2016 was a quiet year for laws regarding creditor-debtor interactions, especially as compared to the many laws passed after the economic crash of 2007. Asset protection remained at the forefront of interest among investment professionals, however, and several new transaction laws passed in 2016 can have serious implications for those seeking to preserve wealth.
Fraudulent Transfer Law
The Uniform Voidable Transactions Act, originally set into law in 1984, saw more states adopting provisions of the law. It was originally designed to protect creditors by providing remedies for certain types of financial transactions (particularly fraudulent money transfers) by debtors that are viewed as unfair to the creditors extending funding to those debtors. The language of the Act has been tweaked almost yearly, strengthening protections across the country. In 2016, six states introduced the Act. Indiana, New Jersey, New York, South Carolina, Vermont, and Washington all introduced the Act to state legislators, while Michigan was the sole state to enact it.
Fraudulent transfers also saw important legal opinions, especially in the case of the IRS vs. Kipnis. In a court opinion, it was agreed that if a debtor had any federal tax liability on debts, even as little as $1, the bankruptcy trustee in the case could use the 10-year statute of limitations for the benefit of all creditors, not just the Internal Revenue Service. Financial analysts say that this legal opinion weakens the statute of limitations for most debtors, as most of them have some sort of federal tax liability.
In a ruling by the State of Texas Supreme Court, it was determined that the cable network called The Golf Channel was not liable for fraudulent transfers totaling over $3 million when it was caught up in an illegal Ponzi scheme where advertising was sold. The Supreme Court ruling reinforced an earlier court’s decision on the case.
Business Entities and New Laws
Actions of the U.S. Treasury Department and Congressional legislation sought to remove some of the anonymity surrounding LLCs in the United States in 2016. New laws require customer due diligence by financial service firms to determine who, exactly, is the owner of an LLC, before opening accounts for that LLC. The owner or owners of an LLC are also known as the “ultimate beneficiaries”. Prior to passage of these new rules in 2016, the owners were protected by anonymity, giving them the ability to profit from certain types of financial accounts.
In a landmark case, the U.S. District Court for the District of Arizona sentenced fraudster Robert F. Alexander to a prison sentence of 96 months. Alexander was the mastermind behind a Ponzi scheme called a high-yield interest program, where investors believed they would receive returns of up to 37% on their investments. The court ruling also validated the application of a 25% limitation on wage earnings related to distributions subject to charging orders. The catch was that those distributions must be able to be traced back to labors of the debtor-members of a business entity. Despite this ruling and similar charging orders cases working their way through state and federal courts, the lack of statutory guidelines has made it difficult for officials to apply even rulings. Several cases in Tennessee and in Maine resulted in poor legal rulings, making the playing field even more complicated for business investors and creditors.
Creditor-Debtor Law in 2016
Legal professionals and financial experts alike watched several cases with interest in 2016. While there was not much movement regarding creditor-debtor law, a couple of the cases provided fireworks for those watching.
Debtors have often tried to protect, hide, or shelter their assets with fake loans, but this rarely works out in practice. Creditors and financial regulatory authorities usually see through these shams. In the case of Pivaroff vs. United States, the IRS sued the Pivaroffs for $8 million in tax liabilities. The couple had tried to hide their assets in offshore accounts and by creating shell partnerships. In short, the couple was trying to loan money back to themselves via an expensive home mortgage by using these shell corporations and LLCs.
Private annuities may or may not be eligible for statutory exemptions in several states. In Texas, a recent ruling suggested that these private annuities, where assets are transferred in exchange for unsecured payments over the course of the annuitant’s life, are not exempt from certain exemptions. In the state of California, 529 College Savings Plans may not be exempt either. These popular plans offered investors a tax-sheltered plan with which to protect assets, but without exemptions in place, tax liabilities may go up.
Trusts in 2016
Many investors choose trusts to protect their assets. These trusts, drawn up by lawyers, offer additional protections over traditional wills, reducing the time and expenses associated with probate courts. While the jury is still out whether trusts are superior to other end-of-life asset protection strategies, their sale by financial planners has increased over the past several years.
Looking Ahead to 2017
It is unclear what, if any, changes will appear in financial markets and debtor-creditor law in 2017. A new Presidential administration is expected to loosen rules regarding investments. A variety of proposed changes has muddied the waters of the financial world, and many experts are waiting to see what will happen. Market corrections are overdue, and it is suggested that the new President will help usher in the correction so desperately needed.