection and debt avoidance,” large subdivisions for they’re for,” Young said. “Their purpose is to well-respected. $100 million,” Young keep people safe when everything goes bad Young said. These are a few of the ways They were philan- said. in their businesses.” he protects his clients’ assets: thropists. They had He had loans that And, Silverman said, the increasing de - • Offshore asset protection esteem in the com- totaled $70 million. mand for asset protection has generated an trusts: Allowed in certain jurisdic - munity. And now “So then he could increasing number of costly mistakes by say that he has $30 both lawyers and clients. Some clients, he tions, such as the Cook Islands, the they’re going to be Caymans and the Bahamas, these broke, really broke … million in equity, and added, even try to save money by setting up has no risk.” their own asset-protection plans. arrangements allow the owner of an as - They’re facing the But today, because “Doing your own asset-protection plan- set to pass legal ownership of the asset most emotionally the land is not sell - ning is like being your own doctor,” Silver - to a trustee. The trustee is usually a difficult time in their ing, no one knows man said. “You can make your situation a lives, at least when it what it is worth. whole lot worse. You think you can pretty bank or trust company. Such trusts usu - comes to their Some investors, much do whatever you want if you’re sol - ally are established to protect assets, as finances.” known in real estate vent. The problem is that many people, even they are not accessible to creditors. circles as “vultures,” many lawyers, don’t understand insolvency. They are however subject to the same buy properties late in You can be insolvent and never have missed tax rules as assets that are domiciled in — Howard B. Young, the foreclosure pro- a payment.” Weisman, Young & cess, when their val - The most common mistake a person the United States. Ruemenapp ues are severely de - makes, he said, is transferring the deed to • Domestic Asset Protection pressed. Even if such the family home into a revocable trust in the Trusts: “In 1996, Alaska woke up a buyer offers as name of one of the people on the deed. The much as $20 million, the gap between what goal is to insulate the home from creditors, and said, ‘Why can’t we have the same the client owes and what the buyer will pay but it can’t be transferred for the purpose of situation’” as the islands have, Young is $50 million, Young said. evading debt. said. The state soon after changed its “The lenders are saying there’s no Asset-protection plans are the most effec - laws to allow self-settled spendthrift collateral, so pay up,” Young said. (See tive if they’re established while clients’ fi - trusts, which allow the beneficiary to es - “Looking for the nut the debtor squirreled nances are healthy, Young said. away,” next page.) If his builder-client had come to him in tablish an entity such as a bank to be the trustee. States which have followed Alaska to allow the establishment of these protected trusts: Delaware, Mis - souri, Nevada, Utah, Tennessee, South Demand for asset protection rising Dakota, New Hampshire and Rhode Island. The accounts can shield assets Few lawyers in Michigan practice in the highly specialized niche of asset protection. Young said he thinks there are only four. from creditors, so long as they are not But there will probably be more, said Jeff Kirkey, director for partnership and certi - established to defraud creditors. fication programs at the Ann Arbor-based Institute of Continuing Legal Education • Spendthrift trust: Similar to a (ICLE), a nonprofit co-sponsored by the State Bar of Michigan and law schools at the self-settled spendthrift trust, which can University of Michigan and Wayne State University, the Thomas M. Cooley Law be established by the trust’s beneficiary, School, University of Detroit Mercy School of Law and Ave Maria School of Law. a spendthrift trust can be established in Kirkey has increasingly heard from lawyers seeking information for their asset- stressed clients. any state on behalf of the beneficiary by “The clients often are small-business owners who want to know which of their assets someone else. Young said these types are safe and which are not. And if they are not, they want to know how to make them of trusts usually are established by more safe,” he said. parents for their children who are either He fields a growing number of requests from lawyers who ask if the institute soon unable to control their spending, or will be dealing with the changing profile of the newly poor. could put their assets in danger in “I’ve gotten several requests recently for ICLE to hold a seminar on bankruptcy for other ways, such as by getting married high net-worth clients,” Kirkey said. “That tells me that we’re seeing a different kind of clientele that wasn’t vulnerable in the past.” without a prenuptial agreement. Michigan Lawyers Weekly • 3 February 9, 2009

