Litigation and Creditor Protection Strategies Flashcards

Which element must a creditor typically prove to establish a constructive (vs. actual) fraudulent transfer?

Answer: The debtor was insolvent at the time of transfer and received less than reasonably equivalent value

Constructive fraud requires no proof of intent—the creditor need only show the debtor was insolvent (or became insolvent) and did not receive reasonably equivalent value for the transfer.

Offshore asset protection trusts (OAPTs) are attractive primarily because:

Answer: Foreign trustees are not bound by U.S. court orders requiring return of assets

The core benefit of an OAPT is that a foreign trustee in a jurisdiction like the Cook Islands or Nevis is not subject to U.S. court jurisdiction and cannot be compelled to repatriate assets.

ERISA protects retirement plan assets primarily by:

Answer: Preempting state law and shielding plan assets from most creditor attachments

ERISA preempts state law and contains an anti-alienation provision that prevents creditors from attaching or garnishing qualified retirement plan assets.

What is 'reverse piercing' of the corporate veil?

Answer: An owner or insider seeking to hold the entity liable for the owner's personal obligations

Reverse piercing occurs when a party (often the owner or a court acting on the owner's behalf) seeks to collapse the distinction between the owner and entity in the owner's favor, or when a creditor uses the owner's control over the entity to reach entity assets.

Which life insurance product typically provides the strongest creditor protection in most U.S. states?

Answer: Cash-value whole life insurance with designated beneficiaries

Cash-value life insurance (whole life, universal life) policies are protected from creditors in most states, especially when beneficiaries are named, because the cash value and death benefit are statutorily exempt.

A 'spendthrift trust' protects a beneficiary's interest primarily by:

Answer: Restricting the beneficiary from transferring their interest and barring creditor attachment before distribution

A spendthrift clause prevents the beneficiary from voluntarily assigning trust interests and prevents creditors from reaching trust assets before they are actually distributed to the beneficiary.

Which strategy is considered the most important first step in legitimate asset protection planning?

Answer: Planning proactively before any claims, lawsuits, or threats exist

Effective asset protection must be implemented proactively, before any claims arise—transfers made after a claim exists or is foreseeable are vulnerable to fraudulent transfer attack.