“Casablanca” is a favorite movie of mine, and I am not alone. It consistently rates in the top ten of the best movies of all time. But did anyone ever notice the ridiculous underlying premise that runs throughout the film? The movie centers around two blank letters of transit, “signed by General de Gaulle himself,” Ugarte explains. All Victor Laszlo and Ilsa Lund have to do is fill in their names. Then they can walk right out of Casablanca, no questions asked. No matter that Victor Laszlo has been hunted all over Europe by the Germans and is the de facto leader of the Czech Underground. “These letters cannot be questioned, not even by the Germans,” says Ugarte. 

Sound too good to be true? Well, if you believe that some letters signed by de Gaulle are Nazi-proof, you probably also believe that you can throw all your money into an irrevocable trust and neither your creditors, your spouse, nor the government can touch it. That’s what the man on the radio promises. 

In your daydream, you see the judge looking sadly at your ex-wife’s lawyer and saying, “I’m sorry, Counselor. There’s simply nothing we can do. That money is out of our reach. It’s going to be a tough time for Mrs. Jones and the six kids, but this man is just too smart for us.” 

Take a look at the following ad currently running on Chattanooga radio:

“Here’s the thing about a divorce: People can come to me prior to the divorce and I can protect their assets. I can protect their IRA, their 401-K, 403-B. I can put it in an irrevocable trust. Those things are divorce-proof. You can be lawsuit-proof, divorce-proof, nursing home-proof, all by putting it in an irrevocable trust. I could have saved you a lot of money, my friend.” 

The first time I heard this I wasn’t paying attention. Afterwards I stopped what I was doing and thought, “What did he say?” The second time confirmed what I had heard. About that time my office got a call wanting to know if we can do an irrevocable trust in preparation for a divorce filing. “Yes, we do trusts, but you can’t do it for that reason.” 

Other calls have been received asking if this man is engaging in the unauthorized practice of law. Assuming he is advising his clients about divorce law, post-judgment remedies, and federal Medicaid law, it appears that he is. 

That the legal advice is wrong does not make it something other than legal advice. Last week, I heard a revised ad that now promises to make you “anything proof”. 

The ads are wrong on so many levels, they resemble a law school exam. Here are the issues:

-1- What are the fundamental moral, ethical, and public policy issues presented by this man’s offer of services?

-2- What are irrevocable trusts and what are they for?

-3- What is a fraudulent conveyance? 

-4- What are the powers of the state and federal governments and courts to undo a fraudulent conveyance? 

-5- What constitutes the unauthorized practice of law?

Morally and ethically, the message implies that if you want to hide assets from a divorce court at the expense of your spouse, this man knows how to do that. If you want to hide assets from the government while the taxpayer pays your nursing home bills, he’s your man. If you want to avoid legal judgment creditors by transferring assets, he can assist.

There is a concept in the law called “the whole truth”: a partial truth which leaves out a material fact is a falsehood. The misleading ads contain a kernel of truth. Tennessee recognizes asset-protection trusts. Under the Tennessee Investment Services Act of 2007, as revised in 2013 (the “Act”), Tennessee created Tennessee Investment Services Trusts (TISTs) which allow irrevocable trusts which name the “settlor” (the owner who is setting up the trust and transferring assets) as a beneficiary. 

Under the common law, if the settlor was also the beneficiary of a trust, creditors could attach his or her interest. Under the Act, the settlor’s beneficial interest cannot be reached by creditors, provided the conditions of the law are met. The conditions, though, are the proverbial tail that wags this dog.

The assets must be irrevocably transferred to a “qualified trustee” (a resident of this state or a company regulated by the Tennessee Department of Financial Institutions, the FDIC, the Comptroller of the Currency, or the Office of Thrift Supervision), and the transfer results in permanent loss of the settlor’s legal ownership and much of the control over the asset. The settlor must swear and affirm, under penalty of perjury, that the transfer will not render him or her insolvent, is not intended to defraud a creditor, is not in contemplation of threatened litigation, is not in contemplation of a bankruptcy filing, and is made with full right and title to the assets being transferred. The settlor cannot convey marital property without the spouse’s joinder.

The transfer by the settlor of assets into a TIST is similar to a life insurance policy in that it protects against future unknowns. But in the same way that a person is ineligible for life insurance if already diagnosed with a terminal illness, a settlor cannot transfer assets to hide them from claims which already exist or which might arise in the foreseeable future.  

Tennessee passed the Act in response to several other states which had enacted similar statutes. Those in turn were in response to competition from off-shore depositories who were capturing the banking business of the uber-rich. The overlying goal of the Act is to keep these large banking deposits inside our state (and to attract such deposits from other states which do not recognize asset-protection trusts).

Trusts are meant to be employed for legitimate asset management and protection, not unlike other asset-protection tools such as corporations, limited liability companies, and tenancies by the entirety. They are also helpful in protecting a spendthrift. Our law firm recently obtained a substantial award for a client who feared that his friends and relatives would be lining up at his door as soon as they learned about the money (he was right). To protect against this, we set up a TIST for the client with a local bank acting as trustee. Within two weeks, the client was calling the trustee for money to bail a friend out of jail. The trustee said “No.”  

