Jul 1, 2010 12:00 PM

, By Mark Merric, Michael J. Bland & Mark Monasky, M.D.

Can traditional asset protection tools withstand their reach?

By Mark Merric, Michael J. Bland & Mark Monasky, M.D.

Is there such a thing as bulletproof asset protection against federal claims? Many estate planners say “yes” and advise their clients to use or rely on certain techniques and tools like state exemptions, tenancy-by-the-entirety property rights, limited liability company (LLC) interests or beneficial interests in trusts. But many of these same estate planners offer their advice based on two mistaken assumptions: first, that state law defines what a property interest is, and second, that all federal creditors must follow state remedies. So let's clear up how property interests are defined and the rules surrounding what federal creditors can and can't do. Then you won't make the same mistakes that many estate planners and asset protection attorneys make. The result: You'll be able to properly and effectively advise your client about how to protect his assets and achieve the best deterrent against federal creditors.

Before 1983, the rule was that state law determined what constituted “property.” That all changed when the U.S. Supreme Court decided three cases¹ beginning with U.S. v. Rodgers, in which the court ruled 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, under federal law, the nature of an interest (or what many refer to as the “bundle of sticks”) is sufficient to equal “property,” then federal super creditors (that is, federal creditors that have a federal collection statute) may attach the property as well as sell it — regardless of state law. State law no longer controls the classification of what is property; the only thing that state law determines is what rights a beneficiary has in something.