Asset Protection Trust as an Alter-Ego
Asset protection is not something that you want to skimp on or do “half way.” Your asset protection plan is only as good as your follow-through and adherence to the strategy you’ve devised. A recent case demonstrates how a good theoretical asset protection plan is different from a plan that has been designed and implemented to withstand attacks by creditors.
The Los Cabos Asset Protection Trust
The case of Gun Bo, LLC v. Cork was decided on May 19, 2011. The facts of the case are rather complex, but the gist is that a man named John Cork established an asset protection trust in March of 2007 (the “Los Cabos Trust”). The Los Cabos Trust owned a 96% interest in a domestic limited liability partnership called JCSC.
On May 21, 2009, a creditor (“Gun Bo”) filed suit against John Cork and several business entities that he owned. The suit was filed because a loan extended to Mr. Cork’s businesses for a real estate development had gone into default. Mr. Cork lost that case and, therefore, became a judgment debtor. A judgment debtor is simply someone who owes a sum of money after a lawsuit is concluded.
Possible Outcomes of the Case—An Asset Protection Analysis
This case is interesting from an asset protection standpoint because the court ultimately ruled that John Cork’s asset protection trust was alter-ego and ruled that Mr. Cork must retrieve funds from the Los Cabos Trust to satisfy the judgment. We don’t know whether that ever actually happened, but a few things are clear.
First, if Mr. Cork had set up his Cook Islands trust properly, then there is no way that he could retrieve funds from it to satisfy a judgment with any lawsuit or judgments pending. It would simply be impossible, regardless of what the court concluded or ordered. Second, if the judgment creditor really wanted to challenge the trust, it would have to do so in the Cook Islands, which is an incredibly expensive proposition. Finally, because the trust was created more than two years before a lawsuit was filed, it was presumptively not a fraudulent transfer under the Cook Islands trust law, meaning that any challenge to the trust in the Cook Islands would almost certainly fail.
If, on the other hand, Mr. Cork himself (or anyone else living under the jurisdiction of U.S. state or federal courts) was acting as trustee of the Cook Islands trust, then Mr. Cork would likely be required to retrieve the funds, which means his asset protection planning would have gone to waste in large part.
There’s no way to know what happened for sure in the case of Mr. Cork, but one thing is certain: At Lodmell & Lodmell we are well aware of the tools at the disposal of judgment creditors, and we devise and implement asset protection plans accordingly, so that no creditor can ever break into your plan. If you have an existing asset protection plan and want to make sure it’s being used properly, or if you have questions about setting up your own plan, please give us a call today.