Types Of Asset Protection To Avoid As An Oregon Resident

There are many beneficial tools that can provide comprehensive asset protection. However, there are also many types of asset protection tools to avoid. How do you know what is best for you? By talking to an experienced attorney at Famulary. Masterful Attorneys, you can understand what should be avoided and why.

Below are two of the major types of asset protection tools that generally should be avoided. To further discuss these and the asset protection methods that would be appropriate for your situation, call us at 503-863-2732 or contact us online. Our lawyer can schedule a free consultation at one of our offices in Beaverton, Corvallis or Salem, from which we represent clients throughout Portland and the entire state of Oregon.

Domestic Asset Protection Trusts

(Also known as an "Alaska trust", "Nevada trust," "Delaware trust," etc.)

These trusts should be avoided for one simple reason: they don't work.

Example: Grantor, an Oregon resident, settles an Alaska trust (using a corporate trustee in Alaska) with $1 million cash. Later, an unforeseeable future creditor seeks a $1 million judgment against grantor. Under Alaska law, grantor is protected from the judgment but in Oregon he is not protected. Therefore, creditor brings suit in Oregon, obtains a $1 million judgment, then takes the judgment to Alaska to enforce against grantor's trust property in Alaska. Alaska is required by the Full Faith and Credit Clause of the United States Constitution to honor an Oregon judgment.

Many lawyers attempt to sell this strategy under the claim that it creates an obstacle for a creditor, and will therefore deter a lawsuit. True, hiring an Alaska attorney to collect the judgment is an obstacle, requiring time and a few thousand dollars. But if you had a $1 million judgment against the grantor, wouldn't you negotiate this obstacle?

The Limited Liability Company (LLC)

The LLC is meant to protect investors or owners from liability that they didn't directly cause. Generally speaking, the remedy for a judgment against a person's LLC interest is a "charging order," which essentially means that the debtor's distribution interest in the LLC is temporarily given to the creditor in order to pay the debt.

  • Example: If Bob, a debtor who owns one-half of "Bob and Tom's LLC" became personally liable to creditor for $100,000, creditor could have the court place a charging order on Bob and Tom's LLC to collect all (or some) of the distributions that the LLC would otherwise pay Bob until the judgment is paid in full. Tom's distribution interest would not be touched by the charging order.
  • Many people (among which include lawyers) mistakenly believe that the LLC members can simply pass a resolution to withhold all payments from Bob until the creditor gives up trying to collect on the judgment, thus protecting Bob from the creditor's judgment. What most people don't understand is that the court can order the LLC to make periodic distributions to fulfill the charging order. In fact, a bill currently passing through the Oregon Legislature is attempting to codify this court remedy (HB 3090). Although we often use LLCs in conjunction with the other asset protection strategies, the LLC by itself generally does not offer considerable asset protection.
  • As with the Alaska trust, some lawyers will try to "create an obstacle" by moving the LLC to a different state such as Nevada. True, Nevada law is more favorable for a debtor when it comes to enforcing a judgment, but not by much. Again, if you had a $1 million Oregon judgment, wouldn't you hire a Nevada lawyer to collect that amount against debtor's interest in a Nevada LLC? Furthermore, at least three courts (California trial court, Connecticut Superior Court and Federal District Court of Delaware) have applied local law to charge the interest of owners of out-of-state LLCs. If this same reasoning is applied by an Oregon court, then owning a Nevada LLC would provide an Oregon resident no advantage at all.