Federal Super Creditors Not Impeded By Most Asset Protection Tools
I’ve written previously that asset protection planning is not effective against collection by certain federal government agencies. The July 2010 issue of Trust and Estates journal contains an interesting asset protection article titled, Beware of Federal Super Creditors. The article explains the difference between federal and state law jurisdiction in asset protection and collection. The article states that, "state law determines the nature of an interest or the type of rights a person has in an interest, but federal law determines whether that interest is considered a ‘property interest.’" If federal law determines a debtor has an interest in property then the federal super creditors may attach and sell the property regardless of state law exemptions and remedy limits.
The article explains that there are two principal federal super creditors: the IRS and the SEC. Each of these agencies have their own federal collection statutes that supersede the state collection paradigms. The IRS and SEC can ignore statutory asset exemptions such as IRA, pensions, and annuities; they can ignore state property immunity such as tenancy by entireties law; and they are not limited by state collection tools such as charging liens applicable to certain partnerships and limited liability companies.
The authors conclude that the safest asset protection tool against the federal super creditors is an offshore trusts with discretionary distributions to the debtor/beneficiary. Discretionary trusts under some states’ trust statutes may provide protection although there are unresolved issues in the effectiveness of domestic trusts. The article states that federal agencies other than the IRS and SEC must look to state procedure and state law for collecting a judgment.
The Trust and Estates article is not available online so I cannot include a link thereto.