2006, protecting more of his assets would They’re frightened.” The father established for the son a dis - have been possible. It was then that per- In the builder-client’s case, he didn’t have cretionary spendthrift trust, to be held by a sonal accounts could have been established to go bankrupt. He has worked out a for - family member, a family friend or the bank. in protected jurisdictions, such as the Cook bearance agreement with his creditors, who Creditors cannot collect from such a trust, Islands, Belize, Channel Islands and realized they had squeezed about as much but it will pay the son’s expenses after his Switzerland. out of him as they can. father dies. Or a business owner’s assets can be as - The builder’s wife hadn’t personally guar - Young had to walk his client through the signed to a spouse or parent or child, or anteed the business debt, so the couple’s range of future events, including what would placed in a spendthrift account, without the home was protected because she is one of happen to the family home, life insurance client’s violating the Uniform Fraudulent the owners. money and inheritance in the event that the Transfer Act. If Young’s client’s wife had a pension, that builder outlives his wife. Every asset needed For many of Young’s new clients, it’s too would have been safe as well. Other assets to be restructured and protected to keep the late. Sometimes all he can do is refer them belong to the builder — for example, his builder from a destitute future. to good bankruptcy lawyers to help them 401(k) and profit-sharing accounts — also “These things have been done for years, sort out their debts. can’t be touched by creditors. but they were usually for irresponsible play - “These are wealthy people who were Young told his client’s retired father how boy sons, or wealthy sons and daughters well-respected,” Young said. “They were phi - to structure his will to best protect the who get into marriages that the parents felt lanthropists. They had esteem in the com - builder-son’s inheritance from creditors. were headed for disaster,” Young said. “But munity. And now they’re going to be broke, “The father will be leaving, let’s say $15 not anymore. ” really broke. million, to his three children. Because the “They’re facing ruin. They are facing the builder-son’s debt could linger for years, or If you would like to comment on this story, please most emotionally difficult time in their lives, decades, or possibly the rest of his life, the contact Carol Lundberg at (248) 865-3105 or at least when it comes to their finances. will had to be tweaked,” Young said. [email protected].

WEISMAN , Y OUNG & R UEMENAPP , P.C. 30100 Telegraph Road, Suite 428 Bingham Farms, MI 48025 Phone: 248.258.2700 Fax: 248.258.8927 Email: [email protected] February 9, 2009 Michigan Lawyers Weekly • 4

Looking for the nut the The Collector’s Creed Choose your cases carefully. In Gary Nitzkin’s case, he uses a complex net - debtor squirreled away work of Internet databases to re - search which cases will be collectible before deciding whether to take When the calls came last week to attorney “There is a fine line between asset pro - them. Gary D. Nitzkin, the chase was on. tection and debt evasion,” he said. “If you’re Two companies need his help. They need on the right side of that line, there’s nothing The result is that in an industry in their $75,000, owed them by a local furni - I can do.” which the liquidation standard is 20 ture store. Howard B. Young, of Weisman, Young & percent, his is between 70 and 80 per - Nitzkin is hoping the furniture store own - Ruemenapp PC in Bingham Farms, special - cent said Nitzkin, of Southfield-based ers call him soon to discuss resolving their izes in asset protection. Nitzkin & Associates. debt. He’s hoping, he said, because if he has In a case in which a doctor knows he is Here are few rules he lives by: to look for the money the store owes, he will going to be sued and is worried that he has - find it, and his method for collecting is going n’t structured his assets properly, the first • Don’t pursue people who have filed to be unpleasant. thing Young would do is to call upon inde - for bankruptcy. Their debts will not Nitzkin, of Southfield-based debt-collec - pendent counsel to evaluate the doctor’s ex - be collectible. tion firm Nitzkin & As - posure to risk. • Same goes for people involved in sociates, is seeing a “Let’s say that the independent counsel sharp rise in the num - says that the doctor could be on the hook for landlord-tenant disputes. When ber of commercial col - $100,000, on top of the $200,000 in insur - debtors are being evicted, their lections. ance coverage he already has,” Young said. debts will not be collectible. “No one ever “What we would do is to put three times that • Don’t chase down people who rent thought they would be amount — $300,000 — into escrow for the apartments. They don’t have the in times that are this purposes of paying a possible judgment tough,” Nitzkin said. against the doctor.” cash to be collected. “The economy is so up - Then his client would be able to set up • Don’t try to collect hospital debt. No NITZKIN side-down right now. protected accounts that can’t be touched by one chooses to be in debt for some - Debtors are trying to protect what little creditors. thing like that. “It does have to be they have.” “No one can say we’re trying to delay or done,” Nitzkin said. “But I don’t have Unfortunately for them, debtors are going defraud creditors by protecting those as - about protecting their cash and assets the sets,” Young said. “It’s just the opposite; we to be the one to do it.” wrong way, Nitzkin said. (See “The new put away three times what an independent • Do look for signs that debtors had poor,” page 1.) consultant said we’d need. We set money money and suddenly do not. That’s a The biggest mistake Nitzkin sees is the aside for this very purpose. That’s far from clue that they have violated the Uni - usually inept shifting around of assets to trying to get away from responsibility.” form Fraudulent Transfer Act, he said, hide them from creditors. Certainly a plaintiff lawyer like Nitzkin In one case, Nitzkin was trying to collect could try. But Young said most don’t. and the money can be found. a debt from a physician who had been sued “The plaintiff’s lawyers have to win two for malpractice. He owed his patient more lawsuits: first, the lawsuit regarding the than $2 million. malpractice, then the suit to collect more ness hours, when customers could see what To hide his assets, the doctor transferred than the amount we’re offering. They don’t was happening. more than $1 million to his wife’s and chil - want to do that,” Young said. “The point is “It was horrifying,” Nitzkin said. dren’s accounts. What astounded Nitzkin is that our philosophy is how we can position If the furniture store returns his calls and that the doctor said he did so with the bless - our clients in order to ensure they have min - works out a plan with Nitzkin, he can spare ing of qualified counsel. imum exposure and maximum leverage.” its owner that kind of embarrassment. “He showed up in my office with four file Nitzkin has never beaten Young in court. “I suppose the fun is in the hunt,” Nitzkin boxes full of records,” Nitzkin said, “and he But he has beaten most of his other oppo - said, acknowledging his enthusiasm for was represented by three attorneys.” nents, he said, because they haven’t been as his work. But Nitzkin figured out where he had cautious about asset protection. To keep it interesting and sportsmanlike, shifted the assets in violation of the Uniform Nitzkin’s firm employs two certified pub - he chases down, almost exclusively, Fraudulent Transfer Act. lic accountants to follow debtors’ money commercial debtors. It wasn’t much fun, nor Nitzkin drafted a letter to the doctor and trails. When he finds the money, he says was it profitable, to collect consumer debt his attorneys, stating he was going to file he’s determined to collect on behalf of his such as credit-card debt. And since the mid- suit against the wife and children. clients, which brings him back to the un - 1990s he hasn’t tried to collect a single debt “I basically told them I was on my way to pleasantness of the collections process. for a hospital. file the suit in court,” Nitzkin said. “He came Last year, he had to collect a debt from “I just can’t do it. People don’t choose to in within a couple of days with a cashier’s two local jewelry stores. He went about col - have hospital debts. The last one I did was a check for $1.6 million.” lection the same way for both. collection for Children’s Hospital,” he said. If the doctor had had an asset-protection “I sent a court officer to clean out their in - “It was too heartbreaking. I never touched plan in place, the debt probably would have ventory,” he said. another case like it after.” been uncollectible, Nitzkin said. The officer went to the stores during busi - — C AROL LUNDBERG