WASHINGTON — What happens to estate plans and other plans when clients file for bankruptcy court protection?
Speakers gave the answers here during a session at the annual meeting of the Association for Advanced Life Underwriting, Falls Church, Va.
The session offered participants a checklist of creditor protection techniques that should be reviewed with clients during the planning process.
On one point, the panelists were emphatic: trying to shield assets through the use of stealth, trickery or deception is near-certain to backfire.
"Attempting to hide assets from creditors generally is not successful," said Jeffrey Jenei, an assistant vice president for advanced markets at a unit of MetLife Inc., New York. "If you move assets to a separate jurisdiction, or sell assets at below market value, the court will invalidate the transfer. The court may also hold the client in contempt of court if the transfer is especially egregious."
Jenei said the courts will look at a range of factors–the amount of money being gifted or transferred, the client's net worth and how much money remains in an estate to satisfy creditor claims–when deciding whether a client intended to conceal assets and defraud creditors. If, after gifting $1 million to children, the client has $5 million in liquid assets with which to satisfy a $1 million judgment, then the court would tend to rule the gift in the client's favor, he said.
The courts also will review the client's history of wealth transfers when determining intent to conceal, Jenei said. When, for example, a doctor makes an uncharacteristically large transfer of assets to a child soon after being sued by a patient for malpractice, then the court would likely view the gift with suspicion. But if the doctor can demonstrate a history of making such transfers, then amounts shifted subsequent to a lawsuit would probably be upheld.
A court would also be predisposed to rule favorably if the client sets up an offshore creditor protection trust as part of a well-documented estate plan. Jenei added that asset protection planning should always be incorporated into the estate plan so as to secure the court's blessing and avoid run-ins with fraudulent transfer rules.
Kenneth Cymbal, a Chartered Life Underwriter designation holder at MetLife, said the level of creditor protection offered on life insurance policies will vary by state. While most states protect the death benefit, only some states fully insulate the cash value from creditor claims.