Is an irrevocable trust divorce-proof? Yes, when made prior to the marriage to segregate non-marital assets (usually made in conjunction with a pre-nuptial agreement), but not in contemplation of an imminent divorce. In divorce actions, the court may equitably divide, distribute and assign the marital property between the parties in such proportions as the court deems just (T.C.A. 36-4-121(a)(1)). The court is empowered to divest and re-vest title to marital property and undo a wrongful transfer (T.C.A. 36-4-121(a)(3)). 

Additionally, the 2013 amendment to the Act removes all time deadlines to attack a fraudulent transfer if the claim relates to child support, alimony, or divisions of marital property (T.C.A. 36-16-104(i). Therefore, contrary to the assertions of the man on the radio, a transfer to an irrevocable trust in contemplation of divorce will not stand.

Lawsuit-proof? Not for a while. A creditor may undo a fraudulent transfer for two years after the conveyance into a trust, or for six months year after the creditor has notice of the fraud, whichever time is longer (T.C.A. 35-16-104). Under the Tennessee Uniform Fraudulent Transfer Act, any transfer, removal or concealment of assets made by a debtor with the intent to defraud any creditor is a fraudulent conveyance (T.C.A. 66-3-305) and a Class E felony (T.C.A. 66-3-104 and T.C.A. 39-14-117)). 

Nursing home-proof? Not for a long time. Medicaid and TennCare have a five-year look-back period in which they can undo any transfer of property made for less than fair market value, and specifically any transfer into a trust (42 U.S.C. 1396p).

Bankruptcy-proof? Not for ten (10) years. A bankruptcy trustee can undo a fraudulent transfer made to an irrevocable trust up to ten (10) years prior to the bankruptcy filing (U.S. Bankruptcy Code, Section 548(e)(1)). When does a bankruptcy debtor intend to defraud? The bankruptcy court looks for “badges of fraud”: (1) Were creditors threatening litigation? (2) Did the transfer to the trust represent a substantial percentage of the debtor’s net worth? (3) Did the creditor continue to benefit from the transferred assets? (4) Was the transfer made without consideration? (5) Was the trust made for the purpose of sheltering assets? Waldron v. Huber (In re Huber), Ch. 7 Case No. 11-41013, Adv. No. 12-04171, 2013 Bankr. LEXIS 2038 (May 17, 2013). 

Using these guidelines, especially item (5) above, it is not difficult for a court to attach assets held in an Asset Protection Trust, which by its own admission is for the “purpose of sheltering assets.” 

The only persons who can be confident that their trust is safe from creditors are those whose net worth remains significant after funding the trust. If transferring assets in anticipation of an imminent divorce or lawsuit sounds too good to be true, it’s because it is. You cannot hide assets from creditors, be they spouses in a divorce, judgment creditors, or TennCare claimants, by fraudulently transferring assets into an irrevocable trust.

Because a TIST entails asset transfers which cannot be rescinded, the legal ramifications of such a transfer should be discussed fully with the client, along with other available options, in order to determine which course of action is right for that client. A client’s estate plan should be custom-fitted to the individual client, and several areas of the law come into play, as has been shown. Tax planning and advice are also a major consideration, as well as conflicts-of-law issues between the states: in the Huber case above, the Alaska trust at issue was decreed invalid in Washington State.

It is the lawyer’s duty to protect the client from unintended consequences. Without clear information and advice, unintended consequences can and will occur. Bill Colvin relates the following story: “Not long ago, an older woman was talked into one of these by a travelling salesman who blew through her church. Some lawyer in Texas prepared the documents. I was contacted when she became incompetent due to Alzheimer’s and her only child could not do anything for her such as pay her bills, collect benefits, etc., because everything was tied up in the trust and she wasn’t the trustee.”

An unlicensed person cannot engage in the business of law. Law business includes legal advice, counseling, and legal documentation in exchange for valuable consideration (T.C.A. 23-3-101 et seq.). Unauthorized practitioners commit a Class A misdemeanor, in addition to incurring civil liability for the damage they cause. The offense is particularly egregious when the client is being advised to take actions which may violate the law and public policy. What was discussed with the client and what did the client intend? All consultations and correspondence between the financial advisor and the customer are discoverable, because no attorney-client privilege exists.

I probably saw Casablanca three times before I thought, “that letters-of-transit thing is ridiculous.” As with my initial acceptance of the letters-of-transit thing, most people have a tendency to believe what they are told, particularly if it is what they want to hear. Expect some of your divorce clients to ask you about divorce-proof irrevocable trusts if they haven’t already.  

By the way, Charles de Gaulle’s signature on those letters of transit just adds to the absurdity. De Gaulle, being the leader of the Free French during World War II, was an enemy of the French State and a wanted man. His signature carried no authority whatsoever in Vichy France; in fact, anyone in French Morocco carrying transit papers under his signature at that time would certainly have been detained and probably shot as a spy.

(Thanks to attorneys Bill Colvin, Fielding Atchley, and George Hixson for their help and advice. Secondary sources include “Where There’s A Will: It’s Trust Time in Tennessee”, TBA Journal dated 8-1-2013, by Eddy Smith, Esq.; “The Tennessee Asset Protection Trust”, Tenn. CPA Journal, Nov. 2007, by Dania Leatherman, JD, LLM, and Ben Alexander, CPA.)