APP Litigation and Creditor Protection Strategies 1 — Questions and Answers
Question 1: What is the primary legal purpose of asset protection planning?
- To hide assets from the IRS
- To lawfully structure assets so they are less accessible to future creditors (Correct answer)
- To eliminate all existing debts and obligations
- To transfer wealth to offshore accounts tax-free
Correct answer: To lawfully structure assets so they are less accessible to future creditors
Asset protection planning legally structures assets before claims arise to make them less accessible to future creditors, not to defraud existing ones.
Question 2: Which legal doctrine allows courts to set aside transfers made to defraud creditors?
- Respondeat superior
- Fraudulent conveyance (Correct answer)
- Promissory estoppel
- Res judicata
Correct answer: Fraudulent conveyance
The fraudulent conveyance doctrine enables courts to void transfers made with the intent to hinder, delay, or defraud creditors.
Question 3: A 'charging order' against an LLC membership interest typically does what for a creditor?
- Grants the creditor full ownership and voting rights in the LLC
- Allows the creditor to seize and sell the debtor's membership interest immediately
- Limits the creditor to receiving distributions if and when they are made (Correct answer)
- Dissolves the LLC and distributes assets to the creditor
Correct answer: Limits the creditor to receiving distributions if and when they are made
A charging order is the exclusive remedy in most states; it only entitles a creditor to receive distributions actually made to the debtor-member, not to control the LLC.
Question 4: Under the Uniform Voidable Transactions Act (UVTA), what is the standard look-back period for transfers made with actual intent to defraud?
- 1 year
- 2 years
- 4 years (Correct answer)
- 7 years
Correct answer: 4 years
The UVTA generally provides a 4-year statute of limitations (or 1 year after discovery) for claims involving actual fraudulent intent.
Question 5: Which of the following assets is typically exempt from creditor claims under most U.S. state laws?
- Investment brokerage accounts
- Qualified retirement plan assets (e.g., 401(k)) (Correct answer)
- Rental real estate
- Business checking accounts
Correct answer: Qualified retirement plan assets (e.g., 401(k))
ERISA-qualified retirement plans such as 401(k)s are broadly protected from creditors under both federal and most state laws.
Question 6: How does 'tenancy by the entirety' (TBE) protect marital property?
- It converts the property into a trust, removing it from both spouses' estates
- It shields the property from the individual debts of either spouse acting alone (Correct answer)
- It exempts the property from all federal and state taxes
- It requires creditor consent before either spouse can sell the property
Correct answer: It shields the property from the individual debts of either spouse acting alone
TBE treats spouses as a single legal unit, so a creditor of only one spouse cannot attach or force the sale of TBE property.
Question 7: Which badge of fraud most strongly suggests a transfer was made with intent to hinder creditors?
- The transfer was made to an unrelated third party for fair market value
- The transfer was made to a family member shortly before a lawsuit was filed (Correct answer)
- The transferor retained no interest in the property after transfer
- The transfer was documented with a notarized deed
Correct answer: The transfer was made to a family member shortly before a lawsuit was filed
Transfers to insiders (family members) for less than reasonably equivalent value shortly before or after litigation are classic badges of fraud courts scrutinize closely.
APP Litigation and Creditor Protection Strategies 1
What is the primary legal purpose of asset protection planning?