For those of you who think putting properties into third party trusts assures creditor protection… think again.

Recently in United States v. Hovnanian, Civ. No. 18-15099, 2022 WL 17959583 (D.N.J. Dec. 27, 2022):

The Government asserted that, although the trusts held title to the residence and the office complex, Shant actually controlled those properties. The court noted that under United States v. Patras, 544 F. App’x 137, 140 (3d Cir. 2013), a third party is a taxpayer’s nominee where “the taxpayer has engaged in a legal fiction by placing legal title to property in the hands of a third party while actually retaining some or all of the benefits of true ownership.” In Patras, the Third Circuit Court of Appeals established a test with six factors—which the court noted should not be applied rigidly—to determine whether a nominee relationship exists due to the taxpayer’s active or substantial control over the property:

1. Whether the nominee paid adequate consideration for the property;

2. Whether the property was placed in the nominee’s name in anticipation of a suit or other liabilities while the taxpayer continued to control . . . the property;

3. The relationship between the taxpayer and the nominee;

4. The failure to record the conveyance;

5. Whether the property remained in the taxpayer’s possession; and

6. The taxpayer’s continued enjoyment of the benefits of the property.

Patras, 544 F. App’x at 141–42.

In determining whether the residence held by the Pachava Asset Trust was subject to a tax lien, the court found that the undisputed facts in the record established that (1) the transfer was made for minimal consideration (the property had been transferred to the trust by Shant’s mother for one dollar), (2) the transfer was made subsequent to the judgment entered by the Tax Court against Shant, (3) Shant had a close relationship with the current trustee, who was his sister, and previous trustees, who were also family members, and (4) Shant possessed and enjoyed the property, which was his primary residence. The court determined that because factors one, two, three, five, and six were met, there was no genuine dispute of fact regarding whether Pachava Trust was Shant’s nominee. It granted the Government’s motion for partial summary judgment and subjected the property where Shant resided to the federal tax lien.

If you transfer to a third party trust w/o an exchange of value, continue to control it by having/exerting authority over the trustee, enjoy the benefits of the trust assets, and are doing this after creditors are already after you… the trust’s assets can be garnished to satisfy the judgment.

For creditor protection based on trust vehicles that courts will respect, you must LOSE control of the assets, you must have an arms-length transfer (or at least a reported tax transaction), your trustee needs to be INDEPENDENT, and you cannot have ANY discretion as to the enjoyment of the income or pricipal of trust assets, you also CAN’T wait until a creditor is already after you.

Real creditor protection *without losing control over your assets*, involves changing your business practices to reduce risk, proper tax planning, sufficient insurance coverage, effective hiring, training, and accountability of team members, delegating things out of your expertise to professionals (attorneys, CPAs, bookkeepers, financial advisors, etc), and strategic ownership of personal assets AND business assets.

To learn more about how to protect your assets from creditors or discover other asset protection strategies, visit www.lcolawfl.com or call us at 813-480-2106.